Working from home can increase your household costs such as on utilities and broadband. There might also be direct costs, such as necessary home improvements. When and how much of the VAT on these bills can your business reclaim?

VAT on private accommodation

You can be forgiven for being confused by HMRC’s guidance on VAT and domestic accommodation expenses. It says you can reclaim VAT paid on the domestic costs of private accommodation you provide for an employee but if the accommodation is for a director or owner of a business you can’t, even where the business owns the property and pays the bills. It also says that VAT can be reclaimed if the director etc. uses the property for business. The guidance appears contradictory.

What does HMRC mean?

HMRC’s guidance means that VAT paid by a business which owns a property that an employee occupies – but not for work – can be reclaimed. For example, VAT relating to a company-owned holiday home made available to employees as a perk. Conversely, VAT can’t be reclaimed to the extent that it relates to the occupation of the holiday home by a director etc., unless the reason is for work, say using it instead of a hotel while on a business trip.

Privately owned property

HMRC’s guidance on reclaiming VAT where your business pays or reimburses domestic costs for properties owned by employees or directors etc. is even more vague. In practice its approach is to allow a claim for VAT on household running costs, including maintenance and improvements, as far as they relate to business use.

Example. Jackie is a director shareholder of Acom Ltd, a business she runs from one room in her home. Acom reimburses Jackie 30% of her domestic bills, e.g. energy, telephone, broadband, other overheads and repairs. Acom can reclaim the VAT included in these but only in proportion to the business use. The same would be true if Jackie were an employee rather than a director.

Tip. Business use alone doesn’t entitle your business to reclaim VAT. It must incur at least the corresponding cost by paying the supplier direct or reimbursing the employee or director, etc.

How much?

The rule for working out how much VAT can be reclaimed is the same for household costs as for any other expense where there’s a mix of business and non-business use. An apportionment must be made which produces a “fair and reasonable” figure. In other words, you can estimate it.

What about evidence of VAT paid?

HMRC’s guidance is especially sketchy on what documentary evidence to support a claim it expects, despite confirming that such VAT can be reclaimed. Our advice is that an employee or director etc. should provide the business a copy of the household bills plus the “fair and reasonable” calculation of the business-related amount. For example, if the expense is for, say, decorating a room used wholly for business, keep a copy (or original) of the bill and a note indicating why 100% of the VAT is business related and so can be reclaimed.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.