Working from Home

Working from Home

Didn't find your answer?

I am sorry for asking a question that has probably been asked several times before what I just wanted to check your thoughts on a director charging rent to his own company.

I have a OMB Ltd company client where the husband and wife work from home in a spare room of their house which is allocated as an office with two desks, PC's etc. There is not 100% business use as the computers are used for private use for internet access etc by themselves and their children.

As employees of their own company working from home I am aware that they could both claim £2 per week but as their home is the only business premises of the company and thus saving a commercial rent I would have thought it would have been reasonable for a share of their expenses to have been reimbursed.

I have received a flyer through the door this week from Company Director magazine suggesting that in order to increase the expense claim above the £2 limit their advice is to draw up a Home Office Landlord Licence Agreement allowing the company to use the room designated as a Home Office and providing the agreed rent is equal to the actual proportion of expenses relating to the office then there will be no tax problems for the Directors.

I would appreciate feedback from anyone who has used this approach in practice and your opinion on whether the Revenue are happy with agreements such as these?

Many thanks

Alison Smith

Replies (5)

Please login or register to join the discussion.

avatar
By User deleted
30th May 2007 17:01

CGT issue
I disagree slightly with the CGT issue. As long as the room/office is not used exclusively for the business, then PPR will still be available in full. I am in the exactly the same position as Alison's client and charge a rent to my Company. I calculate this based on a proportion of mortgage interest, council tax, gas and electricity calculated by reference to the number of rooms in my house and then assume that 80% of that relates to business use. As my rent charged equals the costs, no IT liability and no CGT problem as the room is not used exclusively by the Company.

The only problem I have heard of is that the mortgage company may get a bit funny if you create a licence agreement without telling them.

Thanks (0)
avatar
By AnonymousUser
31st May 2007 16:39

Dubious
I stand ready to be corrected but I have doubts about Ali's suggestion. This would appear to rely on the wording of section 223 TCGA 1992 which talks in terms of apportionment of a gain where part of a dwelling house is used exclusively for the purposes of a trade or business. Ali's argument would appear to be that, by using the room even partially for private purposes, he escapes the exclusivity test in Section 223. In terms of practicality I find it difficult to envisage a rental agreement between the individual and the company which would truly satisfy that requirement - and am pretty sure that HMRC would challenge such a stance.

Even if the rental agreement stated that, say, the room was let to the company from say, 4 am to midnight (i.e. roughly 80% of the time), the obvious HMRC argument would be that between those hours the room was let exclusively for the purposes of the business of property letting. This brings Section 223 into play and gives rise to a potential Capital Gain. If you attempt to argue that the room is let to the company at all times, but used 20% of the time for private purposes, you run into dangers that HMRC will argue that the Directors are then making personal use of a company asset (for 20% of the time)

Thanks (0)
avatar
By User deleted
31st May 2007 18:57

Licence
You can have a non-exclusive licence. Consider the following: Best to have something in writing (no Stamp Duty Land Tax Return or cert required). Avoid use of word "rent", should be "licence fee". Similarly "owner" and "licensee" rather than landlord and tenant. Key points: non-exclusive occupation of room during certain hours, right of owner to substitute another room, benefit of licence personal and non-assignable, similar right to use phones, right to store papers in a location to be designated by owner from time to time. Could give a right to park as well if any company owned vehicles. Owner should promise to pay outgoings. Owner has to declare licence fee obviously. You can pick up some precedents off the web - common for serviced offices. No liability accepted!!

Thanks (0)
avatar
By brookfinancial
31st May 2007 20:46

Nightmare!
Thank you to everyone who has replied to my query.

It does seem that it is far harder for a company director of his own company to be able to claim for home working compared to a sole trader in a similar position.

Your answers have led me to believe that there is not enough use of licences/rent agreements in practice without causing tax issues to arise - I therefore will probably stick to the ordinary £2 per week until a more definite solution is discovered!

Many thanks for your help.

Thanks (0)
avatar
By Tony Monger
30th May 2007 15:00

Some pitfalls
It is perfectly acceptable for Directors to charge a rent to the company for the use of an office but there are potential pitfalls. The first is that of liability to tax on rental income; in effect they, as individuals, are letting property to the company. The income from the letting is assessable upon them. They can, of course, claim expenses against the letting but these are likely to be minimal - e.g. a small proportion of the interest on their mortgage, a small amount of council tax. Considered in those terms, the rent is likely to have to be very low to avoid attracting liability on property letting (and note that the Rent-a-room scheme will not apply as this is office accommodation rather than residential accommodation - see HMRC PIManual 4002).

The other pitfall is capital gains on the subsequent sale of the property. The Private Residence exemption will not apply to the 'let' room for the period in which it is let. In the past the gains arising upon the small portion of a private residence that has been used for office accommodation have often been too small to give the Inspector much concern over possible CGT liability. However, the dramatic rise in property prices in some parts of the country in recent years now makes this a real issue for consideration. If the property enjoys a dramatic rise in value, the CGT liability arising on the gain on the sale that is attributable to the let room, together with any possible liability on the letting itself, could well wipe out the potential benefits of such an arrangement.

Thanks (0)