Introduction »

Spotting the winning ticket in the premises lottery

A common tax issue that arises is where a business incurs expenditure on repair work to its business premises. The tax treatment generally allows a 100% tax deduction for genuine repairs as revenue expenditure but if the nature of the expenditure is more of an improvement or alteration, then the situation is not so clear cut. HMRC are likely to argue that the expenditure is capital rather than revenue and deny the tax deduction.

As capital, the expenditure would then only qualify for tax relief if eligible for capital allowances. This primarily means under current tax rules that it must qualify as plant and machinery, as most 'premises' expenditure does not get relief.

A case heard last year at the First Tier Tribunal (FTT) illustrates these very points. The company in question was involved in the manufacture and retailing of curtains and accessories. The business premises were a two storey building which contained a showroom and warehouse on the ground floor together with a workshop, offices and kitchen on the first floor. Extensive work was carried out to the premises and out of total costs of £67,000 a tax deduction of £53,000 was claimed as repairs.

As a result of this extensive work the premises had a larger refurbished showroom and a reduced warehouse facility. The alterations to the premises were designed to accommodate a shift in the business to providing a bespoke curtain/blind making service along with their installation hence reducing the need to hold stocks of material.

HMRC accepted that expenditure on roof repairs and refurbishing the kitchen should be treated as repairs and allowed a tax deduction. However, they argued the rest represented capital expenditure on alterations and improvements aimed at refurbishing and increasing the size of the showroom and no tax deduction was allowed, except for that part of the cost which was eligible as plant and machinery.

In making its decision the Tribunal looked at the plans and other documentation available and concluded that the work had changed the character of the building as a whole. It was evident that the company had chosen to adapt its premises to its business needs and so they agreed with HMRC that this should be regarded as capital expenditure.

What is plant anyway?

Another case heard at the FTT concerned a taxpayer who runs a country pub in West Sussex. She purchased a wooden gazebo which was placed in the pub’s garden, but not bolted to the ground, to provide cover for customers who smoked.

HMRC argued that capital allowances on the cost of the gazebo were not due as the gazebo was not apparatus with which the business was carried on but premises in which it was conducted.

The Tribunal considered that where a gazebo was simply a fixed roof on pillars where customers could smoke outside the pub, then it would seem more likely that it could be described as part of the premises.

However, in this case, they concluded that the gazebo was not attached in any permanent way in the garden and remained moveable. They described the gazebo instead as 'more like an embellishment of the garden' rather than something which simply performs the function of housing the business, so capital allowances were due.

The moral is, if you are planning to incur repair/improvement expenditure or any capital expenditure in relation to your business, contact us in advance to discuss the likely tax treatment so that the optimum tax position can be planned for in advance.

Introduction »