[22.01.21]

It is anticipated that even when social distancing is no longer required, more people will work from home, enabling a greater work-life balance.  This shift to home-working has encouraged people to set up a defined workspace, more than just a corner of the dining table.  One solution is to create a garden office pod, ie. a posh shed! 

There is a wide range of different types of garden office pods, from kits which are little more than a glorified shed, to a fully insulated, self-contained unit costing tens of thousands which can be built from a flat-pack or can even be built off-site and winched into place.  Ultimately there is a solution available, no matter the available budget or space. 

Planning Permission?

There is a preconception, encouraged by some suppliers of garden office pods, that planning permission is not generally required for such a building, thanks to the permitted development rules.  However, this may not be the case for units intended for 100% business use.  Details of the permitted development rules for England and Wales are available on the planning portal – with garden office pods falling under Class E ‘Outbuildings’

For an outbuilding to fall under permitted development rules, the rules highlight that the outbuilding must be ‘incidental to the enjoyment of the dwelling house’.  There doesn’t appear to be a definition of incidental use for planning purposes.  However, it would be reasonable to consider that it will depend on the nature of operations that will be carried out from the garden office.  For instance an individual looking to move out of a spare room might reasonably claim that the use of the office pod is incidental to their use of their home. Alternatively, someone looking to run a business with staff out of their garden office, or a physiotherapist expecting a number of clients daily, will have a much less convincing argument that such usage is incidental to the residence.  If the intended use will be fully or largely business, formal planning permission may well be needed.  In this case, we would recommend that you speak to your local council to understand if planning permission is needed.  It is far better to incur some upfront planning costs, than have to remove the office pod because it does not meet permitted development rules.

Business rates?

Government guidance suggests that making changes to your home to accommodate your business can create business rates issues.  Again it is best to speak to your local council to understand if business rates are payable.  If business rates are applicable, it may be possible to mitigate the costs with small business rates relief; thus reducing the charge to nil, provided that the business only uses one property, and the rateable value of that property is less than £15,000.

Who should pay for the pod?

Where the pod is going to have a mix of business and personal use, you may want to incur the installation costs personally.  Personal ownership can help to keep things simple in the longer term, in particular the tax position should you sell your house.  However, personal ownership does come at a price in the short term.

The immediate downside is that the individual will need to find the funds for the installation, which may mean borrowing personally or extracting additional funds from the business. For an incorporated business, this could mean a further tax liability on additional dividends or salary. It also means forgoing any potential tax reliefs on the installation of the unit which the individual’s business may otherwise have been able to claim.

Although tax reliefs for the installation will not be available if the pod is in personal ownership, the individual should be able to recover business-related running costs from their business (whether it is incorporated or not), either through charging a rent or making an expense claim.

As long as the individual is not operating as a sole trader, they could charge rent to their business.  This effectively results in the creation of a rental business, which will impact on other joint owners of the property, such as a spouse. Any rent charged in excess of expenses such as heating and lighting, will be taxable on the individual and other joint owners, and will need to be reported as rental receipts on the individuals’ self-assessment returns.  A further constraint is that company Directors should not be charging their company excessive rents, as they would not be acting in the best interests of the company. 

The alternative to charging rent, is to recharge the business-related running costs of the pod.  A simplified approach for incorporated businesses, is for the homeworking Director to claim the homeworking allowance (currently £26 per month) to cover the costs of heat and light, plus the costs of any business calls.  Where the business is unincorporated and the individual works more than 25 hours per week at home, they can claim a flat rate allowance towards the running costs.

These flat-rate costs are not particularly generous, however they do significantly reduce the need for record-keeping.

Let the business pay for the desk

Should you need to buy a desk, chair or any other equipment for your office pod, the business should pay for that equipment, as long as the equipment will be used predominantly by the business.  Otherwise there is a risk of benefit in kind costs for the company Director.

