15 Jan 2021
Tax Implications: Bringing the office to you?
Having your employer arrange to have a nice new mobile office pod dropped into your garden, facilitating a more effective home working environment while releasing the kitchen, dining room etc back to the family, is something we’re increasingly asked about. Perhaps after several months of working from home due to COVID-19, that’s not surprising; nor should you be surprised that there are tax consequences!
Tax implications for the employee/director
Many may see a mobile office as a commercial necessity for remote work, but the tax rules don’t always adequately recognise such things.
Indeed, the employee/director will likely receive a benefit in kind tax charge. That’s based on the usual tax rules that govern assets made available for private use and, broadly speaking, is the greater of any rent/hire charge paid by the company for the office pod and 20% of its market value immediately before it’s first applied as a benefit.
Whilst there is an exemption from this tax charge where private use is specifically prohibited, it would seem difficult to rely on this given that the office pod is installed on the employee/director’s own property without any means of controlling their access. Moreover, it might be counter-productive to claim this tax exemption, as it could limit entitlement to capital gains tax private residence relief in respect of that part of the garden/grounds.
However, the employee/director could try to reduce the benefit in kind tax charge by claiming a deduction for the days that it can be demonstrated the pod was in use exclusively for business. Caution here, however, as any use (there is no di minimis!) other than in the performance of the duties of employment would disqualify a whole day, and it wouldn’t be hard for HMRC to find examples.
Looking to the future, the need for the business use of the pod may well pass. If, at that point, it’s left to the employee/director to do what they want with it, a separate benefit in kind charge arises based on the higher of market value at that time or original cost less the amounts previously charged as a benefit for usage.
Finally, working from home, whether in the kitchen or a pod, inevitably brings other costs, some of which may be reimbursed by an employer, some of which may not. What is and isn’t taxable is largely governed by longstanding rules which afford little flexibility. HMRC have, however, outlined some of the possibilities in their online guidance which you can find here.
Tax implications for the employer
Firstly, in providing the pod, and in relation to the associated benefit charge, there will be a Class 1A National Insurance contribution charge (13.8%) for the employer.
In purchasing a pod, the company would incur a capital expense. Can it make a capital allowances claim to obtain tax relief rather than getting a deduction against trading profits?
Unfortunately, HMRC don’t accept mobile prefabricated structures as being within the scope of plant and machinery allowances. Whilst there is now a separate structures and building allowance, this requires the company to have an interest in the underlying land, again causing any claim to fail.
On a more positive note, tax relief can be obtained through capital allowances on any furniture or equipment installed into the building such as desks and shelving units. Thermal insulation, electrical and plumbing will be covered as well.
Running costs for the outbuilding, electricity, gas, water and repairs can also be claimed as a business expense. However, as already stated, you’ll need to consider the personal tax consequences for the employee/director.
Any VAT paid on goods or services must be incurred for a business purpose to be recovered as input tax. The main difficulty in this instance is working out whether the motive for incurring the expenditure was business related rather than personal.
VAT incurred in relation to an activity carried on from home using a particular area specifically for business by a sole trader, partner in a partnership, director of a limited company or an employee of a business may qualify for recovery as input tax either in full or in part.
VAT incurred on costs which can be identified specifically to an area used solely for business can be treated wholly as input tax. However, an HMRC officer is likely to look for factors to suggest that the area is used for both business and personal reasons and seek to apply an apportionment.
In the case of mixed use, you will have to work out what proportion relates to the business activity and make an apportionment as appropriate. There is no one size fits all method of recovery. Each case must be judged on its own merits.
A business should take advice before deciding to charge a rent for the space to make sure a direct and immediate link to an exempt supply is not created, which potentially precludes recovery.
Further issues may arise when a business ceases to use an asset, or at the cessation of trade or deregistration from VAT, which may result in some of the VAT that has been recovered being repayable to HMRC.
As above with other taxes, there is a whole raft of considerations in relation to the recovery of VAT associated with the ongoing costs of running a home office which the taxpayer must consider before making a claim.