Maximise tax deductions for property repairs
When you carry out major repairs to your premises HMRC might argue that some or all of the cost isn’t allowed against your business profits. How can you improve your chances of a tax deduction?
Whatever your business, if you have premises from which it is run, there is one case is worth taking a look at. This subject has always been a bone of contention with HMRC but the judgment in Wills v Commissioners of HMRC (W v HMRC) makes things just a little clearer.
What’s the difference?
The case concerned the old chestnut of whether the cost of a repair to a business property is deductible from profits or from any gain made when you sell the property. There are two tax advantages to getting a deduction from profits. Firstly, you won’t have to wait until you sell the property, or your company, to get the tax deduction. Secondly, if you don’t make a capital gain when you do sell it, or if the gain is reduced, e.g. by entrepreneurs’ relief, you might get less or no tax relief at all.
“Fixing-up” a Premises
In the case referred to above, W spent nearly £107,000 renovating an outbuilding used for business purposes. He claimed over £43,000 of this was for repairs, and so deductible from profits. The balance was for improvement and so deductible from any capital gains that might be made from the property when it was eventually sold. HMRC argued that because the part of the building in question was run down, the repairs were so significant that they were effectively an improvement.
Repair = improve?
We’ve seen this argument many times and it’s a tricky one to dispute: HMRC asks “Did the work improve the building” , and the answer is “ Yes, of course” ! But for tax purposes “improve” doesn’t just mean that the property was better after the work was done than before, you would expect that to always be the case. It really means is there anything new or added that is of better quality or additional to what was there before. In deciding in favour of W, the judge was keen to point this meaning out by quoting directly from HMRC’s own manuals.
It’s in the manual
According to the Taxman’s manual:
“A repair or replacement of a part of a building using modern materials may give an apparent element of improvement because of the greater durability, superior qualities and so forth of the new material. But the cost normally remains revenue expenditure(deductible from profits) where any improvement arises only because the taxpayer uses new materials that are broadly equivalent to the old materials.”
In other words, a like-for-like replacement is a repair even if it’s better than what it replaced.
Here’s an idea: If you’re improving your business premises, ask your builder or architect to identify the cost of work that is no more than a replacement or repair to the existing structure. You can deduct this part of the cost from your profits even though the overall work was in the nature of an improvement.