Ian McMonagle: Beware the tax pitfalls of building a garden shed for use as a home office

Ian McMonagle: Beware the tax pitfalls of building a garden shed for use as a home office

Ian McMonagle

Ian McMonagle, a chartered tax adviser who sits on the Scottish Committee of the Chartered Institute of Taxation, and taxation director at Russell & Russell, business advisers, warns of the tax implications of using a garden shed as a home office.

Amongst millions of people throughout the UK, WFH, or “working from home” has set off an explosion of interest in the possibilities of buying or building a work-related shed, pod or home office space in a secluded corner of the garden.

Away from the noise of the Dyson, the barking of dogs and the incessant demands of home-schooled youngsters, a detached, warm, yet “cool”, well-equipped and stylish home working environment is the dream of many aspiring WFH devotees.

But, be warned: this is a complex area - so much so that any such plan requires close scrutiny from your proven professional adviser. If you convert a shed or buy or build new garden pods to work from home, you need to ask yourself about the tax implications.

First, there are income tax considerations if you seek to charge your employer, or your own company, a rent for you to work from home. As well, any personal use of the home office would be a benefit in kind and a tax charge would be raised on the individual.

If no charge is raised there would be no benefit in kind for personal use and the individual could potentially rent it back to the company, but you may want to consider restricting this to 5 days a week so that it is not wholly for office use as this can have a capital gains tax implication.

Second, what about the Capital Gains Tax implications of having a ‘pod’ or static office built in your garden when you later try to sell your house?

If the home office had been used 100 per cent for business then it could potentially impact the capital gains on the sale of the house as this “portion” of the property would no longer qualify for Principal Private Residence Relief (PPR) and so is no longer tax free.

Third, if you purchase a home office through a company which is VAT registered, you should be able to claim back the VAT, but there will be no deduction for corporation tax for the cost of the “structure”.

You might be able also to claim back VAT on its contents, all of which means you have to ensure that any claims made for a tax deduction or relief have to be correct. To get these reliefs, you may need to declare that it is for 100 per cent business use.

If, on the other hand, it is not purchased through the company then there would be no VAT recoverable though paying for it could be quite expensive for an individual.

In addition, there are other things to consider other than tax, such as Council Tax, planning permission, connectivity to gas, electricity and water.

This is just touching the surface, and each individual needs to run the numbers for his or her personal circumstances to see whether or not it is beneficial.

In summary, the dream of working from your garden will create a number of unknown tax liabilities for individuals that they and their employers may not be aware of.

This is probably not what you want to hear, but the bottom line is: think hard before acting and speak to your accountants.

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