Room for hire

Get the documentation in place

Many contractors operate their company’s business out of their own home and use at least one room in the house as a dedicated office.

It therefore makes sense for a director of a PSC to recoup some of their associated costs by charging the company rent as this can be a useful method of extracting money from the company. The company pays rent for the use of the room for which it will obtain full corporation tax relief and, provided the level of rent only covers the expenses incurred, will not be charged to tax in the hands of the director. Although the director will have to report the income on their Self Assessment Tax Return, it will be negated by identical expenditure. Furthermore, there is no NIC payable by either the company or the director.

It is important that the level of rent charged to the company is no more than a market rent so that full corporation tax relief can be claimed. Equally as important is the need to have a formal rental agreement drawn up between the company and director as failure to do so can lead HMRC to classify the rent as salary and thereby charge PAYE tax and NIC. In addition, a Board Minute should be drawn up as evidence of the resolution approving the rental/licence agreement.

Without this documentary evidence a director would be left vulnerable to a challenge by HMRC as to the validity of the rent paid by the company. However, this was exactly the situation a contractor, whom I defended, faced most recently. We were able to successfully argue that it was not necessary for a rental/licence agreement to be in place because of Regulation 7 of The Companies (Model Articles) Regulations 2008 which states:

1. The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8 (unanimous decisions)
2. If—

(a) the company only has one director, and
(b) no provision of the articles requires it to have more than one director,
the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Where, therefore, a company has only one director, there is no legal requirement for Board Meetings.

HMRC accepted this defence without question but it is not recommended to rely upon this. Better to have the documents in place so as to ward off HMRC’s unwanted attentions.