AT THE HEART OF THE ROAD TRANSPORT INDUSTRY.

Call our Sales Team on 0208 912 2120

Home improvements

9th June 2005, Page 38
9th June 2005
Page 38
Page 39
Page 38, 9th June 2005 — Home improvements
Close
Noticed an error?
If you've noticed an error in this article please click here to report it so we can fix it.

Which of the following most accurately describes the problem?

Operators renovating their base or buying a new site can save money if they play their tax cards right. John Hiddleston reports.

0 ver time operators may need to improve, refurbish or buy new sites. But how does the taxman treat the money they spend? The law says repairs to premises are tax-deductible, while improvements are not.

Unfortunately the tax treatment of refurbishment work is rarely straightforward because expenditure can attract any one of a number of different tax treatments.

Expenditure can come under three categories: • Revenue qualifying for an immediate tax deduction *Capital spent on plant and machinery qualifying for capital allowances *Capital on improvements to the premises not qualifying for tax relief at all.

The distinction between capital and revenue expenditure is a grey area in tax law.The courts have held that expenditure is capital for taxation purposes if it provides an "enduring benefit" to the business„That's not a particularly helpful definition as "enduring" does not mean "forever" in the case of a vehicle it can mean for as little as two or three years.

Repairs and decoration are normally revenue expenditure. Repair is replacing what existed before, whereas improving is creating something superior. Remember that repairs are tax-deductible, while improvements are not.

Unfortunately, it is hard to replicate something exactly Building materials change and the old item may no longer be available, and building practices change, so something different could well serve the same purpose at a much lower cost.

While alterations are normally capital expenditure, even structural alterations may sometimes be the most efficient and effective way of restoring a building to its original condition.This was held to be the case in Conn vs Robins Bros Ltd, where work on a shop over 40 years old, including strengthening a floor and replacing a bow front with a flush one,were held to be repairs, The definition of repairs, or revenue expenditure, depends very much on the facts. Redecoration will normally be revenue. The replacement of existing counters and light fittings might equally be capital.

Premises' facades have traditionally been dealt with on a renewals basis the cost of replacing an existing front being revenue, but any element of improvement being regarded as capital.

Negotiate over definitions

The definition of "improvements" is normally a matter of negotiation and compromise with the tax inspector.

A useful principle established in case law is that if a building is bought in the knowledge that work will have to be carried out before it can be used for the purpose for which it was bought,the cost of that work will be capital. It will not be "repairs", it will be the "improvement" of what was bought. However, if the building is used in its existing state there will be a strong implication that the subsequent work will be "repairs". In the real world, of course, if the work is carried out before the building is used it will be hard to establish that the work constitutes repairs.

For capital items it is necessary to distinguish between plant and building. Plant attracts capital allowances; premises do not. Broadly speaking, if something is installed because it is needed in the particular business, such as a truck washer, it is likely to be plant. If it is needed to allow the building to be used for any purpose at all, it is not plant.

In this context, counters, shelving, signs and security mirrors are likely to be plant. Machinery such as security cameras, fire and burglar alarms, smoke detectors and illuminated signs also qualify for capital allowances in the same way as plant, but there are a number of difficult areas.

Lighting, for example, is not normally plant, even if specially designed for the business but it can be plant if it has a specific purpose, such as security lighting.

Electrical wiring is also a problem. it is not normally plant, as the premises could not be used without wiring. On the other hand, if the premises needs electricity for trade equipment, the extra wiring to support that equipment will be plant.

Again it will probably be necessary to negotiate the split between plant and premises on an item-by-item basis.

What other tax considerations arise when considering a refurbishment? Think tax from the beginning.The contractor's bill, or the bill of quantities, should be as detailed as possible. Anything that is included in the specification which is specific to the trade should be separately identified. • John Iliddleston is a senior tar consultant at Chiltern plc.


comments powered by Disqus