I have a client who runs a limited company from home with his wife. They switched from a sole trader to a Limited Co. in January and he has asked whether he can charge the limited company rent and I have confirmed that they can do so but I am not sure how much. Their accountant has suggested £4 per week which to me just isn't enough as the saving to the company by the directors running it from home is substantial. They both work in the office and also visit clients but I would say that the office is used for at least 8-10 hours per day by either one of them Monday to Friday and then limited hours over the weekend. The room that they use is used wholly for business and does not get used for any other purpose. My client does not own the house and pays a rent of £1,300 per month. My client suggested that they looked to move into a smaller property late last year at a rental of around £1,000 per month and then to rent an office for the business in a separate location but it worked out more expensive, around £1,400 in total so they decided to stay put for now. So basically can my client charge the ltd Co. the £300 per month on this basis as this would be under the going rate for the size of room within the area? If that were feasible I assume that the £300 per month would be an allowable expense and would reduce the companies CT and that the directors would not be profiting as the rent they received would be passed directly to the landlord? Any advice would be appreciated.
The accountant is suggesting the Government simplified expenses amount of £208 per year which will be allowed without looking at the detailed breakdown required to justify a larger sum.
Other methods include a division of floor space and would require all expenses to be calculated out to show the legitimacy of the division.
You mention that the house is rented, not owned. Is it permitted on the lease to run a business from the rented property?
You say that the directors would not be profiting from this but they would in that their rent would be reduced by £300 pcm.
The reality to me seems to be that the payments would be subsidising rent rather than compensating loss of space or a legitimate charge for additional expenditure on top of what was already being paid.
Unless the room was 100% business useage (#1) and additional expenditure specific to the business could be shown I would be in the same camp as the existing accountant in suggesting £4 per week.
And therein lies another issue. If the client has an accountant as suggested in your question why are you giving them any advice at all especially advice that contradicts what the accountant is telling the client?
kind regards,
Shaun.
#1 on average you are saying that the room is used for business 45 hours per week (average 9 hours per day, 5 days per week) which means that it is not used for business but available (whether used or not) for other uses 123 hours per week.
That is different to a dedicated office where if the office is not being used then not available for any other use.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Yes the landlord is aware that the business is being run from the property and the room is 100% for business as it has two desks, filing cabinets etc and no space to be used for anything else.
I accept that the directors would be reducing their rent by £300 per month but to suggest that they would be profiting is not strictly true. It could be argued that they only remained in this particular property/or chose this particular property because they needed the extra space to run their business, so in effect they are personally funding the office space on behalf of the limited company. If they decided to reduce the size of the house and rent an office for the company there would be an increase in their rent from £208 per year (as you suggest) to £4,800 per year? Surely HMRC would need to consider that in this instance the company paying £3,600 per year for an office is not excessive and that if a rental agreement existed between the directors and the company based on the above that it could be an acceptable arrangement?
I have spent some time this evening looking around the web and there are a number of accountancy firms suggesting that it is a perfectly legal and tax efficient way of extracting some of your companies profits by renting out a room to a limited company. There is also the following link which deals specifically with this question:
I don't disagree with the accountants response as this information is readily available on the HMRC website, but this appears to be the easiest, safest option and on occasion I have seen accountants, who are so detached from their clients business, offer a standard answer without going the extra mile to see if there is a better, more efficient way of dealing with things. This forum is fantastic, I have spent many hours reading the posts and responses and in this instance I thought that it may be worth asking the question and doing some research to see if this was a case of me being able to offer better advice to a client. I accept that business is not always fair and if it can't be done then at least I can say to the client that I tried on their behalf to seek an alternative and in fact in this case the accountant is right!
So Shaun, with the additional information above do you still think that the £208 per year is the best way forward?
Hi Chris
I will leave Shaun to respond to the bulk of this - sorry Shauny but when you say the landlord is aware, you havent specifically covered off its actually allowable. Ie re the lease as Shaun suggested, plus what does the mortgage over the property say (they would need something specifically in writing from the landlord), plus do you need to tell the council if you follow this stance of wholly for the business, rather than a dual purposed room? Have you done the calculation of division of floor space as suggested and does this still work out more than the £4 per week?
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Also, I did say that you could use the division of space method if that gave a more accurate representation of additional expenditure rather than the £4 per week (note that phrase "additional expenditure", such is not intended to compensate existing expenditure which would be born regardless).
But sub letting a room in a house that one does not own as an office to a business that is available for, even if not used for, other uses for approximately 73% of a week...
Such usage is opening up the house to both Business Rates and Capital Gains Tax on disposal (the latter may be the case anyway but I am taking it that this is a short term let of a families house rather than purpose purchased buy to let).
Ignoring the can of worms that your clients may open up for the landlord lets go back to the Aweb thread, like here you need to read quite a few responses as there are very different opinions held by many accountants. Unfortunately there's no contribution by Euan MacLennan in that thread as he's one of those few whose word I tend to take as gospel.
