When you work for yourself you need to set aside some space for your business, if only to complete and store all the paperwork the Taxman requires! The spare bedroom often fits the bill, but where that is not available a purpose-built garden building can be the solution.
We are talking glorified shed here, not a permanent structure that may need planning permission. However, do check with your local council, as in some areas there are restrictions on the height and size of sheds which homeowners are permitted to construct in their gardens.The Taxman will treat the cost of the garden building as capital expenditure, as the item is expected to last for some years. You are only allowed to deduct the cost of capital expenditure from your profits for tax purposes when the item purchased qualifies for a so-called capital allowance.
All equipment that is used within the business qualifies for a capital allowance. But your garden office is not a piece of equipment, it is a structure in which the business operates, – at least for part of the time. So on the face of it you cannot deduct the cost of the garden building from your profits. This applies even if the building is theoretically moveable, such that it can be dismantled and reconstructed elsewhere if required.
However, there are some elements of the garden building that can qualify for the capital allowance, and hence be tax deductible:
The cost of installing power to the building, including any electrical wiring, light fittings and space heaters all qualify for the capital allowance. If the building is likely to use a significant amount of power you may want to have a separate electricity meter installed to monitor the energy used, so you can charge that cost directly to your business.
The cost of installing a cold water supply to the garden building also qualifies for the capital allowance, as will the cost of any water-heating device. If you need to include a powered system of air-cooling or ventilation, that will qualify for the capital allowance. Any office furniture or equipment purchased for use in the garden building also qualifies for the capital allowance.
The maximum cost of items that can you can claim as a 100% capital allowance per year (i.e. a full deduction for the cost), is £100,000 for items purchased after 5 April 2010. If your garden-office was purchased and installed between 6 April 2008 and 5 April 2010, the maximum cost per year qualifying for 100% capital allowances is £50,000. Any excess expenditure above this annual limit does qualify for a capital allowance but only 20% or 10% of the excess cost can be deducted from profits in any one year. The exact rate of deduction depends on the item purchased.
If your business is VAT registered you can reclaim the VAT charged on the cost of acquiring and installing your garden building, on your quarterly VAT return.
However, if you use the flat rate VAT scheme for small businesses there are restrictions on the VAT you can claim back on capital items. Under that scheme you can only reclaim VAT on capital goods that cost at least £2,000 each (including VAT). The cost of the garden building may exceed £2000, but your office equipment and furniture unlikely to cost £2,000 or more per item. The installation costs for electricity and water are not ‘goods’ for VAT purposes, so if you use the flat rate scheme for small businesses you cannot reclaim the VAT charged on those bills.
One word of warning: Some local councils are keen to collect business rates where any part of a domestic property is used exclusively for business purposes. The way to get around this is to ensure your garden building has some limited private use, perhaps to store sports equipment.