Property Refurbishment/Alterations
Property refurbishments often offer taxpayers the greatest proportion of tax relief compared with new building developments or acquisitions. This is due to the following:
- Revenue Expenditure
- Capital Allowances Act (CAA) 2001 S25
Revenue Expenditure
Maintenance and repairs are normally regarded as examples of revenue expenditure. In such cases the whole of the expenditure can be deducted in the tax computation for the year that it is incurred. The effect is to relief 100% of the expenditure at the taxpayers marginal rate of tax.
It is important to note that there is a thin line and large volume of case law regarding the distinction between revenue and capital items. In general terms, the distinction is not founded upon the quantum of the expenditure, nor upon the size of the assets involved, rather the following key principles
- The durability of any new asset created
- Whether it is the whole or a merely a part of an asset which is being replaced
Revenue expenditure is not due for the cost of replacing an entire asset 'the entity principle', for example a whole building or in some instances readily identifiable parts. Also, revenue expenditure will not be allowed if there is a significant element of improvement to the asset (note: use of modern equivalents is normally allowed), for example the replacement of timber single glazed windows with modern aluminium framed double glazed windows. Moreover, just because an asset is shown as repair in a building contract does not necessarily mean that it will satisfy the test as a revenue expense for tax purposes.
A further consideration is that the owner must either have used the property before refurbishment or at least demonstrate that it could have been used despite the refurbishment works.
For the avoidance of doubt all repair/maintenance expenditure in a building contract should be itemised and priced separately.
Capital Allowances Act (CAA) 2001 S25
Certain elements of a building or structure are normally excluded by statute from qualifying as plant or machinery for capital allowances purposes. For example: floors, walls, ceilings, lift shafts, etc.
This section in the Capital Allowances Act specifically allows a taxpayer to claim capital expenditure on items that would not normally qualify and that are incidental to the installation of plant or machinery as a result of alterations to an existing building. For example, the installation of a lift shaft associated with a new lift in an existing building will qualify under this section.
For the avoidance of doubt all such associated expenditure in a building contract that involves alterations to an existing building should be itemised and priced separately.
