How can I build an office in my garden (and get the company to pay)?
With businesses considering a permanent change to their working environment, many business owners are looking at ways to adapt their homes to create a permanent working space. Alongside converting existing spaces, building a completely new garden office has become very popular.
If you’re considering a garden office, there are two main options to consider:
- will it be solely used as an office, or;
- will there also be an element of private use (e.g. as a playroom, hobby room or overnight accommodation for guests)
How HMRC treats the costs of the garden office, differs depending on your answers to the above points. Each individual circumstance may be slightly different, so it’s always good to seek specific advice. Below we’ve captured how HMRC would treat different costs based on a limited company purchasing the garden office as a company asset.
Treatment of the initial cost of the structure
Limited company - 100% business use - Costs can be paid in full by the business. The structure will be treated as an asset and will be capitalised and depreciated.
Limited company - Some private use - The same applies, however, it will be classified as an employment-related benefit, which means you may be required to pay Benefit in Kind (BIK) tax.
Treatment of thermal insulation (even where it forms part of the structure) and furniture
There are certain elements of the build that do attract capital allowances, including installation and supply of power, heating, air conditioning and thermal insulation. New fittings and fixtures will also still benefit from capital allowances, so it's a good idea to get a detailed breakdown of the structure from your builder to help support your claims.
Treatment of other associated costs e.g. planning, architect and legal fees
Limited company - 100% business use - The business can pay these costs in full. They are treated as capital expenses (and not as corporation tax relief). VAT can be reclaimed in full if the asset is shown on the company's balance sheet. If you're on the VAT flat rate scheme, it's a little more complicated.
Limited company - some private use - The business can pay these costs in full. The private proportion of the associated VAT shouldn't be reclaimed, as this is based on a fair and reasonable calculation between business use and personal use.
Treatment of ongoing costs
Limited company - 100% business use - Costs can be paid by the company, and you can reclaim 100% VAT on all costs that are allocated as running costs for your garden office, this includes heating, lighting and metered water as well as redecoration and repair costs.
Limited company - some private use - Costs can be paid by the company, but you can only reclaim the business proportion of the associated VAT on all costs allocated as running costs for your garden office. This is based on a fair and reasonable calculation between business use and personal use.
Capital Gains Tax
Limited company - 100% business use - Capital Gains Tax (CGT) doesn't usually apply to your primary residence when you sell it. However, it can apply if say, for example, your garden office covers 3% of your total floor area. If it does, then 3% of the gain might be subject to CGT when the property is sold. This is something to bear in mind if you are thinking about moving house in the near future.
Limited company - some private use - As you're not using it for 100% business, CGT wouldn't apply.
Personal Benefit in Kind (P11D)
Limited company - 100% business use - No personal benefit in kind arises, so there is nothing to report on a P11D and no Class 1A National Insurance to pay. It's worth including an agreement between directors (as landowners) and the business to confirm there is no private usage of the building allowed, and it should state that it is for the purpose of business use only.
Limited company - some private use - Each year, you'll need to assess the personal benefit in kind to the directors and be reported on a P11D. The Class 1A National Insurance is payable by the company, as well as personal income tax by the directors. Follow the HMRC guidance to find your calculation.
Business Rates
Limited company - 100% business use - Rates may be assessed, check with your local authority for guidance.
Limited company - some private use - Rates aren't usually assessed.
Planning permission
Always check with your local planning authority to see if you need planning permission for the structure.
Helpful links
- HMRC’s guidance on expenses and benefits for employers
- HMRC’s guidance on assessing the personal benefit in kind for the Directors
We try really hard to keep our blogs up to date, but sometimes the information and advice given are only correct at the time of writing. If you would like to discuss anything you read in our blogs please contact us.
