Are you planning on building a home office in your garden, but you're not sure if you can claim back the VAT through your VAT-registered business? It's important to remember that each case needs to be decided on its own individual merits, but the most common principles are that (from Section 24(1) VAT Act 1994 defines input tax as VAT on the supply to a taxable person of):

“goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”

HMRC’s Internal Manual VIT11500 also says “If VAT is incurred wholly or partly for other purposes then it can only be input tax to the extent that it is incurred for business purposes.”

The fundamental criteria is that the supply in question must be made to the business. If the company is limited, then the company should directly contract and pay for the building rather than the director claiming it as an expense, or through an adjustment to the director's loan account. This way the building is indisputably a company cost.

If you are a VAT registered sole trader it will be different because you can proportion items upon use between business and personal without benefit in kind implications. Whereas a limited company either owns the item which is wholly and exclusively used for the business or otherwise there will be tax implications; Benefit in Kind and Capital Gains Tax. The question of whether the purpose of the building will be deemed solely for the business can be problematic, as it's part of a private residence. There is no guarantee that HMRC will not enquire into the usage of the property and if you expect that it will be used in any way for private use, then an appropriate apportionment should be made on a fair and reasonable basis.

The issue can become more complicated if you're using the flat rate VAT scheme. Be careful of assuming that if the expenditure is over £2,000 that the VAT can be recovered under the capital expenditure goods rules. Building services and materials are not goods for VAT purposes. You may be able to argue that the purchase of a complete lodge or structure can be goods, but it's best to get specialist advice before you make a claim, just in case.

Also be aware that questions can arise if there is later a change of use back to private, non-business use. If the building use was reverted back to non-business within 10 years and it was purchased prior to 2011, then as part of the Supply of Services Order 1993 ( SI 1993/1507 as amended) an adjustment will need to be made. Since 1st January 2011, that was only necessary if the value of the expense was within the capital goods scheme: i.e. when the VAT exclusive value was over £250,000. The order does not apply, however, where there was previously an apportionment to reflect non-business use.

If you're unsure about the tax implications of a home office or any other expenditure, why not try a free consultation with us via

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