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TaxationWeb by Andrew Needham

Andrew Needham of VAT Solutions (UK) Ltd considers an important VAT issue for those working from home.

Example

The Managing Director of a company, Mr Jones, works from home a lot and is considering having his loft converted into an office to give him more room. The new office will contain the usual computers, desks etc and be decorated and furnished in line with the proposed use. The full cost of the building work, decorations and equipment will come to £20,000 plus VAT which the company will pay because it will all be used for business purposes. The VAT on the work and equipment will come to £3,500, and Mr Jones wonders if the company can recover this.

Classic solution

The normal answer is that the company can recover the VAT on the equipment, they own it and it is for business use, but the VAT on the building work and decorations cannot be recovered because, on the face of it, it is specifically blocked by the VAT legislation (ss 24(3) and (7), VAT Act 1994). This states that “where a company purchases, acquires or imports goods or services which are used or to be used in connection with the provision of domestic accommodation by the company for a director, those goods or services are not treated as used or to be used for the companies business and any input VAT is not recoverable”.

Tip

There is a little known (even to Customs) concession to this rule that allows the recovery of input VAT in certain circumstances. Customs’ published and internal guidance states that:

“Where a domestic room or rooms is put to business use, Customs & Excise may agree to an apportionment using an objective test to the extent to which the room is put to business use”

(VAT Notice 700, para 4.8, C&E Manual V1-13, Chapter 2A, paras 14.7 and 14.7)

This means that if Mr Jones can show Customs that he intends to use the loft conversion for entirely business purposes, then the company will be able to recover the VAT on the building work and materials. If he can show that the carpets and decorations are for a business purpose as well, than the company will be able to claim that VAT back as well.

How can Mr Jones avoid trouble with Customs?

It is possible for the company to just claim all the VAT back in the normal way and see if Customs query it when he comes to visit. However, we would not recommend this as you could find yourself involved in protracted correspondence with the local VAT Inspector. We would recommend that you inform Customs in advance, giving them all the necessary information to allow them to agree that the building work is only being carried out for a business purpose and that there is no private use. Include any architectural plans and lists of the furnishing that you intend to use. The watchword would be to be reasonable; use an adequate carpet, not the most expensive in the shop, and use simple decorations to make the office habitable - don’t hire an interior designer and hang works of art on the walls!

The staff dealing with written enquiries are more experienced in this area than the normal VAT Inspectors, and have more time to consider the matter without the pressure to make a quick assessment. If you make a reasonable case, you should have no trouble getting the VAT back.

The same principle applies to extensions, garage conversions, and even having a shed at the bottom of the garden as your office. Provided it has a genuine business use, and the purchases and decorations are in line with the proposed use, the VAT should be recoverable by the company.

Andrew Needham
Director
VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com
Tel: 01928 571207 (Runcorn Office)
Tel: 01925 242497 (Warrington Office)
website: www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc