Tax Planning to Create a Home Office

You’re downsizing your business premises and will now mainly work from home and “hot desk” when you go into the office. If the company meets the cost of creating your home office, will it count as a taxable benefit?

Is it a benefit in kind?

As a director or employee, if the business you work for pays for equipment, e.g. a computer, office furniture, and allows you personal use of it, or transfers ownership to you, you’ll be taxed on a benefit in kind . There are different rules for working out the taxable amount depending on whether you or the business owns the items in question.

Planning. A temporary exemption (originally for 2020/21 but extended to 2021/22) from benefit in kind tax applies where a director or employee paid for equipment so they could work at home during the pandemic. They are reimbursed by their employer but can retain ownership of the equipment ( yr.20, iss.20, pg.8 , see The next step ).

Ownership is the key to tax liability

Where the temporary concession we mentioned doesn’t apply, tax liability can arise for employer-paid-for fitting out of home offices. For example, this applies to expenditure on decorating and structural work on your home because it forms part of your property and so can’t be owned by the employer (unless the employer also owns your home). Such costs are therefore taxable benefits.

No charge. If you use goods paid for by your company for business purposes and there’s only an insignificant amount of personal use, the rules say there’s no taxable benefit. However, this doesn’t apply to the cost of an “extension, conversion or alteration of living accommodation” . You might get away tax free with light redecoration of your home office but nothing more significant.

Planning. Before starting any building work grant your company a lease allowing it exclusive use of the part of your home for, say, ten years. This means the creation of the office relates to the lease and not the freehold. As a result, the benefit in kind charge is deferred until the lease expires. There’s also another tax advantage to this.

Diminished value

The taxable amount of a benefit on goods transferred to an employee is the lower of their cost or their market value (MV) at the time of transfer. If you follow our tip the MV is taken when the lease expires. One method of arriving at the MV is to value the whole property with the conversion and again assuming the conversion didn’t exist. The difference would be the taxable amount. So, if the conversion cost £25,000, but it only increased the value of the property by £10,000, you’ll only be taxed on the lower figure.

Trap. Our planning only works if you create a formal lease. A licence to use or rental agreement won’t do because it doesn’t give your company a legal interest in the property.

NI savings

As well as reducing the benefit in kind on which NI is payable, you can escape the benefit in kind tax. There’s a further but less obvious NI saving derived by following our tip. It relates to the rent your company pays under the terms of the lease. While this is taxable as income it’s not liable to NI. This makes the rent a tax/NI efficient way of extracting money from your company.