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Ltd Co buying residential flat to use as Office

Thoughts please

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A client wants to purchases a residential flat and use it as his office. The facts are

He wants to buy the flat using money that belongs to the Limited Company.

The flat will belong to the limited company and won't be rented out.

The flat he wants to purchase is in the same premises that he is owner/occupier of a larger flat. 

He doesn't intend to use the flat for anything other than an office.

There will be no visitors to the office. He visits clients they don't visit him. 

Crucially - he doesn't intend to notify the council of change of use from residential to commercial as he wouldn't get planning permission to run an office. He won't be notifying the leaseholder.

My thoughts are that because the premises is residential and will remain so it is not registered for business HMRC wouldn't allow the expenses, there is no proof that the flat is being operated as an office. Not suprisingly I can't find anything to support my views as normally you would go through the change of use for business premises. There are massive implications outside of accountancy such as insurance, fire regs, business rates, dishonesty, neighbours complaining etc which I've flagged up. 

I've flagged up the issues with holding a residential property within a limited company. 

Condensing it down - the client wants to buy a flat through his limited company and claim expenses as if the floor space was 100% business. 

I have been asked by the client to restrict my advice to accounting for the expenses.

Could I have your thoughts on whether HMRC would allow the running expenses for the office to be claimed for Corporation Tax purposes?

Thanks for your time.

Replies (37)

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By Paul Crowley
28th Oct 2021 12:38

If client wants you to just think in expenses and not the full position I would be reluctant
Do you have that in writing, or email?
If you act for the company, how can you ignore information received?
How can the flat not be available to the director?

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By SteveHa
28th Oct 2021 13:00

Quote:
Crucially - he doesn't intend to notify the council of change of use from residential to commercial as he wouldn't get planning permission to run an office. He won't be notifying the leaseholder.

I'd be quite concerned about this. If he's prepared to breach regulations and contracts with such impunity, what else is he prepared to do.

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By Bobbo
28th Oct 2021 13:22

If he won't be having clients visiting the office flat and he himself lives in a larger flat in the same building, what exactly is the reason for buying a whole separate flat?

Is he really going leaving his living flat at 9am to go to the office flat and then going back at 5pm each day?

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By Hugo Fair
28th Oct 2021 13:35

Although it goes against the (moral) grain, I guess the question could be re-phrased in two parts:
a) If the company purchased a premises as its office (and that premises wasn't in the same block as OP's client .. and wasn't residential), then could client claim running costs of the office as expenses for CT purposes?
b) If yes, what is it within the info provided that would stop this from being the case?

But IMHO, the bigger issue for OP is that you can't really pick and choose which bits of conversation with a client you have 'heard' vs the bits for which you were struck deaf.
As Steve suggests, the red flags appear to have bells attached and could soon start putting into practice their lessons on the Klaxon!

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Replying to Hugo Fair:
Routemaster image
By tom123
28th Oct 2021 13:57

I only learned recently that Klaxon is a brand name, like Hoover..

Of course you knew that, Hugo, which is why you used a capital letter :)

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Replying to tom123:
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By Hugo Fair
28th Oct 2021 14:23

I did indeed. My fount of useless knowledge includes several others - but my favourites are when the generic noun not only originates from a brand, but from the name of the original manufacturing company ... like Tannoy (who still exist)!

A close second is Fridge, which doesn't originate from Refrigerator but came into use when the leading exponent was the Frigidaire company (who built the first one just over 100 years ago) ... but unfortunately were taken over by Electrolux.

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Replying to Hugo Fair:
RLI
By lionofludesch
28th Oct 2021 18:30

Hugo Fair wrote:

A close second is Fridge, which doesn't originate from Refrigerator but came into use when the leading exponent was the Frigidaire company (who built the first one just over 100 years ago) ... but unfortunately were taken over by Electrolux.

What ????

Surely they were named after the inventor, Les Fridge, the former St Mirren, Clyde and Dundalk goalkeeper !

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Replying to lionofludesch:
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By Paul Crowley
28th Oct 2021 18:33

I thought Les Fridges was French for some fridges

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Replying to Paul Crowley:
RLI
By lionofludesch
29th Oct 2021 09:56

Paul Crowley wrote:

I thought Les Fridges was French for some fridges

You're thinking of his brother, Des Fridges.

