Business rates and the home office

This article by Andrew Bibby, in a slightly different form, was first published in The Observer, 2004

A spare bedroom in a semi in a suburban street in south London has recently played a starring role in resolving a legal tussle about home-based workers' liability for taxation.

The room has been the main place of work for the past five years for Eileen Tully, an Inland Revenue analyst who began working from home with her employer's blessing after suffering a back injury. But according to local valuation officers, this was enough to turn what was once just a room in an ordinary domestic property into business premises. Eileen Tully and her husband found themselves at the receiving end of a demand for business rates.

The Tully case, which turned into a major legal test case for home-workers generally, has now [2003] been resolved. Mrs Tully's spare room, complete with airing cupboard and ironing board, is once again officially restored to its original status as domestic premises. At the same time, much of the confusion over business rates liability for home offices has been cleared up.

"Thousands of home-based workers can breathe a sigh of relief," says Alan Denbigh, executive director of the Telework Association and himself a home-worker. "It relieves uncertainty. The fact that business rates could conceivably be levied and back-dated caused many people concern, even though in practice there were very few cases like this one."

The Valuation Office, the branch of the Inland Revenue which assesses property for rates and council tax, also seems satisfied with the outcome of the Tully case, which was heard at an appeal by the President of the Lands Tribunal. "It was a very significant case. What the President has done is clarified and extended the law. It's given the Valuation Office a bit more of a steer," says Tony Eden, a policy officer with the VO.

The tribunal ruling - in legal terms, broadly the equivalent of a high court judgment - suggests that home-based working using furniture and equipment of a kind commonly found in ordinary homes can be treated as a normal part of the use of a residential property. This means that home-based employees in situations like Mrs Tully's are highly unlikely in the future to encounter problems with business rates. As well as employees, the ruling also helps many self-employed people, including authors and consultants with offices at home.

As Tony Eden points out, the new ruling ties in with recent government initiatives to promote work-life balance, encourage family-friendly employment practices, and reduce traffic congestion. "Government policy is very much in favour of things that encourage more people to work from home," he says.

The Lands Tribunal ruling makes it clear, however, that there are still some occasions when working from home can create a potential business rates liability. Structural alterations to a building can be one significant factor - in an earlier test case, a garage which was converted into a children's nursery was deemed to have become a business premises. Other trigger factors can be the presence in the house of staff or public visitors, the use of equipment not normally found in domestic homes, and the advertising of the business externally.

The issue of business rates is one of a number of legal and tax problems which have traditionally worried home-based workers. Another of these is the capital gains tax liability which can potentially be levied on the proportion of a house used for work purposes, when home-owners come to sell up. Although the Lands Tribunal ruling does not directly affect CGT, it does suggest that the use of home offices is now becoming increasingly accepted as a normal part of life. In practice, and particularly given the annual exemption limits for CGT, very few home-based workers will probably need to lose much sleep over this issue.

Another connected matter is the circumstance in which home-based workers need to obtain planning permission for change of use, an issue dealt with by local planning authorities rather than the Valuation Office. Although the Lands Tribunal ruling does not cover planning law, many of the factors it identified as significant - including structural alterations to houses, external signs and the presence of day-time visitors - are relevant here too.

There is an unofficial lesson which homeworkers can draw from the Tully's case. Mrs Tully had her bedroom reclassified as business premises only because she had herself, perhaps rather unwisely, contacted the district valuer to point out that she was using a bedroom as an office and to ask for a council tax reduction. Without her initial approach, it is highly unlikely that anyone in authority would have been aware of her move to home-working. It is hard to avoid the conclusion that the wisest course for many people beginning working from home may simply be - keep it quiet.

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