Tax Doctor:
Mark McLaughlin
ATII ATT TEP

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September 2004

Q:

I operate a limited company as a professional adviser. My business operates from home in a dedicated office - with some private use as well. In the company's 2003 accounts, my wife and I jointly charged the company £9,000 rent for this use of home as office which we have disclosed separately in our individual tax returns - and paid income tax on as appropriate after claiming relevant deductions.

A:

The same rules for claiming business expenses apply in respect of the rent paid by your company as for other expenses, i.e. it must be ‘wholly and exclusively' incurred for business purposes. There is nothing wrong in principle with charging your company rent for the business use of your house. However, there are a number of issues to consider. For example:

• The rent should not exceed a market rent. It may be difficult to ascertain what is a fair ‘market rent' for the occupation of a dedicated office in a house. You mention that the rent is commercially justifiable in terms of the potential cost of leasing alternative premises, but obtaining a professional assessment of the rental value is recommended, if you have not already done so. If the rent is excessive, part of the expense may be disallowed as a deduction when calculating the company's tax position.
  
  
• A licence agreement between you and the company should help to demonstrate a degree of commerciality about the rental payments. It should also prevent the Inland Revenue challenging the rental payments on the basis that that they in fact earnings disguised as something else.
  
  
• You mention that the company operates from a ‘dedicated' office in your home. This may affect the tax position when you and your wife eventually sell the house. There is relief from capital gains tax on gains from the disposal of an individual's only or main residence. However, this relief is restricted to the extent that any part of your home is used exclusively for business purposes. You mention that there is some private use of the office, so it might be possible to argue that the office was not ‘exclusively' used for business. However, the Inland Revenue could argue that private use should be disregarded, if it is merely incidental to the main business purpose.
  
  
• With regard to personal use of the office, if you are using a dedicated office that is let to your company at a commercial rate, then it seems likely that the company is effectively paying for that personal usage. This may result in a taxable benefit-in-kind. It may be possible to avoid a tax charge by demonstrating that any private use is insignificant, or by reimbursing the company for that private use. However, the degree of private use or the amount of any payments to be made to the company may be difficult to measure.
  
  
• Among the other things to watch out for is the possibility of business rates being charged on the office area, depending on the circumstances (for further information on the potential charge to business rates see Tax Doctor #16. In addition, you should confirm whether your household insurance policy covers commercial lettings and business use. If you have a mortgage, you should also check whether partial business use is permitted.

A piece of good news is that rental income is not subject to National Insurance contributions. Extracting profits from your company as rent in your capacity as its landlord compares favourably with taking a salary or bonus as a director or employee, as the latter is subject to Class 1 National Insurance contributions for both you and the company.

Mark McLaughlin

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