Tax rules for turning a home into an office

AH writes: I am a sole trader working from home. I have planning permission to extend and convert the space above my detached garage into an office. The cost would be £10,000 plus Vat. Can my business pay and obtain tax allowances and reclaim the Vat? If it pays would I have a capital-gains-tax (CGT) problem when I sell my house? If I pay personally can I charge the business rent and is this taxable in my hands? Could I take advantage of rent-a-room relief to charge rent even though the office is for business and detached from the house? Are there any other tax-efficient routes?

Answer

On the Vat front, the improvements you want to make are to a private house and while an office is being created, the space could revert back to domestic use. Customs & Excise guidance on this states that businesses should normally accept there is this possibility of future private use by disallowing a part of the input tax at the start. This will then mean there can be no deemed supply when the area reverts to private use. So come up with an appropriate percentage of the input tax you intend to reclaim and then write to Customs & Excise setting out your proposals. As regards capital allowances, the spending cannot be described as plant and machinery and it is unlikely you will be able to claim allowances. There may be some scope if computer wiring is needed but this would be minimal. If you did claim the office was solely for business, this would limit your principal private residence (PPR) exemption and when you sold there could be a taxable gain on the business part. So it may be better to make it not solely for business to keep the PPR exemption. You cannot use the rent-a-room relief because you cannot let to yourself or commercially. If you pay for improvements personally you can charge the business some of the costs of the use of your home as an office. This charge to the business is supposed to be the actual costs, therefore any charge made by yourself would not be taxable in your own hands as you would just be covering your costs.