Can I write off home/office extension as business expense & Vat

[ninak]

Hi, Just wondering if I am able to claim back any of the below through our LTD Company. We recently built on a garage at the side of the house. We have divided it in two, with room for a small office for my husband to work out of. We run a Ltd. Co. from our home at present. We are both full time employed in the Co. We were going to look for an office space to rent, but decided to try this instead. As a result of this decision, we increased, at some cost, the insulation in the roof and walls of the garage. We also ran heat and power in.
My question is if I can firstly claim back any of the Vat paid, say for the extra insulation, through the business? If so could I claim Vat back on all building costs,or just those that went in because it is to be used as an office.

Also, can I claim any of the building costs as a business expense? Or could I possible have the business pay us as the building owners, rent for the portion of office space?

 

[mathepac]

I suppose the first question that arises in situations like this is do you have the appropriate planning permissions in place to run a commercial operation from (part of) a residential premises? What kind of business is it?

The other questions (pro and con) have in fact been asked and answered here a few times in the past.

 

[ninak]

I am aware of the issue with change of use & planning. But as it is an online Co. ,all that is going in there is a desk and laptop and husband. I don't think anyone will notice and inform Council. Where I live, this is not going to be noticed by anyone. We do not have to use meet with clients either. As we have no intention of selling, and even if we did, there would be no profit, so no CGT relevant. I don't think Revenue are too bothered about whether we have planning permission for the desk in garage and the Council will not be aware of it.

As to these questions being answered already, I have not seen anything about building costs before. I did see a post regarding a farm, but this is a different situation. I know where I stand on taking a small portion of household bills as Company Expense since both of us work from home full time. I have never portioned any of the mortgage as business, so effectively, have never charged the Co rent, only heat, light, etc. My question is specifically about building costs, Vat on those and whether I can charge my Co. rent or recoup some of the extra expense gone into insulating the garage from the business. If these have been asked before, sorry, but I have not found them. Maybe Mathepac, you could send me a link too them. Thanks.

 

[Mrs Vimes]

If you charge your company rent then you will then have to pay income tax on this rent so it wouldn't necessarily be beneficial overall.

 

[Luternau]

Maybe i am taking picking this up wrong, but if you have no official business trading from your property-i.e. its not a mixed used building, how can you put the costs of any refurbishment/extension through your limited company?

 

[WizardDr]

@ninak I think the planning permission is irrelevant.

If you are using your main residence for business you can of course apportion some of the costs as you have done already.

Specifically on the building - there is a difference between Fixtures / Fittings and permanent works.

If the business pays for some of the permanent works then on a disposal part of the proceeds are by equivalence taxable. Many would not split this.

The Fixtures and Fittings are not permanent and you could claim capital allowances.

That's roughly the situation.

 

[oneday]

I'm looking at doing pretty much the same thing (split garage for use as office for part time business).

Picking up from last re. "Fixtures / Fittings and permanent works" would a

- stud wall construction works
- "dot and dab" plasterboard and insulation on interior walls
- flooring
- minor electrical works (couple of additional sockets)

cost be classed as fixtures and fittings as it is removable if the business ceased or could be left.

I suspect it would not constitute a permanent work as I see many businesses erect semi-permanent structures in landlords premises which they surely class as a business expense.

My business would also trade in a consultancy capacity as client sites and the office would support "base" activities such as report writing.

I think the basic principle for both our queries is that we would not be incurring these costs if we were not trying to run our respective businesses and any benefit we may receive as a householder in my respect (basic part garage conversion) is hopefully justified, though stretching to building an actual extension might be pushing it.

 

[bongyeu262]

Hi, Just wondering if I am able to claim back any of the below through our LTD Company. We recently built on a garage at the side of the house. We have divided it in two, with room for a small office for my husband to work out of. We run a Ltd. Co. from our home at present. We are both full time employed in the Co. We were going to look for an office space to rent, but decided to try this instead. As a result of this decision, we increased, at some cost, the insulation in the roof and walls of the garage. We also ran heat and power in. <br />
My question is if I can firstly claim back any of the Vat paid, say for the extra insulation, through the business? If so could I claim Vat back on all building costs,or just those that went in because it is to be used as an office.<br />
<br />
Also, can I claim any of the building costs as a business expense? Or could I possible have the business pay us as the building owners, rent for the portion of office space?

