CAPITAL ALLOWANCES - 27.04.2006

Missing link

Straightforward repairs

Overlaps. Many companies and tax advisors find Capital Allowances (CAs) troublesome. They fit awkwardly between property, tax and accounting knowledge, and require any capital expenditure to be segregated into plant and machinery, repairs, capital expenditure, and, where appropriate, Industrial Buildings Allowances. It is not unusual to review company tax computations and fixed asset ledgers and to see a high proportion of capital expenditure classed as ineligible for CAs. Your first area of scrutiny should be repairs expenditure.

General rule. You can claim a full tax deduction for money you have had to spend on normal repairs and renewals. However, it’s not always clear exactly what a normal repair and renewal is. There have been hundreds of cases to sort out disagreements between taxpayers and the Taxman over the definitions.

Taxman’s approach. One ofthe Taxman’s favourite questions during an enquiry is “what’s included in repairs and renewals?” That’s because he’s looking for items which aren’t, as these can’t be deducted from your profits. However, even if the expenditure proves not to be tax-deductible there is something else you can do with it.

Tip. Don’t ignore the past. Review old tax computations, with the help of your tax advisor if necessary, to see if there are any expenses which have been disallowed on which you can now claim CAs. Disallowed expenses for the past six years are eligible for this review. (Taxman’s Statement of Practice 6/94).

Re-opening old wounds? There’s no need to worry about The Taxman re-opening earlier years, these disallowances are amendments which you have already agreed with him.

Tip. Once you’ve identified the costs that can only be deducted from sales proceeds, set up a schedule to record these and add to it in future years. This way nothing will be overlooked.

VAT

Example. A company purchased an office for its own occupation and then carried out a “fit-out” of the property. A review showed that a CAs claim that was made for the fitting-out expenditure did not include the irrecoverable VAT. Consequently, it was possible to significantly enhance the claim.

In practice

Reluctance. Sometimes there can be a reluctance to re-analyse historical expenditure in case it reflects badly on external advisors. This is short-sighted as legislation and accepted practice has changed significantly in recent years. If it results in savings, who cares? Generally, a review will provide a positive benefit. The positive message is that if there have been under-claims in the past, these may be rectified by either amending the tax returns or by making additional claims in current periods.

Start-ups. Remember, that in a start-up situation the company may not be tax paying when the expenditure is incurred. In this instance, you may not consider it worth incurring professional time to carry out a review to optimise your CAs claim. However, it will be worth revisiting when the company becomes tax paying.