Because a large proportion of our clients choose one of our garden rooms to use as a home office, it means that we get to chat with an army of home-based workers. We’ve built garden offices for accountants, lawyers, writers, designers, IT consultants, architects, journalists, farm offices, and a number of businesses start from garden offices; and build into much bigger companies - this is how Garden Affairs began all those years ago!
There are plenty of ‘fun’ decisions, like choosing from the many sizes, styles and colours of garden offices we can supply. A subject that is often raised by clients when choosing a garden office is how it will affect their company’s accounting and this is an area where there seems to be confusion about whether there are financial implications for a home-based business having its office in a separate garden building.
At this point (as you’d expect!) we’re going to print a really big caveat. We’re not qualified accountants, and with the various scenarios available and the particular needs of each company, it’s really important that you only make a decision on how to account for your garden office once you’ve consulted yours. Business Link and similar organisations also provide useful advice.
However, it’s often useful to have some outline guidance just to get you started. For our clients running their own business, there are two main ways that they treat their garden office: as an asset owned by their company for purely commercial use, or as a privately-owned part of their house for which they can charge their company some form of rent. Each option has its own potential advantages and tax implications.
A garden office owned by your business
In the first scenario, your company may be able to reclaim VAT on the cost of the office, installation and fittings if it is VAT registered, and clearly this can be a big saving. Other criteria may apply, including whether the office is technically capable of being moved. Small-business VAT schemes place a minimum value on the items on which you can reclaim, so this is one to check if the VAT-reclaim route looks attractive, as the VAT paid on things like smaller fixtures may not qualify.
Usually, your company can’t offset the cost of the office as a capital allowance against corporation tax: an office is not classed as having a “productive or industrial function” but as a location where these functions take place.
However, the cost of an office for other business uses such as a workshop may qualify in your capital allowance, and the fixtures and fittings in a garden office do qualify for corporation tax offsetting, including the cost of their installation. This includes connecting utilities such as water, power and heating as well as desks and equipment. All of these can be itemised on our invoice if this is something your company wants to do.
Business rates and CGT
While this route clearly has potential tax advantages, garden offices accounted for in this way may attract business rates. However, small businesses and those based in rural or designated economic areas often qualify for significant business rate reliefs, so this may not be significant in practice. Reliefs vary by local authority, so do take local advice.
Another issue is that if part of your home is used and accounted for exclusively for commercial use, it may create a liability for capital gains tax (on the value of the office only) when you sell your home. The significance of this will depend on the relative values of your home and the garden office, how the CGT compares to the applicable tax benefits above, and the timescale over which you intend to live in your current house and run your business from the garden room.
Overall, the balance of benefits and costs will dictate if this route looks practical for your business. While it’s not often true of a home-based office, remember also that if your business location will generate significant traffic or other impacts on your neighbourhood, you may have no choice but to get planning permission for commercial use anyway.
A part of your home
The second scenario treats your garden office as part of your home, just as if your business were still in your back bedroom (but without the clutter!) You pay for the office personally and you charge rent to your business. If you personally profit from this income, you may be liable for income tax on this. However, if you charge rent at cost based on a sensible allocation of your business’s share of relevant domestic costs, you are not earning any profit. These costs can include interest on a loan arranged to pay for a garden office.
If your garden office is used partly for domestic purposes – including a garden store, perhaps, or adaptable as a guest room, all of which we can advise you on – this helps to reinforce the non-commercial designation of the building should the need arise. You just need to adjust the allocation of domestic costs applied to your business accordingly.
Unless it is above 2.5m in height, a log cabin, summerhouse or garden studio which you happen to use for office purposes won’t normally need planning permission; we can advise you further on planning issues.
An office for home-based employees
Many of our garden office clients are home-based but not self-employed, of course. A growing number of companies offer the option for employees to work away from HQ some or all of the time. Some companies are willing to pay ‘rent’ for home-based office space whether it is in the house or a garden office. Just as with charging rent to your own company, personal income tax implications need to be considered in setting sensible “at cost” rates.
Other organisations we’ve heard about have provided an interest-free payroll loan to employees to fund the cost of a garden office. This operates like a season ticket loan, with a deduction from payroll for the employee to repay the cost – it may be worth asking your employer if they’d consider this option. HMRC indicate that as for a season ticket loan, there is no tax, NIC or reporting requirements on a ‘beneficial loan’ of this kind up to the value of £5,000 per tax year.
Find the right balance for your business
So all together now, one more time: you need some expert advice on this, just as you would for any other choice of business premises. We’ve based this on what we know from clients and published experts, but things can change and the treatment of business rates and even commercial planning enforcement varies by location.
Then it’s back to the fun stuff. Once you’ve decided on the best way of putting your office through the books, you can relax and enjoy all the benefits of a luxury garden office: de-cluttering your home, reclaiming your work-life balance, designing a unique and inspirational workspace, and feeling inspired sitting at a desk with the best view on earth.
Speak with our Garden Affairs team to design a garden office of your own.Contact us