<br />
<br />
R?t dáng quan tâm, mình cung dang tìm hi?u cái nÃ*y.

 

[ninak]

Thanks WizardDr. Think I will move away from the idea of taking rent from the Co. I am considering just claiming back the VAT on the extra insulation that went in and putting the insulation cost down as an office expense. I am not going to charge any of the building costs, materials or labour, just the extra insulation. I understand that there may be tax implications if we sell either the house or the business, butniether is likely at the moment.

 

[T McGibney]

I am considering just claiming back the VAT on the extra insulation that went in and putting the insulation cost down as an office expense. I am not going to charge any of the building costs, materials or labour, just the extra insulation.

I don't understand your logic in distinguishing insulation costs from building costs, as once installed, insulation forms part of the building.

I think you would be foolhardy to reclaim VAT on such costs, and its quite likely that the savings would not justify the attendant bother if it comes to Revenue's attention at a later date.

 

[ninak]

I suppose my point was that these costs were only incurred as we will use the garage as an office, otherwise we would not have bothered putting in that insulation. It could be argued that they were a cost directly related to the business and choosing to run it from home instead of an office. But if this argument is inaccurate from Revenue's point of view then I will just take the extra cots incurred as a personal expense rather than a Co one. As you say, it is not a great saving that we are making, and I would rather not do it if I was sure it was incorrect, but in this environment, any saving is helpful and worth thinking through.

 

[mandelbrot]

I suppose my point was that these costs were only incurred as we will use the garage as an office, otherwise we would not have bothered putting in that insulation. It could be argued that they were a cost directly related to the business and choosing to run it from home instead of an office. But if this argument is inaccurate from Revenue's point of view then I will just take the extra cots incurred as a personal expense rather than a Co one. As you say, it is not a great saving that we are making, and I would rather not do it if I was sure it was incorrect, but in this environment, any saving is helpful and worth thinking through.

I'd expect the Revenue position would be that since the company doesn't own the premises it's operating from, to the extent that it pays the cost of creating/insulating the office space, what it is actually doing is laying out money for the personal benefit of the directors as owners of the premises. This leads to unpleasant tax consequences.

As was already pointed out, conventional wisdom would be that it's not generally a great idea to have the company paying rent to the directors either, as that gets messy too.

There is also no question of VAT deductibility, as the expenditure even if borne by the company, is not per se for the business of the company within the meaning of the VAT legislation (as the company has no interest in the premises that the money is being spent on).

 

[ninak]

OK, thanks for the feedback. Yes I have never gone near the whole Co paying rent to the director's before and we have been running things from home for years. Will leave it that way. Think I am hitting a brick wall with recouping any of the costs from the company for the extra insulation. Will just cover the costs personally and have a very cosy garage! Thanks for all the feedback, much appreciated.

 

[WizardDr]

The Revenue position would be illogical as it would imply that any expenditure on a rented premises by the renter could not qualify for VAT deduction which is absurd.

The proximity of the relationship is what the poster is referring to and I think he may be over interpreting here.

Similarly splitting the household expenses such as light and heat, needs to be on a reasonable basis.

Currently as far as I am aware the Revenue do not sit in the Courts as judge are not therefore the arbiters of legislative interpretation.

 

[mandelbrot]

Your first post on the thread above was incorrect, but I didn't bother pointing out the error since you were essentially advising against claiming the input credit, however I can't let you off the hook on this one..!

The Revenue position would be illogical as it would imply that any expenditure on a rented premises by the renter could not qualify for VAT deduction which is absurd.

The proximity of the relationship is what the poster is referring to and I think he may be over interpreting here.

I presume both of these sentences are in reference to my post.

Just to clarify, I didn't imply that "any expenditure on a rented premises by the renter could not qualify for VAT deduction".

Expenditure on furniture or fittings would of course be deductible - the tenant company owns them, and can bring them with them if/when they vacate the building.

But expenditure on fixtures (i.e. anything that becomes part of the property once installed, and can't be removed without damage to itself and/or the building to which it is affixed) or on refurbishment/development of the property, in the absence of such expenditure creating/augmenting a capital good for the party incurring it, will not give rise to any deductibility. Since the company has no enforceable interest in the property, it cannot be the owner of the capital good created by the construction / refurbishment of the garage/office.

