The home has become an increasingly favoured location for starting and growing a business, with many entrepreneurs and directors working solely from residential accommodation, or relying on it extensively for their operation.
According to the most recent labour market statistics, in November 2024 to January 2025 there were 4.39 million self-employed people in the UK. A sizeable proportion of these self-employed workers will utilise their home or other residential accommodation to run all or part of their business.
As long as these home-based businesses are registered for VAT, they can reclaim input tax on expenses incurred for the purpose of their business activities.
Claiming input tax on domestic accommodation
Navigating VAT and deciding what can be reclaimed when operating a business from home can involve some complex rules, with the main obstacle being whether the expenditure was actually incurred for a business rather than a personal purpose.
There is no absolute definition of business purpose, so it is necessary to carefully consider why a purchase has been made before deciding whether you can claim input tax.
Typical examples of where claims could be made that do not satisfy the purpose of the business test include:
- Costs related to domestic accommodation;
- Costs in the pursuit of personal interests such as sporting and leisure orientated activities;
- Spending for the personal benefit of company directors, proprietors, partners; and
- Spending in connection with non-business activities.
If a particular room or area of the home is used specifically for a business, such as an office or workshop, VAT incurred on costs which can be identified exclusively to that area can be treated wholly as input tax – this would apply to:
- Fixtures and fittings; and
- Decorating costs.
Domestic and business use
It gets trickier when expenditure relates to both domestic and business use, as the private use must be taxed.
Mixed use could include:
- Fuel and power;
- General maintenance of the property; and
- Security systems.
You must decide how to treat mixed use expenditure at the time VAT is incurred on purchasing the goods. Essentially, for VAT purposes, an asset with mixed use is treated as if it were two assets – one within the business (the included part) and one outside it (the excluded part).
Most of the time, if a business pays VAT on assets it intends to use for business and non-business or private purposes, it will have to apportion the VAT incurred. The business can then only recover the part that is related to business use (subject to any partial exemption restriction).
However, this seemingly simple rule is subject to some more complex conditions and specific exemptions.
Click here to read our more detailed blog on reclaiming VAT and private proportions.
Capital expenditure
For Capital expenditure incurred in the creation (construction) of living accommodation, there is a specific rule that blocks VAT recovery in relation to the living accommodation for both employees and directors.
However, if an employee is supplied with accommodation for business purposes – such as a flat above business premises so that they are on hand and the security of the business is improved, or the construction of a Director’s home office, then this cost is wholly for a business purpose and as such VAT incurred will be recoverable.
If the employer charges rent to their staff for the provision of the accommodation, this will be an exempt supply by the employer and therefore the input tax incurred will be exempt input tax and the partial exemption rules must be observed.
Sole traders, partnerships, Directors and family members
Where a Company, Sole proprietor or partnership employs family members, or where it is the Director of a Company or the Director’s family members, more robust evidence is needed when it comes to recovering VAT for living accommodation.
Because Business owners and Directors will have the power to make decisions regarding the expenditure of business funds, HMRC are more likely to argue that the accommodation has been provided for purely personal reasons – as such, evidence is required to prove that there is a direct and immediate link with the expenditure and the business.
Whilst there is no longer a specific block on recovering the VAT incurred for living accommodation provided to a Director or family member, it remains difficult to do so, and it will only be recoverable in very limited circumstances.
For example: a Director of a limited company may work from home and have a room specifically set aside as an office:
- VAT incurred in respect of this room would be recoverable, provided it is invoiced to the company; and
- If there is any private use of the room, apportionment would be necessary.
How M+A Partners can help
In many businesses personal and business finances are closely linked, particularly when it comes to the use of domestic accommodation, and input tax may be claimed incorrectly. ‘Business purpose’ can be a complicated area in relation to input tax.
M+A Partners’ VAT specialists provide professional guidance on the specific rules for reclaiming input tax when it comes to using domestic accommodation for business purposes.
To find out more about how we can assist with your VAT obligations, please get in touch with our expert below or email enquiries@mapartners.co.uk
