The concept of claiming a deduction for minor repair expenditure to an existing property is well understood. It is usually a normal business expense and readily identifiable in the audited accounts and deducted in full.
However, a frequent problem occurs when repair work is carried out as part of a larger refurbishment project to an existing building that is capitalised reflective of the majority work involved. This can lead to higher tax bills through missed repair claims.
This is because tax law, not accounting treatment, governs whether expenditure on repairs is allowable.
A newly acquired property that needs urgent repairs before it can be used is unlikely to contain any repair expenditure; however, a property that is capable of use and actually used by the business before refurbishment or conversion works begin is likely to contain an element of repair expenditure.
Set out below are the key areas HM Revenue & Customs will wish to see considered as part of any claim:-
Replacing an asset – Replacing a part is a repair to the larger asset, replacing the whole asset is not a repair, and is not an allowable deduction for tax purposes because it is capital expenditure.
Improvements – The cost of improvements to an asset are not allowable expenses (although this is subject to modern equivalent materials which may be allowable).
Alterations – the cost of altering an asset so it does something different are not allowable.
New materials – repairs are often carried out using new materials. The use of new materials does not mean that the repair is not allowable.
New technology – the introduction of new technology may mean that the new parts are better than or last longer than the old, but the question to ask is whether the asset as a whole has been improved. If it does the same job as it did before then it may well be simply a repair.
Change of ownership – although an asset has been recently acquired the cost of repairs will usually remain allowable expenditure. For example the cost of routine repairs and maintenance remain allowable expenditure. If an asset is acquired in a run down condition then the cost of putting the asset into a useable condition is capital expenditure and not an allowable deduction.
Capital allowances – The capital allowances legislation contains deeming provisions that treats significant amounts of work on features in a building, including the electrical or air conditioning system as capital expenditure which is not allowed as a revenue deduction.
Character of the asset – As a final check, you need to consider the results of the work carried out. If as a result of the work the asset can simply be used to do the same job as before then it is likely to be a repair and therefore allowable expenditure. If it can do more or can do something different then the character of the asset has changed and the work is likely not to be an allowable expense.
In a comparable way to a capital allowances exercise, a detailed segregation of the different work categories is often required to assess the correct capital and revenue/repair split (ie. repairs to existing assets such as floors, walls and ceilings that remain after completion). Tax law determines whether an item of expenditure is capital or revenue, so the fact that such an item has been ‘capitalised’ in the accounts does not preclude a claim. There are complex rules to govern the right treatment but common items can include replacement windows, roof lining and re-decoration.
Repair expenditure that is capitalised for accounts purposes that qualifies for tax will generally only be capable of being deducted as it is expensed through the profit and loss account (i.e. as it is depreciated or amortised).
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