Introduction
With more people now choosing to working from home, the question of what can be done with the VAT on the conversion costs is becoming a common issue. In this article, I explain what the rules are, and how you can go about reclaiming that VAT.
Example
The Managing Director of a company, Mr P, works from home a lot, and is considering having his loft converted into an office to give him more room. The office will contain the usual computers, desks, etc., and be decorated and furnished in line with the proposed use. The full cost of the building work, decorations and equipment will come to £20,000 plus VAT which the company will pay because it will all be used for business purposes. The VAT on the work and equipment will come to £3,000, and Mr P wonders if the company can recover this.
Classic solution
The normal answer is that the company can recover the VAT on the equipment, as they own it, and it is for business use. However, the VAT on the building work and decorations cannot be recovered because, prima facie, it is specifically blocked by the VAT legislation. (VAT 1994 s 24 (3) and (7)). This states,
“where a company purchases, acquires, or imports goods or services which are used or to be used in connection with the provision of domestic accommodation by the company for a director, those goods or services are not treated as used or to be used for the company's business, and any input VAT is not recoverable”.
Tip
There is a little-known (even to HMRC) concession allowing the recovery of input VAT in certain circumstances. HMRC’s published and internal guidance states,
“Where a domestic room or rooms is put to business use, you may agree to an apportionment using an objective test to the extent to which the room is put to business use” (HMRC Manual V1-13, Section 14, para 14.7, and VAT Notice 700, Section 33,)
This means that if Mr P can show he intends using the loft conversion for entirely business purposes, then the company will be able to recover the VAT on the building work and materials. If he can show that the carpets and decorations are for a business purpose as well, than the company will be able to claim that VAT back too. The staff dealing with written VAT enquiries are more experienced in this area than normal VAT Officers, and have more time to consider the matter without the pressure to make a quick assessment. If you make a reasonable case, you should have no trouble getting the VAT back.
The same principle would also apply to extensions, garage conversions, and even using a shed at the bottom of the garden as your office. Provided there is genuine business use, and the purchases and decorations are in line with the proposed use, the VAT should be recoverable by the company.
[ On a more general tax note, the effect of exclusive business use of part of one's main residence on eligibility for CGT Principal Private Residence Relief should be considered, as well as home insurance, and possibly even council tax and business rates]
A blog providing UK tax information and planning ideas from John Pointon, Accountant, Business and Tax Consultant. Please send any suggestions for topics you would like to see covered to me at jpointon@gmail.com or 34 Lightley Court, Sandbach, Cheshire, CW11 4QA or phone 01270 763 466.
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John, I am a director of a small firm, which my wife is also an employee of. We're looking at extending our house and converting our garage. My wife works from home 2 days a week, managing the companys finances - invoices, payroll etc. As part of the construction work we're looking at building an office in the garage, which will be used for both work and personal needs. As such, would we be able to fund part of the construction via the company (Ltd) and claim any VAT back? Many thanks, Ed
ReplyDeleteIf you will email me at jpointon@gmail.com, I will deal with your query. Space does not permit here.
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