A spare bedroom in a south London semi recently played a starring role in resolving a legal argument about homeworkers' tax liability.

As The Observer analyses a case reported on TaxZone last October, the room in question had been Eileen Tully's main place of work for the past five years.

Mrs Tully, an Inland Revenue analyst, 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. Mrs 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 homeworkers generally, was settled last year. Mrs Tully's spare room, complete with airing cupboard and ironing board, has officially been 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 homeworker. 'It removes uncertainty. The fact that business rates could conceivably be levied and backdated caused many people concern, even though in practice there were very few cases like this one.'

The Valuation Office, 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,' says Tony Eden, a policy officer with the VO. 'What the president has done is clarified and extended the law. It's given the Valuation Office a bit more of a steer.'

The Public and Commercial Services Union, which backed the case, said it was an important ruling for the more than 2m people who worked from home.

The tribunal ruling 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 home-based employees in situations like Mrs Tully's are unlikely in future to encounter problems with business rates. The ruling also helps many self-employed people, including writers and consultants with offices at home.

The Lands Tribunal ruling makes it clear, however, that there are still some occasions when working from home could create a business rates liability.

Structural alterations to a building can be one significant factor - in an earlier test case, a garage that had been converted into a children's day nursery was deemed to be 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 that have traditionally worried home-workers. Another is the capital gains tax liability that can potentially be levied on the proportion of a house used for work purposes when homeowners come to sell.

Although the Lands Tribunal ruling does not directly affect CGT, it does suggest, says The Observer, that the use of home offices is now becoming accepted as a normal part of life. In practice, and particularly given the annual exemption limits for CGT, few homeworkers 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.

Homeworkers can draw an unofficial lesson from the Tully case. Mrs Tully's spare room was 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 that, it is highly unlikely that any authority would have been aware of her move to home-working.

Source:
TaxZone.co.uk
26-Jan-2004
Amended by MacDougall & Co
06-Feb-2004

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