Tips for Small Businesses: Avoiding Risks Associated With Working From Home

Word is out that Cherie Blair is under investigation for running an office from a rented Mews house near her Connaught Square home. After receiving a complaint from a local resident, planning officers are considering whether the use of the house for business purposes is an unauthorised use.

The question under consideration is whether there has been a material change of use. If there has been, then Cherie Blair could face enforcement action. Unless business rates are already being paid by the Blair office, it won't be long before there is an investigation into whether business rates should be levied on the house as well.

Planning permission and business rates are not just concerns for those running an office from their home—they apply equally to doctors, physiotherapists, accountants, journalists, the self-employed and those downsizing in these tough economic times in an attempt to reduce their overhead. Although most of these arrangements, being behind closed doors, are off the radar of most authorities, it is likely to be a disgruntled neighbour concerned by the comings and goings at the premises—as in Cherie Blair's case—that brings the issue to the forefront.

Small businesses will be concerned not to incur business rates unnecessarily and will wish to avoid running afoul of planning law. The latter encompasses both planning permission for use of the premises for business use and planning permission/building regulations for any alterations made to the premises. Business rates are a concern for the simple reason of cash flow and profit margins, whereas planning permission is a risk for business enterprises because of the risk of business interruption and prosecution.

Planning Permission

Planning permission for change of use is not always required. The key test is whether the property will remain mainly a home or will become a business premises. If the answer is "no" to any of the following questions, then it is likely that planning permission will be required:

1. Will the premises mainly be used as a private residence?
2. Will the business activities maintain current traffic and visitor levels and not cause a nuisance to neighbours?
3. Are the activities usual in a residential area?

Quite separate from planning permission for use of the building, planning permission is sometimes required for extensions, loft conversions and garden sheds. However, the Town and Country Planning (General Permitted Development) (Amendment) (No 2) (England) Order 2008 came into force on 1 October 2008 and extends the previous list of developments that do not require planning permissions in England. A good place to start investigations into whether planning permission is required is to use the interactive guide found at the Planning Portal, the UK Government's online planning and building regulations resource for England and Wales.

Business rates raise around £13.2 billion per year for the central government and can amount to one-third of the tax bill for small companies. Those running a business from home already pay council tax. The risk is that if the Valuation Office (VOA)—the organisation responsible for banding all domestic property in England and Wales—finds out that a business is being operated from a property, it may conduct an investigation to establish whether the property should be listed for nondomestic rates. The VOA will consider a number of factors, including:

1. Whether a space is exclusively for business purposes
2. The frequency a space is used for business premises
3. Whether modifications have been made to the property to accommodate the business use

The VOA will make its assessment on an individual basis and may find that the whole of the property should be listed for nondomestic rates; that the business use is de minimis and therefore council tax should continue to be charged; or that the property is a composite hereditament and part of the property should be listed for business rates whilst the remainder continues to be charged council tax.

The VOA has offered some guidance: A seller of bespoke supermarket and safe doors who is employed by a national firm and travels to meet clients four days a week; who uses his home as a base to write pitches and compile sales reports but attends the company's head office once a week for meetings and to post his reports; who has a small office cabinet in his living room; and who uses a dining room table for writing his reports in the evening and weekends is unlikely to be charged business rates.

So, where does the distinction lie? The test case of Tully v Jorgensen (2003) offers guidance. Mrs. Tully was a project/business analyst for the Inland Revenue. After a back injury, the Inland Revenue offered her flexibility to work from home to comply with its duty to make reasonable adjustments to her employment under the Discrimination Act 1995. The Revenue provided Mrs. Tully with office equipment and a dedicated phone line for use in her study. Mrs. Tully worked normal office hours and the study continued to be used as a private study by her husband in the evenings and as a guest room and for domestic chores.

The VOA assessed the property as a composite hereditament and concluded that the study should be placed on the nondomestic ratings list. At appeal, the president of the Lands Tribunal considered the fact that no structural work or adaption had been carried out, no staff were employed, and that Mrs. Tully did not receive any business callers. To be classed as a composite hereditament and listed on the nondomestic ratings list, pursuant to the Local Government Finance Act 1988, the president would have to find that part of Mrs. Tully's home was no longer wholly used for the purposes of living accommodation. The president did not conclude that was the case and found that where a person was working at home, they could also be using the whole house for the purposes of living accommodation.

The question is one of fact and degree. The president's decision offers guidance to small businesses: "Where a person working at home uses accommodation, furniture and equipment of the kinds that are commonly to be found in domestic property, such use will, in general … constitute use for the purposes of living accommodation" and business rates will not be applied. "Rateability may, however, arise if the accommodation is adapted so as to lose its domestic character or where equipment of a non-domestic sort is used, to a significant extent." Similarly, if employees or clients frequent the premises or if the business is advertised in the Yellow Pages, this may constitute a use outside the ambit of the use for the purposes of living accommodation.

Other considerations for the business occupier of residential property include the loss of capital gains tax residential exemption for any part of the property classified as wholly for business use (applicable where the property is owned); whether a landlord's consent for change of use is required (applicable to leasehold premises); and whether the business use will put the occupier in breach of any restrictive covenant, mortgage or insurance terms affecting the property.

Practical Considerations for Startups and Small Businesses

To avoid the risks associated with working from home, new startups and small businesses should ensure that all areas within the property retain some form of domestic use and that furniture is that which would normally be found in a residential premises. Physical alterations to the property should also be avoided. The impact on the local area should be minimised. However, as the business expands and part of the premises is separately identified for purely business purposes, e.g., a part is separately converted for employees, it will be inevitable that business rates liability will arise and planning permission for change of use will be necessary. The alternative to using a home for business purposes is to rent office space and meeting rooms on a pay-per-use basis and there are a number of organisations that offer reduced rates for startups and entrepreneurs.