Based on Ninak's OP, she is talking about construction costs of the garage/office space, including insulation. There is no question of deductibility for the limited company, as it holds no interest in the asset. No more so than if the company's money is used to buy a van for the director (or the friendly next door neighbour, or whoever), on the basis that the company will occasionally get to use the van for free on an ad hoc basis.

I mean, just step back for a minute and think about what you're saying. Let's say the company go ahead and claim an input deduction on all the building costs including the insulation. And in 6 months time Ninak and MrNinak decide to sell the house (and garage/office which is part of the same property). What is the position then? Are Ninak and MrNinak obliged to account for VAT on the sale or some part of it even though they haven't actually carried out any development or received any input deductibility, or is the company obliged to account for VAT even though it is not making any taxable supply, since it has no legal interest in the property which is owned by Ninak and MrNinak...?? (I'm afraid it's you who's being absurd!)

Currently as far as I am aware the Revenue do not sit in the Courts as judge are not therefore the arbiters of legislative interpretation.

Of course they don't, but it is Revenue's job to apply the legislation, which by necessity involves interpretation in the first instance, subject to the courts arbitrating when due process requires it.

 

[WizardDr]

The whole point about the 'extension' (i.e. permanent as opposed to what can be removed) does give rise to an interest in building - hence I was referring to CGT on disposal. Therefore there is the interest and they could get a deduction for the inputs. There are the complications on sale as I referred to and for those reasons I would not do it myself. Now that you have raised it - if the sale arose it would be sold as PPR presumably so VAT would not apply to the sale. The complication I did see was the interest that the company had acquired. And because the gain for the company would not be indexed (a savage imposition) then at the the CGT rate which is far larger than the VAT rate and even allowing for the time value of money it would still be larger. I therefore would not do this and because of that I was able to step over the VAT. Potentially as you have raised it, there could be a VAT element on the equitable interest acquired by the company but they could get around that by deregistering before the sale.

By the way when I think you are wrong I regard it as interpretation on your part. Hence you and I would be in and out of the Appeal Commissioners and the Circuit Court

Technical point: An equitable interest may arise even if there is no legal ownership. [Revenue hate this!]

 

[mandelbrot]

The whole point about the 'extension' (i.e. permanent as opposed to what can be removed) does give rise to an interest in building - hence I was referring to CGT on disposal. Therefore there is the interest and they could get a deduction for the inputs. There are the complications on sale as I referred to and for those reasons I would not do it myself. Now that you have raised it - if the sale arose it would be sold as PPR presumably so VAT would not apply to the sale. The complication I did see was the interest that the company had acquired. And because the gain for the company would not be indexed (a savage imposition) then at the the CGT rate which is far larger than the VAT rate and even allowing for the time value of money it would still be larger. I therefore would not do this and because of that I was able to step over the VAT. Potentially as you have raised it, there could be a VAT element on the equitable interest acquired by the company but they could get around that by deregistering before the sale.

By the way when I think you are wrong I regard it as interpretation on your part. Hence you and I would be in and out of the Appeal Commissioners and the Circuit Court

Technical point: An equitable interest may arise even if there is no legal ownership. [Revenue hate this!]

Talk is cheap Wizard, and talk of taking jaunts to the Appeal Commissioners, the Circuit Court and beyond is paricularly so, in comparison to the potentially prohibitively expensive reality.

Particularly in the case of someone whose gripe, if they have one, is over the input deduction on a % of the cost of building a garage/office onto the side of their house.

As for the rest of your post, I have to confess I'm not actually sure what you're on about; it appears you are suggesting that the company would have an equitable interest in the property of its director (or anyone else for that matter whose extension it pays for) merely by virtue of having spent the money? Is there any case law directly applicable to this type of situation, and particularly regarding a right of VAT deductibility derived from such an interest?

 

[WizardDr]

I think we will have lost the audience (if there is one) by now.

We agreed that a deduction for VAT would be possible with respect to the moveables.

I pointed out to the Poster that if he were to seek a deduction in respect of the the immoveables there would at the very least be a CGT problem on a sale if the Company were involved.

