Many people are now choosing to work from home. But are there restrictions on what VAT can be claimed back from the various expenses incurred when setting up and running an office from home?
Limited Company or Not?
The first point to consider is that there are different rules for reclaiming VAT for sole proprietors/partnerships and limited companies and directors.
Recovering VAT on household costs is easier if you are a partnership or sole proprietor. Example: Your house has 8 rooms and you use one of the bedrooms as an office. In this case, you claim back 1/8 of the VAT on the heating and lighting for the house as this is a genuine business cost. If you have a separate business phone line you can claim back all the VAT on that but if you only have the one phone line then you can claim back a reasonable percentage of the VAT. You can also claim back the VAT on decorations and furniture that are necessary for the business.
A company director runs his business from home and kits out a room as an office, what VAT can he recover? The normal answer is that the company can recover the VAT on the equipment, they own it and it is for business use, but the VAT on any building work and decorations cannot be recovered because, on the face of it, it is specifically blocked by the VAT legislation (section 24(3) and (7) of the VAT Act 1994).
The Managing Director of a company, Mr Jones, works from home a lot and is considering having his loft converted into an office to give him more room. The new 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 £3,500, and Mr Jones wonders if the company can recover this.
There is a little known concession to this rule that allows the recovery of input VAT in certain circumstances. HMRC’s published and internal guidance states that “Where a domestic room or rooms is put to business use HMRC may agree to an apportionment using an objective test to the extent to which the room is put to business use” (VAT Notice 700, para 12.2, C & E Manual V1-13, Chapter 2A, paras 14.5 to 14.7)
This means that if Mr Jones can show HMRC that he intends to use the loft conversion for entirely business purposes, 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, then the company will be able to claim that VAT back as well.
The watchword would be to be reasonable, use an adequate carpet, not the most expensive in the shop, use simple decorations to make the office habitable, so don’t hire an interior designer and hang works of art on the walls!
The same principle applies to extension, garage conversions and even having a shed at the bottom of the garden as your office. Provided it has a genuine business use and the purchases and decorations are in line with the proposed use then the VAT should be recoverable by the company.
By Andrew Needham