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I'm looking here at the differences in tax treatment of money spent on repairs and a new building or improvement to an existing building.
The cost of repairing an existing asset can be offset in full against profits in the year that it is incurred. The cost of a new building or an improvement to an existing building is treated as capital expenditure and while capital allowances may be due on some of the cost, it is likely that part of the expenditure will receive no tax relief at all.
An example of the difficulties that can result in trying to work out whether expenditure is a repair or capital expenditure is illustrated by a tax tribunal from a few years ago. A dairy farmer was receiving complaints from milk tanker drivers as to the state of his lane. He therefore spent a sizeable sum in having tarmac laid etc and this amount was claimed as a repair in his accounts. HMRC argued that the lane had been replaced in its entirety and was a new asset and was capital expenditure. A farm lane does not qualify for capital allowances and the farmer faced the prospect of getting no tax relief at all on the cost.
Thankfully the tribunal accepted that the money was spent putting the lane back into its original condition rather than improving it, and the farmer got his tax relief. Had the new lane been wider or capable of carrying heavier lorries, then the cost may have been classed as an improvement.
Furthermore, HMRC now accept that the use of modern materials or improved technology does not in itself make something an improvement. In the past they argued that the replacement of single glazed windows with double glazing was an improvement but they have changed their view on this in recent years.
There have been a couple of other more recent cases, not involving farmers, where HMRC attempts to deny tax relief on repair expenditure were rejected by the courts. This is an extremely complicated area and it is necessary to carefully review the work that has been done in order to maximise the tax relief available.
Keith Johnston - Tax Director
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