How a home business can claim the VAT back on domestic accommodation costs, by Andrew Needham for Tax Insider.
Any VAT paid on goods or services must be incurred for a business purpose in order to be reclaimed. As a general rule it is a personal, rather than business, responsibility to provide domestic accommodation. So in most cases the VAT incurred on domestic accommodation cannot be reclaimed.
However, where a business is operated from home and costs are genuinely incurred for a business purpose the VAT can be reclaimed. In instances where expenditure relates to both domestic and business use of the property, the VAT should be apportioned in a fair and reasonable manner.
Carrying on a Business from Home
A sole proprietor or partner who carries on a business from home and uses a particular room or area specifically for business can claim back the VAT incurred on costs which can be identified specifically with that area. This would apply mainly to fixtures and fittings and decorating costs. VAT cannot be claimed on any items used purely for domestic purposes, such as a bedroom suite.
Company directors are technically employees of the companies they control. Directors are unlike other employees in that they have the power to make decisions regarding the expenditure of business funds. On the face of it, VAT on Directors' accommodation is specifically blocked by VAT legislation VATA 1994 s 24 (3) & (7). There is a little known concession to this rule that allows the recovery of input VAT in certain circumstances. HMRC says that where a domestic room or rooms are put to business use they may agree an apportionment using an objective test to the extent to which the room is put to business use.
In some cases a business has to provide domestic accommodation for its employees to make running the business easier. This cost is wholly for a business purpose and any associated VAT can be reclaimed. For example, farms and hotels often provide accommodation for staff because it is essential to have them available at all times of the day and night. In such cases the tax incurred on providing and maintaining accommodation is seen as necessary for the purposes of the business.
An employer may charge their staff for the provision of accommodation. This would be an exempt supply by the employer. Any VAT incurred remains input tax but would be subject to partial exemption restrictions so it may not all be recoverable.
In the case of farmhouses, HMRC accepts that they are an integral part of the farm business itself. Farmers need to be available at all times to attend to livestock and safeguard farm buildings or equipment. The farmhouse also provides domestic accommodation for the farmer and his family. Therefore an apportionment between business and private use is required. Based on a number of Tribunal decisions, HMRC accepts that the business can claim 70% of the VAT incurred on any building work done to the farmhouse.
Many larger farming businesses continue to provide former employees with accommodation after retirement. The properties remain business assets which will, in due course, again be occupied by serving employees. In such circumstances HMRC accepts that VAT incurred on repair and maintenance can be reclaimed.
Providing you have a genuine business reason for incurring costs on domestic accommodation you can reclaim the VAT. If there is both private and business use you should apportion the VAT.