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Reaping the revenue from repairs
While capital expenses are considered to be long-term investments in the future of the business, revenue expenses are incurred in its day-to-day running, and so can be deducted when calculating the taxable profits.
However, the difference between the two is not always clear, especially when it comes to repairing existing assets. Furthermore, what a business considers a repair will not always be viewed in the same light by HM Revenue & Customs (HMRC).
This was recently highlighted in the case of G Pratt & Sons v HMRC, which considered the tax treatment that should apply when the farm partnership resurfaced its drive, spending £23,300 in the process.
One of the key points in the case was the difference between repair and renewal. Repairs are considered revenue expenses, while renewals will be treated as a capital expense. A like for like replacement is usually considered a repair, but demolishing an asset to build a new replacement is a renewal.
While the farmer maintained that, as the new surface had been laid on a hard-core base created from the old tarmac, this constituted a repair, HMRC argued that the drive was a new asset – and therefore should be considered a capital expense.
Furthermore, if the asset has been extended in any way or has enhanced the ability of the business to carry out its trade, then it could be considered as capital expenditure.
Indeed, in this case, HMRC argued that the new drive had improved the business and, as substantial construction work had taken place, it should be considered a capital expense.
While the tribunal ruled that this was, in fact, “a repair to an existing asset”, it did also state that it may have ruled in HMRC’s favour had the drive been altered in any way – for example, such that bigger lorries could be accommodated.
Consequently, firms need to take care when repairing existing assets to ensure that they do not then fall into the trap of these expenses being treated as capital by HMRC. If in doubt, it is always advisable to take advice from dedicated professionals, such as the team at Moore Thompson, and to take photos before and after the repairs to prove what tax treatment should apply.
For more information, please contact us.
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