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Replying to lionofludesch:
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By Hugo Fair
28th Oct 2021 19:58

And I thought MY mind was full of obscure facts (well it is but not usually relating to football - given that my local club peaked in 1975-6 when they came within 1 point of winning the 1st Division as-was, but lost it and then Stan Bowles).

But I'm impressed you knew of Les Fridge ... who "transferred early in his senior career to Chelsea in April 1985. He played regularly for the Juniors in 1985-86 and made his first-team debut for Chelsea in the last game of that season at home to Watford. Chelsea lost 5–1. This was his first and his last game for Chelsea." Brutal!

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Replying to Hugo Fair:
RLI
By lionofludesch
29th Oct 2021 09:55

Hugo Fair wrote:

But I'm impressed you knew of Les Fridge ... who "transferred early in his senior career to Chelsea in April 1985. He played regularly for the Juniors in 1985-86 and made his first-team debut for Chelsea in the last game of that season at home to Watford. Chelsea lost 5–1. This was his first and his last game for Chelsea." Brutal!

Surely everyone's heard of Les Fridge.

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Replying to lionofludesch:
By plummy1
30th Oct 2021 19:03

He only had the licence to sell them in France,

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Replying to lionofludesch:
By plummy1
30th Oct 2021 19:03

He only had the licence to sell them in France.

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Replying to Hugo Fair:
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By Paul Crowley
28th Oct 2021 14:13

I started to think in that direction, but no business rates and community charge?
How many rooms in the "office"?
Lounge and two bedrooms?
Never used for visitors?

QI Klaxon all over it

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paddle steamer
By DJKL
28th Oct 2021 14:17

I can think of certain business activities where an extra flat might be useful, catch is most of these business activities are illegal (Albeit taxable)

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Replying to DJKL:
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By Paul Crowley
28th Oct 2021 14:21

Nah
Its probably just a mancave with a cinema

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Replying to Paul Crowley:
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By Hugo Fair
28th Oct 2021 14:25

Or (very non-PC) if he's really brave, is it the place to install his 'secretary' without his wife realising?

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By lesley.barnes
28th Oct 2021 14:26

Thanks for taking the time to reply. These highlight my problem perfectly as Hugo says if this were a commercial office premises the running costs would be allowable. The client has said his flat is too small to use as his office and he wants to keep his work/personal life separate. I have offered my opinion verbally when I was asked about purchasing the flat re-planning, limited Co etc hence being asked for an accountancy perspective rather than the legal aspects. The accountancy perspective is proving more difficult to articulate than the moral perspective.

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Replying to lesley.barnes:
paddle steamer
By DJKL
28th Oct 2021 14:41

I see no reason why the flat running costs would not be allowable, just because use as office is not permitted does not mean it is not deductible.

Running a brothel is not permitted but it is I believe taxable and the costs are I believe deductible. (Not that I ever acted for one)

To me the issue is not a tax problem it is an issue re permitted use, insurance and consequences if something goes wrong etc (eg one night shredder bursts into flames, entire building destroyed etc, comes out post event how premises used, there is a possibility the client just landed on the square after Picadilly)

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Replying to DJKL:
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By gillybean04
28th Oct 2021 15:07

When are business rates payable? When are expenses allowable?

On one hand he'll be claiming no part of the property is exclusively used for business use (for council tax) but simultaneously claiming 100% of the expenses were "wholly and exclusively" for business purposes.

Seems a bit contradictory. No?

I wonder who the council tax bill will be made out to, given the director is neither occupant or owner of the property.

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Replying to gillybean04:
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By Paul Crowley
28th Oct 2021 18:37

Good one
But a company can own a buy to let so may not trigger any questions

Service charge companies will not bat an eyelid at company ownership of flat

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Replying to DJKL:
By SteveHa
28th Oct 2021 15:14

I haven't acted for one, but many years ago (back in my Revenue days) we had one paying taxes. Albeit, under the guise of "modelling" or some such, but what was (then) illegal (I believe it is now just a civil matter, though I could be wrong) was still taxable, and oddly they went out of their way to comply with taxation.

