The Hidden Tax Traps of Building a Home Office Through Your Company
- Taylor Keeble
- 2 days ago
- 4 min read
It’s easy to see the appeal that many company directors working from home think, “Why not have the company pay for my new garden office, reclaim the VAT, and deduct the cost for tax?”
On the surface, it looks like a good idea, the business gets a corporation tax deduction, you get a modern workspace, and the company can even reclaim VAT on the costs. But this apparent win-win can turn into a tangle of VAT, income tax and capital gains tax issues later on.
Below we explore why it’s tempting, and where the hidden traps lie.
Capital Gains Tax: The Private Residence Relief Restriction
When you sell your home, Private Residence Relief (PRR) normally ensures that any gain is tax-free. But PRR can be restricted if part of the property has been used exclusively for business purposes.
As per the legislation, you must apportion the gain between business and private use, typically based on floor area or room count. Only the “living accommodation” part qualifies for full relief.
For instance, if 10% of your home was set aside purely as an office, 10% of any gain may be taxable when you sell.
However, if the space has mixed use, for example, it doubles as a guest room or study, then the full gain remains exempt. HMRC only restricts PRR where a room or area is used exclusively for business.
This distinction often surprises people. A director who builds a dedicated office at the bottom of the garden may later discover a slice of their home’s gain is taxable.
VAT Recovery Implications
A VAT-registered company can, in theory, reclaim VAT on costs relating to the business use of a home office. But in practice, it’s rarely straightforward.
VAT can only be reclaimed on the business proportion of mixed-use expenses, such as heating, electricity, and broadband.
For building or conversion work, invoices must be in the company’s name, and the company must genuinely be the recipient of the supply.
If there’s any private use, VAT recovery must be restricted accordingly.
If the office forms part of a residential property, VAT on the building structure itself is often not recoverable, because it’s a domestic supply.
HMRC scrutinises claims where the company appears to pay for assets that the director personally enjoys or that form part of their home. If the boundary between personal and business use isn’t clear, VAT recovered may later be clawed back, often with interest and penalties.
In short: VAT can only be reclaimed where the business use is clear, proportionate and properly documented.
Income Tax and Corporation Tax Implications
From a company and personal tax perspective, there are several legitimate ways to handle home office expenses, but each has its own complications.
Flat-rate allowance — The company can pay you up to £6 per week tax-free for using your home as an office. Simple and low-risk.
Apportioned costs — The company reimburses part of your household expenses based on actual business use (e.g., 15% of utilities if your office represents that proportion of floor area). This must be supported by calculations and records.
Formal rental agreement — You rent part of your home to your company. The company deducts the rent as an expense, and you declare the income personally.
That last route can work well, but it introduces income tax on rental profits, possible benefit-in-kind charges if the company funds personal improvements, and a real risk of PRR restriction if the space is exclusively business use.
It’s also essential to ensure the rent is commercial and the agreement is documented, otherwise HMRC can challenge the deduction or reclassify it as a benefit.
Why the “Company Pays” Route Can Backfire
What seems to be efficient tax planning can unravel:
Loss of PRR — Exclusive business use turns part of your main residence into business premises, restricting CGT relief when you sell.
Benefit-in-kind exposure — If the company pays for improvements or equipment that have personal benefit, you could face income tax and NIC charges.
VAT clawbacks — HMRC may disallow VAT reclaimed on mixed-use or personal costs.
Business rates or insurance issues — A clearly defined business area may need separate business-rate assessment, and insurers or mortgage providers must be informed.
You may gain a short-term corporation tax saving but are likely to face a long-term loss of PRR worth far more when the property is sold.
Practical Steps
If you’re planning a home office build or conversion, keep these steps in mind:
Avoid exclusive business use if possible as shared use preserves full PRR.
Keep records and apportionments for VAT and expense claims.
Ensure formal agreements (if charging rent) reflect market terms and are properly documented.
Check your mortgage, lease, and insurance before making structural changes.
Plan for the exit — model the potential CGT cost now rather than later.
Speak to an Expert
It’s easy to see why many company directors consider using their company to fund a home office, on the surface, it feels like a sensible, tax-efficient move. But the tax system doesn’t always see it that way. Between VAT recovery rules, corporation tax deductions, and the loss of PRR, what starts as a practical home-office project can quickly become a complex web of long-term tax implications.
Authored by: London Team
