You want to erect a cabin in your garden to use as a home office. You and your family will also use it for private purposes. Will it be more tax efficient for you or your company to pay for it?
No tax exemption
If your company provides you with as asset, e.g. a computer, solely for the purpose of work to use when you’re away from your normal workplace it isn’t a taxable benefit in kind. This exemption applies even if there’s private use as long as it’s not significant. Consequently, if the private use is significant there is a taxable benefit in kind.
How much tax?
The taxable amount depends on two factors: the cost of providing the asset and any additional expenses, e.g. for maintenance of the asset.
Example. Carol is an owner manager of Acom Ltd. She wants to spend less time commuting and so arranges for Acom to pay for a fancy garden office so she can work at home. It pays £25,000 for the installation. The taxable benefit is 20% of this, i.e. £5,000 each year. Assuming the structure is used for 15 years Carol will be taxed on a whopping £75,000. In addition, Acom pays Class 1A NI on the same amount. If Carol is a higher rate taxpayer throughout the 15 years, and assuming the tax and NI rates stay as they are, the tax and NI cost would be £40,350 ((£75,000 x 40%) + (£75,000 x 13.8%)).
Alternative tax charges
If in our example Acom rented or leased the structure, the taxable benefit in kind for any year will not be 20% of its cost but the amount of rent etc. paid by Acom. Carol pays for lighting and heating the office personally. If Acom paid these costs it would increase the taxable benefit. Despite this it could be more tax and NI efficient for Acom to pay them.
Reduction for unused periods?
Some days Carol won’t use the garden office at all. The bad news is that this doesn’t reduce the taxable benefit. The benefit applies to any day where the office is “available” for private use, even if it’s not used. Unless Acom is able to prevent its use, the garden office will always be available.
Reduction for business use?
The tax rules for employment income include various exemptions and deductions relating to benefits in kind where there is business use associated with the benefit. We’ve already mentioned one which applies where private use of a benefit is insignificant. However, in our example, the private use is significant so the exemption cannot apply. Also, while a reduction in the taxable amount is allowed where there’s business use of some types of benefit, this rule doesn’t apply to use of an employer-owned asset.
More tax efficient alternative
The long-term use of employer-owned assets can result in a disproportionate tax and NI bill.
Tip. Rather than making an asset available to a director or employee for long-term use, the NI cost can be reduced if a dividend is paid. In our example, the tax cost to Carol would be just under £15,300 with no NI for Acom to pay. Even though Acom will lose corporation tax relief on the cost of the asset (up to £7,500), the overall tax bill is far less. When providing use of an asset always consider the tax and NI cost over the expected period for which it will be used.
If private use of the home office is significant, an annual taxable benefit will apply equal to 20% of the cost of the office. Over many years the resulting tax and NI can easily exceed the original cost of the asset. It would be more tax and NI-efficient for your company to pay you a dividend to enable you to purchase it.
If you want advice on tax efficiencies, get in touch – help@elsbyandco.co.uk
Read more about how our expert team of tax accountants can advise clients on their personal tax affairs – Personal Tax Accountants Northampton | Elsby & Co (elsbyandco.co.uk)