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Replying to SteveHa:
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By Hugo Fair
28th Oct 2021 15:44

Hopefully will end up with full entitlement to State Pension ... although a change in career may be sensible for some of the later years of contributions.

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Replying to DJKL:
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By Paul Crowley
28th Oct 2021 15:56

One issue would be that the building insurance will be paid by the Management company.

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Slim
By Slim
28th Oct 2021 14:31

It feels to be like it could be argued and there are some small things you can do to stop the accommodation BiK kicking in but I'd never advise that.

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Replying to Slim:
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By Hugo Fair
28th Oct 2021 14:43

Although no-one has come out and said it openly, my feeling is that (irrespective of the 'stick to the tax treatment' edict) he, or rather his company, can only really buy it as residential premises ... for all the reasons of fact outlined in OP & by responders.
In which case the company can provide it to him (as a BiK) ... and he might well be able to receive the WFH 'allowance' tax-free from his 'employer'. But I think that's the last time you're going to hear the words 'tax free' in this context.

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Replying to Hugo Fair:
Slim
By Slim
28th Oct 2021 14:54

It's an interesting topic.

If he were to remove the kitchen it would add some weight to it no longer being accommodation for the purposes of BiK. A bit like atleastisoundknowledgable... if it looks like an office and used as an office etc.

Although you've still got the freeholder issue, rates which would probably cost less than the council tax, planning, insurance, mortgage (if required) etc.

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ALISK
By atleastisoundknowledgable...
28th Oct 2021 14:47

i have a feeling that this came up a couple of years ago in AW - I think that flat had been cleared of all recognisable furniture and kitted out as a ‘proper’ office … or maybe there was still 1 bedroom and the place was used as a office/layover for travelling staff …?

Or am I daydreaming again?

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Replying to atleastisoundknowledgable...:
By SteveHa
28th Oct 2021 15:16

The issue here is still not a tax matter, but the failure to notify the local authority and the leaseholder of the change of use.

Even if we concentrate on tax alone, I'm pretty sure that HMRC would find this to support their case.

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By gillybean04
28th Oct 2021 14:52

Sounds like your client has advised you that they're going to commit fraud to avoid paying business rates.

Furthermore, it sounds like they do not value your knowledge or experience.

I appreciate that clients may only want certain services, but if they do want advice, they don't get to dictate what advice I give (although obviously they are free to choose whether to follow all, some or none of that advice). It is MY place, as the paid professional, to know what the advice should include. While I can't force them to take my advice, they can't force me to give advice that I feel would be negligent because it was incomplete/did not cover all relevant points that any reasonably skilled professional would.

Don't let demanding or awkward clients lower the level of service you provide. Especially when it could result in liability for you later down the line.

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Replying to gillybean04:
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By Southwestbeancounter
28th Oct 2021 15:22

Good advice Gillybean!

Easier to say than do sometimes but still very sound advice in my opinion and I do feel the client of the OP seems rather disrespectful of the all round advice being offered.

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By OldParkAcct
28th Oct 2021 14:59

He is probably breaching the lease terms by using it commercially. That could result in the lease being terminated, perhaps the risk of this might persuade him to change his plans.

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By lesley.barnes
28th Oct 2021 15:58

Thank you everyone AW contributors at their best - lots of really useful points that I hadn't thought about.

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Jason Croke
By Jason Croke
28th Oct 2021 17:43

SDLT been factored into it? Acquiring a residential in a Ltd attracts the 3% surcharge and if the value of the property is over £500k then potential for the higher additional rate plus ATED. Calling it an office doesn't change its status for SDLT purposes.

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RLI
By lionofludesch
28th Oct 2021 18:32

I reckon it's the zillions of non-tax issues which are the problem.

All the expenses seem to be wholly and exclusively incurred.

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Replying to lionofludesch:
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By Paul Crowley
28th Oct 2021 18:42

But only if it is an office and exclusively an office
Not spare accommodation

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Replying to Paul Crowley:
RLI
By lionofludesch
28th Oct 2021 19:11

Paul Crowley wrote:

But only if it is an office and exclusively an office
Not spare accommodation

The client has assured us that's so.

Is there evidence to the contrary?

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