Sticking with that I viewed the potential CGT as a far worse situation than the recovery of the VAT and for that reason I would completely avoid it.

You then say that the Company could not have claimed the VAT anyway. I am saying that they could. (How could they claim it on moveables and not immoveables if there is an equitable interest?

And a simple equitable interest would arise where house owner writes a note saying I am giving 10% of the house to X Ltd in consideration of their paying Y for improvements. Assume that is how it arose and is a proper document for the purposes of the Statute of Frauds (Ireland) Act.

 

[mandelbrot]

I think we will have lost the audience (if there is one) by now.

We agreed that a deduction for VAT would be possible with respect to the moveables.

I pointed out to the Poster that if he were to seek a deduction in respect of the the immoveables there would at the very least be a CGT problem on a sale if the Company were involved.

Sticking with that I viewed the potential CGT as a far worse situation than the recovery of the VAT and for that reason I would completely avoid it.

And a simple equitable interest would arise where house owner writes a note saying I am giving 10% of the house to X Ltd in consideration of their paying Y for improvements. Assume that is how it arose and is a proper document for the purposes of the Statute of Frauds (Ireland) Act.

The potential CGT problem and the VAT deductibility issue are pretty much wholly unrelated, but you seem to be conflating the two.

The CGT problem exists regardless of whether or not there is a VAT deduction claimed by the company. The relevant statutory provisions being at S.604 (6) & (7):

(6) Where the gain accrues from the disposal of a dwelling house or part of a dwelling house part of which is used exclusively for the purposes of a trade, business or profession, the gain shall be apportioned and subsections (2) to (5) shall apply in relation to the part of the gain apportioned to the part which is not exclusively used for those purposes.

(7) Where at any time in the period of ownership there is a change in the dwelling house or the part of it which is occupied as the individual's residence, whether on account of a reconstruction or conversion of a building or for any other reason, or there have been changes as regards the use of part of the dwelling house for the purpose of a trade, business or profession or for any other purpose, the relief given by this section may be adjusted in such manner as the inspector and the individual may agree, or as the Appeal Commissioners may on an appeal consider to be just and reasonable.

So Ninak and MrNinak are already in a position where, on a sale of their house, they should be doing a fiddly apportionment to calculate the amount of chargeable gain / allowable loss arising on the disposal as a result of the partial use of the property for business.

You then say that the Company could not have claimed the VAT anyway. I am saying that they could. (How could they claim it on moveables and not immoveables if there is an equitable interest?)

The company can claim it on the moveables because they own them. If I buy a desk for the office you're letting me use, then it's my desk and of course I'm entitled to my input credit.

We'll have to agree to differ in our view of the VAT on the immoveable property - as I said at the outset if the company pays for extension of the director's house it would be viewed by Revenue as a payment for the benefit of the director(s)/participator(s) and fall to be taxed under either BIK / close company provisions (or both, depending on who owns the property and who's employed / acts as director of the company). If I were a VAT inspector (!) I wouldn't be putting much store in the piece of paper declaring an equitable interest in the property - I'd let Mr Kelly or Mr O'Callaghan make that call.

 

[smeharg]

I think we will have lost the audience (if there is one) by now.

There's still one

There are 2 distinct and separate issues: VAT deductibility and loss of PPR relief from CGT.

A deduction can be claimed for VAT charged in respect of goods/services supplied in so far as they are used for the purposes of making taxable supplies. There's no provision of which I am aware which restricts goods/serivces to be used in or on property owned by the taxable person.

So in theory a deduction could be claimed in the circumstances set out by OP.

PPR relief may be lost if the part of the premises is used exclusively for business purposes. This means that if it is used part business/part personal then there shouldn't be any loss of PPR relief on disposal.

Where the VAT deductibility and PPR relief could interact is if full deduction for VAT incurred on improvements to the premises was claimed, it would be one indication that that part of the premises was used exclusively for business. As the expenditure was incurred by the company it couldn't then be claimed as enhancement expenditure when calculating CGT.

The alternative would be to claim VAT incurred in proportion to business use, which would help demonstrate that there is a non-business element to the use of the premises. Of course, all facts would need to be considered to conclude one way or the other.

In my opinion, it's just not worth it.