As you will no doubt see there are a couple of quite outlandish statements in that thread such as no reason why you couldn't claim under two methods... Whilst "technically" not incorrect in the context of that thread, that might make for an interesting inspection!
The key here I feel is the wholly and exclusively test. Would your client be paying the same rent for the property if they were not in business. In the case that you explain yes they would, there are no additional costs associated with the rental therefore any attempt to gain advantage at HMRC's expense would be purely contrived and the business reasoning for the lease overridden at inspection.
You come back to two options, the £4 per week or the division based on space, percentage usage and additional costs over those which would have been incurred regardless.
A possible variance on the above would be if the clients moved to a property which was let for the outset under two leases with clear demarcation then would to my mind be legitimate. (your suggestion would seem to be subletting rather than two lets)
However, a subdivision of existing accomodation purely in order to reduce tax liability isn't going to fly and I can see an inspector treating that as a distribution rather than rental income (remember that the rental income implies an additional self employed business. The money may all go to the landland but the extra business is the responsibility of your clients).
I need to emphasise here that I am answering this based on the accomodation being discussed being rented accomodation. There are more grey area's around owned accomodation although even then it can be a bit of a minefield in a swamp.
All in all I would stick with my original answer of £4 per week unless the additional expenditure exclusive to the business makes it more beneficial to the client to use the division of space method in which case I would adopt that one.
Personally I would not contemplate the sub lease approach unless it was a true division (seperate entrance door not accessible from the main house. i.e. a converted garage) and even then I would be very wary about such approach due to the CGT and Business rates implications or accomodation used exclusively for business.
I do go back to my opriginal point here though that advice over this should come from the companies accountant. Any advice that you give will increase the amount of time that he spends telling the client why they should have taken his original advice or defending the client to HMRC over advice that he did not give. Both of which they will charge their standard rate for, plus the client may end up with a large tax bill and penalties on the back of this so your giving the client advice could prove quite costly to them and result in the client seeking full recompense from you for any loss incurred on the back of such advice.
For that reason ensure that your PII will cover you for this sort of advice scenario.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
However, a subdivision of existing accomodation purely in order to reduce tax liability isn't going to fly and I can see an inspector treating that as a distribution rather than rental income (remember that the rental income implies an additional self employed business. The money may all go to the landland but the extra business is the responsibility of your clients).
I think this is an important point here Shaun. Correct me if I'm wrong but I understand the £300 a month would need to be declared as income by the Director(s)and taxed accordingly (assuming they have used up their PA elsewhere)
Moving on, I wasn't aware that a Ltd Co could claim the expense of running a home office in the way a sole trader can, so is in effect welcome news for later this year if I decide to up sticks. (Still not decided whether to go for a bigger house and use one room or rent a small office but probably the latter) Is it exactly the same principle and would you credit the DLA account rather than capital introduced?
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
yes, I add the use of home to the DLA which rather than being a loan from the director often ends up as a part balancing entry for directors tendencies to do silly things like try to claim a receipt for little johnies scalextric set just before christmas is a new printer!
When will these people learn that both we and HMRC inspectors actually read the receipts, we don't just look at what the figure at the bottom of them is!
On the taxed accordingly, worth noting on that point that rent a room is not available for this sort of thing (strictly residential only) so no trying to go with that one... Actually, didn't Rob write that in a reply a couple of months back??? Sure that it was him.
On the move or rent decision don't forget to factor in the moving costs into that scenario. I know, wrong audience for that advice but I am so used to clients fogetting little things like stamp duty, solicitors, removals, seatches, estate agents, etc. that it's the first go to thought when I hear people pondering that one.
all the best,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
On the taxed accordingly, worth noting on that point that rent a room is not available for this sort of thing (strictly residential only) so no trying to go with that one... Actually, didn't Rob write that in a reply a couple of months back??? Sure that it was him.
Never even gave rent a room a thought tbh, I meant that the £300 a month would be taxed at 20 or 40%
On the move or rent decision don't forget to factor in the moving costs into that scenario. I know, wrong audience for that advice but I am so used to clients fogetting little things like stamp duty, solicitors, removals, seatches, estate agents, etc. that it's the first go to thought when I hear people pondering that one.
I'm only a poor little sparrow lol, I rent but I have factored in deposit, agent fees and moving costs. It's not 100% definite yet but the majority of my work is down Doncaster way, so it makes sense.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
but when you say the landlord is aware, you havent specifically covered off its actually allowable. Ie re the lease as Shaun suggested, plus what does the mortgage over the property say (they would need something specifically in writing from the landlord), plus do you need to tell the council if you follow this stance of wholly for the business, rather than a dual purposed room? Have you done the calculation of division of floor space as suggested and does this still work out more than the £4 per week?
