Treatment of Repairs and Capital Expenditure for Tax Purposes
We are often asked how repairs and capital expenditure to both new and old buildings alike should be classified for tax purposes. Although it is usually easy to identify separate items of plant and machinery from invoices, clients are often unsure how to treat related expenses such as installation costs. This overview should give you an idea of the main points to consider.
Repairs
Where expenditure is incurred to restore an existing asset to its original state, this should be classified as repairs in the profit and loss account and will be fully allowable as a deduction from profits. For example re-surfacing of existing car parks, re-decoration of existing buildings, replacement of existing windows, re-plumbing and re-wiring of existing buildings will all be justifiable items of expenditure.
Capital Expenditure
An item is classed as capital where the expendi- ture brings ‘into existence an asset or an advan- tage for the enduring benefit of the trade’. This will apply to items such as property improve- ments or plant and machinery.
Property improvement
Expenditure that will be classed as capital within property improvements will include items such as building work (i.e. the bricks and mortar cost), the windows in a new wall and the installation of utilities (e.g. electricity, gas, water and sewerage/ drainage). No capital allowances may be claimed for the cost of property improvements unless the property qualifies as an industrial building. However, such systems provided specifically for the purpose of the underlying business may in certain circumstances be treated as plant and machinery, for example, lighting and plumbing for the toilets in a restaurant.
Plant & machinery
Unlike property improvements, expenditure on plant and machinery is eligible for tax relief in the form of Capital Allowances. Plant and machinery are the equipment used for carrying on a business. This does not include stock, but will include most other goods and chattels (fixed or moveable) for enduring use within the business.
Sometimes items meet this definition but are also incorporated into the fabric of a building. The treatment of these items can be resolved by reference to case law and definitions laid down by statute which often provides for such items to be treated as plant. The costs of installation can be included and allowances can be claimed on these costs.
In order to stay on the right side of any inspection, it would be wise to keep a fully documented register of all assets acquired, including detailed schedules of works. It is always worthwhile reviewing the schedule of works as
there are often plant items contained within what appears to be improvements to property. By identifying them at this stage you can take advantage of tax relief now, rather than having to wait until the sale of the underlying property.
This article is far from an exhaustive list of how to treat the relevant expenditure, but should give you an overview of the issues to consider. If you would like to discuss how to treat expenditure your company has made on your business premises then please call your regular Hyde contact or Michael Clark on 020 8652 2450.
If you would like to discuss how to treat expenditure your company has made on your business premises then please call your regular Hyde contact or Michael Clark
on 020 8652 2450.
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