The garden office part 3: Business ownership
Some garden offices are intended to be used entirely for business and, if so, it’s worth exploring which costs of installation and construction the business can incur without creating tax problems.
Where the garden office pod is purely used for business there is likely to be a much greater desire to achieve the maximum tax benefits for the business.
Structures and Buildings Allowances
Could there be any reliefs for the structure itself if it’s owned by the business?
A garden pod in and of itself falls within the category of a structure for the structures and buildings allowance (SBA) introduced in October 2018. This allows relief at 3% per year on a straight-line basis on the costs of the construction of non-residential buildings.
However, SBAs are not intended for buildings with residential use. In HMRC’s original technical note from 2018, it stated that “no relief will be provided for work spaces within domestic settings, such as home-offices”. Subsequently, in June 2019, the Government noted that legislation would be introduced to clarify that assets within the curtilage of a residential structure or building would also be excluded.
The guidance on gov.uk is similarly clear, so the usual reply to a request to claim SBAs on a garden pod is: “No you can’t”. However, the way the legislation is written suggests there might be some limited scope in some circumstances for individuals with large gardens, who are able to set aside space for a pod outside the definition of “garden and grounds”.
Other costs which are unlikely to qualify for tax relief are planning expenses, legal fees and any architect or design fees. These will all form part of the initial capital outlay by the business for the pod which will be capitalised in the accounts and may be offset against sale proceeds in the future.
Plant and machinery allowances
While there is no relief for the structure, the business should be able to claim capital allowances on integral features such as wiring and plumbing, as well as any necessary furniture or office equipment needed to kit it out for business use.
The key is to ensure there is sufficient evidence of the costs of any fixtures and fittings supplied with the pod to make a claim for any integral features. The person supplying and installing the pod should be asked to supply a detailed breakdown of all the various costs to provide the evidence to support any capital allowances claims.
Where the business is VAT registered there may be scope to recover the VAT on the various costs of constructing and installing the pod. However, the VAT treatment of construction and building costs can be complex, and the position will need to be considered in detail based on the exact nature of the supply, and the intended use of the pod.
Care will also be needed if the business is on the flat rate scheme, as VAT can only then be reclaimed on capital assets where the amount of each individual purchase, including VAT, is £2,000 or more. Under the flat rate scheme VAT cannot be recovered on any other goods or services, so the costs of fees for advice about the pod will not be acceptable.
As the business owns the pod, it can also meet the running costs and claim these are a business expense.
All the above is based on the pod being used 100% for business. But can the homeowner have their cake and eat it: get their business to pay, but use the pod for both business and pleasure? Potentially yes, but it will inevitably generate more tax issues.
For the unincorporated business, any private use will mean a need to restrict capital allowances and VAT claims, as well as restrictions to the proportion of running costs claimed.
For an incorporated business, the pod in the director’s garden is likely to create an ongoing benefit in kind issues, as well as restrictions to VAT reclaims.
Benefit in kind
At the moment there does not appear to be any specific guidance on the benefit in kind charge for garden offices.
One approach would be to view the pod as an asset which has been lent to the director and is available for their use, but to which legal title has not been transferred. If the pod does not fall within the special rules for living accommodation, then the general rules will apply. The HMRC view is that living accommodation is something that gives the occupant the necessary facilities to live domestic life independently without reliance on others to supply basic needs, so offices and workshops are excluded.
In this case, unless the pod is hired, the cash equivalent of the pod to be assessed each year as a benefit will be 20% of the market value of the asset when first made available – most likely the cost of the asset when new. This is likely to be more significant than the benefit in kind for living accommodation and, if the pod is to be kept long term, it might be better for the director who wants personal use to pay to install it privately.
In the first tax year, this benefit can be apportioned so the individual is only taxed on the number of days since the pod was first made available.
Sale of house
The final hurdle is the position when the individual comes to sell their home, with the business-owned pod in the garden.
Is the pod is going to be sold with the property, or relocated to the new residence at the cost of the business?
If it is to be relocated, then the individual only needs to consider if there is any PRR restriction on the land where the pod was located, as a result of the business use.
If the pod is to be sold with the house then, in addition to any PRR restriction on the land occupied by the pod, the business will need to receive some proceeds for the sale of its asset. To avoid the business being part of the sale process, it might be simplest to transfer the pod at market value to the homeowner prior to sale first, with a valuation of the pod obtained as evidence that a reasonable market value was paid.
The receipt of proceeds may trigger a tax charge in the business, but this should not be significant if the pod has been used for some years as these structures are less likely to appreciate in value (and more likely to depreciate) than bricks and mortar. There is also the potential to trigger some balancing charges for the integral features within it.
A simple decision to construct or install a garden pod will result in as many tax issues as there are styles and finishes of pod to choose from. There are also a few legal issues such as planning to be thrown into the mix.
Like all gardening, a garden office will require planning, patience, and a bit of perseverance.
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Helen Thornley has a focus on personal and capital taxes. Initially training as an accountant before moving to tax, she worked in practice until her appointment as a technical officer in 2017. She also has an interest in the history of tax.