Choosing the right heading for expenditure on buildings can be tricky. For accounting and tax purposes expenditure on repairs of buildings is fully deductible from profit. Whereas expenditure on improving buildings should be recorded as an increase in value of the asset and the deduction from profit for accounting purposes spread over more than one year as depreciation.
The tax system’s equivalent to this is capital allowances (CAs) which has its own timetable for tax deductions. So wrongly allocating expenditure can affect your tax bill.
Recording repair costs to a building as improvement expenditure can result in extra tax charges if your business moves premises.
When you sell a business premises the CAs you’ve claimed for expenditure on improvements can be clawed back. Usually, the buyer will be keen to attribute a high value to fixtures because they will be entitled to claim CAs on whatever they pay for them. If the value you agree is greater than the original cost minus the CAs you have claimed, the difference is taxable.
A tax saving is more likely if your business is unincorporated because a clawback of CAs is taxed at income tax rates of up to 45%, whereas CGT is payable at just 10% or 20%.
Analyse bills for work critically and attribute as much as is fair and reasonable to repairs. Correctly identifying expenditure as relating to repairs rather than improvements to buildings will prevent a possible clawback of tax relief previously claimed as capital allowances.