More than ever, many of us are working from home. Though some might still be working from the dining room table, others have made more permanent changes to their homes. Garage conversion into a home office is a great way to ensure peace and quiet to help you work while still being at home.

But as with all areas of work, considering the tax implications is a must. If you were redoing your work building, you’d likely be familiar with the tax implications, but when it’s a home, you may be more unsure. Helpfully, the things to look out for with tax implications of garage conversion as a home office are all outlined below.

VAT

With a normal conversion of an office building, the VAT rules would be clearer. When you are converting your home garage, the rules are a bit more complicated. Like with an office building, you can claim back VAT for building costs on a garage conversion into a home office. However, you can only claim back the full VAT for this conversion if the room is only used for work.

If your garage conversion is used as your home office and is used as a nursery on the weekends, you cannot claim full VAT. Instead, you can claim around 70% percent (i.e., 5/7 of the time is used for business uses, 2/7 for personal uses, so VAT is claimed this way). Similarly, if you use half of the space in your garage as a home office and half as a workspace for your painting hobby, you could only claim 50% VAT on your conversion’s building costs.

VAT rules can become a bit more difficult when you use the VAT flat rate. The VAT flat rate is a scheme by the UK government where businesses pay a fixed rate of VAT and keep the difference between the company’s pay to HMRC and the charge to customers. However, under this scheme, companies cannot reclaim VAT on purchases. This is pretty blanket, except for specific capital assets that cost over £2,000.

Obviously, if you are part of this scheme, claiming back VAT won’t be as easy to navigate. The best thing to do if you are unsure in this scenario is to seek professional advice. The other complication with VAT when converting your garage into a home office is that you cannot claim the VAT back if you are not a VAT-registered business.

Capital Gains Tax

Capital gains tax is the tax put on profits when you sell an asset. In this case, the capital gains tax pertains to your house, should you sell it. If your home has increased in value since you bought it, the profit you make in selling it is the portion of the money that is taxed.

Usually, a house used for private living is not subject to capital gains tax. However, now you have converted your garage into a home office, this may no longer be true.

Capital gains tax does apply if you have used a part of your home for business purposes exclusively. If you use a room in your house – such as a garage conversion – as a temporary or occasional office, it doesn’t count as exclusive business use. However, if your garage conversion home office is your only office, you will have to pay capital gains tax if you sell your home and make a profit.

Ironically, taking this tax implication in the context of the previous point, one will run into another. If you don’t use your garage conversion home office exclusively for business – for example, because you also have a home gym in the corner – you cannot claim the full VAT back on the building costs. On the other hand, if you do use it exclusively, you can claim full VAT but have to pay capital gains tax upon selling.

Business Rates

Business rates are a familiar tax to anyone working for a company. However, when it comes to a home office, the rules become less clear. Business rates will apply to your home office if the Valuation Office Agency gives a rateable value to the home in which your office resides. The likelihood of this will depend on several factors. For peace of mind, it can be smart to contact the Valuation Office Agency before beginning to convert, so you know the tax implications for business rates.

You will likely have to pay business rates and council tax if you’ve made changes to your house for your company. On the government website, they give the example of converting a garage into a hairdresser’s. On the other hand, they also state that if you use a small part of your house for your business, you do not need to pay business rates, such as a bedroom office.

Therefore, the likelihood of paying business rates will depend on the kind of company you run or work for.

Expenses

The recent pandemic has slightly loosened claiming tax on expenses. While you can’t claim tax relief if you choose to work from home, if your garage conversion home office came about because you had to work from home (and wanted somewhere comfortable to do so), you can claim tax relief on expenses. Similarly, if your boss requires you to work at home for all or part of the week, you can claim tax relief on expenses. As long as you aren’t specifically choosing to work from home, you are counted.

You can claim tax relief on several expenses. You can most notably claim tax relief on gas, metered water, and business phone calls access. Of course, this tax relief cannot be claimed on the full cost of these expenses – most of the cost will be due to the presence of people living in your house privately. However, the amount it takes to heat the garage conversion or provide internet can be claimed as tax relief.

Equipment you’ve bought for work, such as laptops or stationery, can also be claimed under these rules.