Repairs and Renewals
A distinction is drawn between repairs and improvements when considering if tax relief is available.
The general rules are that:
- Expenditure on restoring an asset to its original state is revenue in nature and so allowable in calculating taxable trading profits; and
- Expenditure on altering or improving an asset is capital and must be added back when calculating trading profits. Tax relief for these costs may be available when the asset is sold or via the capital allowance system if they are qualifying assets.
It is not always easy to distinguish between repairs and improvements. There are several points to bear in mind:
- The use of modern materials does not of itself mean that an asset has been improved if the materials used are broadly equivalent.
- If an entire asset is replaced, all the expenditure is considered capital.
- If an asset is bought in a poor state of repair and is not fit for use at that point, then there is an assumption that the purchase price was discounted to allow for the costs that are required to bring the asset into use. These costs will be considered capital.
- Special rules apply to repairs to integral features within a building. These include electrical and water heating systems. If the costs equate to more than 50% of the costs to replace the whole feature, then they will be classed as capital.
This is a general summary of the position, but the detailed rules can be complex.
If you are in any doubt about whether an expense is a repair or an improvement, please get in touch with Robson Laidler’s Tax Advisory team or email us directly: taxteam@robson-laidler.co.uk.