As a company director, setting up a home office can be an efficient way to manage your business. However, it’s crucial to understand the tax implications and legal considerations associated with this decision. This blog post will explore two scenarios: using your home office exclusively for business purposes and using it for both business and personal use.
1. Home Office for 100% Business Use
If you decide to dedicate a space in your home exclusively for business use, consider the following points:
a) Formal Agreement
You must establish a formal agreement between your company and yourself, stating that the home office is for 100% business use.
b) Capital Expenditure
While the majority of building costs are not tax-deductible, certain items qualify for capital allowances. These include:
- Electric wiring
- Plumbing
- Thermal insulation
- Furniture
- Shelving
- Lighting fixtures
c) Running Costs:
You have two options for claiming running costs:
- Claim the business proportion of actual costs for:
- Lighting and heating
- Home insurance
- Telephone and broadband
- Other relevant running costs
- Claim a flat rate home working allowance of £6 per week
d) Capital Gains Tax
While you typically don’t pay capital gains tax when selling your primary residence, having a 100% business-use home office may change this. The potential capital gains tax would depend on:
- The size of the home office
- The percentage of total floor area it occupies
If the potential capital gain is insignificant, this may not be a concern.
e) Local Council Considerations
You must inform your local council about your home office. Depending on their assessment, you may or may not need to pay business rates.
f) Benefit in Kind
If you declare the home office as a company asset and there’s any element of private use, you must report this on a P11D form for Benefit in Kind. This will result in:
- Class 1A National Insurance payable by the company
- Personal income tax payable by the director
2. Home Office for Both Business and Private Use
If you use your home office for both business and personal purposes, the considerations are different:
a) No Formal Agreement
You don’t need a formal agreement between the company and yourself.
b) No Capital Gains Tax Implications
There are no capital gains tax concerns when selling your home.
c) No Need to Inform Local Council
You don’t need to notify your local council about your home office use.
d) Running Costs
You can still claim running costs for the business proportion of use, but you cannot deduct any building costs.
Conclusion
Choosing between a 100% business-use home office and a mixed-use space depends on your individual circumstances. There isn’t a one-size-fits-all solution. It’s essential to consider all aspects carefully and consult with your accountant before making a decision. By understanding the tax implications and legal requirements, you can make an informed choice that best suits your needs as a company director.
Still unsure about the best home office setup for your situation? Book a free 1-2-1 consultation today with our expert accountants today! We’ll help you navigate the tax implications and find the most beneficial solution for your business. Contact us now to schedule your complimentary session.
