When carrying out extensive repairs to maintain their premises a farmer may assume that, without question, these repairs will be offset against the business income received thus reducing the tax bill for the applicable accounting period. HM Revenue and Customs however, may adopt an entirely different view.
Repairs are tax deductible and can be claimed as a business expense in the year that there are incurred however, enhancements, alterations, improvements, refurbishments or indeed any such works which change the character of the asset will be categorised as capital expenditure, and as such will be relieved when the asset is sold and recorded in the capital gains tax computation.
If an asset is restored i.e. subsidiary parts of the whole asset are replaced and as a result of the work carried out the asset can be used to do the same job as before, then it is likely to be a repair. Replacing a whole asset however, is capital expenditure. Because of this distinction it is important to establish the asset on which work has been carried out, and decide whether the asset is an asset in its own right, or is part of a bigger asset.
The cost of improving an asset is not allowable as revenue expenditure and similarly the cost of altering an asset so that it does something different is also not allowable.
The inclusion of high levels of repair expenditure reported in accounts can give rise to enquiries from HMRC, thus highlighted in such recent cases as G Pratt and Sons (2011) and Hopegear Properties Limited (2013). Whether expenditure is a capital or revenue expenditure is a complex area, so it is vital to consider the correct tax treatment of repairs before you carry them out.
For further advice please contact Green & Co.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.