Tax and building a workspace at home
Susan is a self-employed childminder. She is planning to have an extension built on her home, in which she’ll run her childminding business. Susan would like to know if she is entitled to a tax deduction for any of the construction costs. Partner and Tax Specialist, Christiaan Hansen, looks at the implications below.
Homeworking
Tax deductions for homeworking are a bone of contention with HMRC, especially in relation to employees.
However, Susan as a taxpayer is not employed, she is a sole trader who currently runs her childminding business from a local hall, unfortunately for her the hall is soon to be demolished. Rather than find new accommodation to rent she’s having an extension added to her home from which she’ll operate the business. The cost is significant but as she intends to use it for the business for many years, it will be cost efficient in the long run. What’s more, the extension will increase the value of her home and even better if she can get tax relief for building the extension.
Capital expenditure
The bad news is that the cost of the extension is capital expenditure, and the tax rules specifically prohibit a deduction when calculating taxable profit. However, since 2018 a different type of tax deduction can be claimed for constructing or extending a building used for business.
The SBA
The structures and buildings allowance (SBA) can be claimed as a capital allowance (CA). However, the SBA rules contain a clause which specifically prevents allowances for a building which is for residential use. The rules specifically deem a structure or building to be in residential use if it is situated on land that is or intended to be occupied as a dwelling, even where in practice it’s used only for business purposes. However, there is some good news.
In our example, Susan as a taxpayer is entitled to a tax deduction under the CA rules for equipment (plant and machinery) that is attached or contained within the extension.
Capital allowances other than the SBA
Capital allowances can be claimed for the cost of equipment which the tax rules specify as “integral features”, and for other general plant or machinery contained in the extension. Integral features are electrical systems, lighting systems, cold-water systems, space or water heating system such as radiators, a powered system of ventilation, air cooling, air purification, lifts and escalators, solar shading and solar panels.
In addition to integral features, Susan in the example would be entitled to CAs for the cost of other plant and machinery affixed to the extension. For example, this would include shelving and seating, safety bars and handrails.
IN SUMMARY
A tax deduction is not allowed for the cost of building the extension because it is a capital expense which is specifically excluded. However, you can claim a deduction for the cost of plant and machinery included in the extension, e.g. heating and lighting systems, air conditioning, shelving and so on.
Contact the JRW Hogg & Thorburn team to discuss this further and any other related questions you may have.