If the business owns the pod

Where the garden office pod is purely used for business, you may want the business to own the pod.  If the business purchases and installs the pod, there will be an initial tax-saving to the Director, who will not need to draw out of the business additional income to pay for the supply and installation of the pod.

Structures and Buildings Allowances: Potentially a garden pod could be eligible for the Structures and Buildings Allowance (SBA), which allows relief at 3% per year on a straight-line basis on the costs of the construction of non-residential buildings.  However, HMRC’s technical note states that “no relief will be provided for work spaces within domestic settings, such as home-offices”.  The Government also noted that legislation would be introduced to clarify that assets within the curtilage of a residential structure or building would also be excluded.  The usual reply to a request to claim SBAs on a garden pod is “No”! However, there may be some limited scope to claim SBA where you have a very large garden.

Sunk costs:  Other costs which are unlikely to qualify for tax relief are planning expenses, legal fees and any architect or design fees. These will all form part of the initial capital outlay by the business for the pod which will be capitalised in the accounts and may be offset against sale proceeds in the future.

Plant and machinery allowances:  While there is no relief for the structure, the business should be able to claim capital allowances on integral features such as wiring and plumbing, as well as any necessary furniture or office equipment needed to kit it out for business use. You should ask the company supplying and installing the pod to supply a detailed breakdown of all the various costs, as evidence to support any capital allowances claims.

VAT: Where your business is VAT registered there may be scope to recover the VAT on the various costs of constructing and installing the pod. However, the VAT treatment of construction and building costs can be complex, and the position will need to be considered in detail based on the exact nature of the supply, and the intended use of the pod.  Where the business is on the flat rate scheme, VAT can only be reclaimed on capital assets where the amount of each individual purchase, including VAT, is £2,000 or more. Under the flat rate scheme VAT cannot be recovered on any other goods or services, so the costs of fees for advice about the pod will not be acceptable.

Running costs: As the business owns the pod, it can also meet the running costs and claim these as a business expense.

Private use: All the above is based on the pod being used 100% for business. However, the homeowner can use the pod for both business and pleasure, although it will inevitably generate more tax issues.   For an unincorporated business, any private use will mean a need to restrict capital allowances and VAT claims, as well as restrictions to the proportion of running costs claimed.  For an incorporated business, the pod in the Director’s garden is likely to create a benefit in kind issues as well as restrictions to VAT reclaims.

Benefit in kind:  There is no specific guidance on the benefit in kind charge for garden offices.  One approach would be to view the pod as an asset which has been lent to the Director and is available for their use, but to which legal title has not been transferred. If the pod does not fall within the special rules for living accommodation, then the general rules will apply. The HMRC view is that living accommodation is something that gives the occupant the necessary facilities to live domestic life independently without reliance on others to supply basic needs, so offices and workshops are excluded.  In this case, unless the pod is hired, the cash equivalent of the pod to be assessed each year as a benefit will be 20% of the market value of the asset when first made available – most likely the cost of the asset when new. This is likely to be more significant than the benefit in kind for living accommodation and, if the pod is to be kept long term, it might be better for the Director who wants personal use to pay to install it privately.

Sale of house:  If the pod is to be relocated to the new house, the individual only needs to consider if there is any Private Residence Relief (PRR) restriction on the land where the pod was located, as a result of the business use.  If the pod is to be sold with the house then, in addition to any PRR restriction on the land occupied by the pod, the business will need to receive some proceeds for the sale of its asset. The receipt of proceeds may trigger a tax charge in the business, but this should not be significant if the pod has been used for some years as these structures are less likely to appreciate in value (and more likely to depreciate) than bricks and mortar. There is also the potential to trigger some balancing charges for the integral features within it.

In summary, should you be looking at a garden office pod, please contact Jackie or Andrew to discuss how best to structure the ownership of the pod.

In summary, should you be looking at a garden office pod, please contact Jackie or Andrew to discuss how best to structure the ownership of the pod.

Castletons Accountants