Repair or Improvement – tax relief?

Article published in the Galloway Gazette, Girvan News and Carrick Gazette w/c 18th October 2010.
John Simpson (ACA) a director of Montpelier Professional Limited
Repair or Improvement – can I obtain tax relief?

We are often asked by our clients if they can receive tax relief on work undertaken at their business premises.
If the work undertaken is classified as a repair, then the cost is deductable against your profits in the year that is incurred.  If the work undertaken is classified as an improvement then you do not get a tax deduction from your profits.  Instead you will get some additional relief from capital gains tax when the property is eventually sold.

There are two main disadvantages if it is classified as an improvement:

1. The tax relief is delayed until some time in the future.
2. The tax rates for capital gains are lower than for income tax, and in addition there are other attractive reliefs available for capital gains.  This means that the tax relief received against a capital gain is likely to be much less than if the work was classified as repairs and therefore available for relief against income tax.

The tax man sometimes tries to make the case that if the work undertaken improved the property, then it must be improvements and not repairs.  However their own tax manual states that ‘…cost normally remains revenue expenditure (repairs) where any improvement arises only because the tax payer uses new materials that are broadly equivalent to the old materials’.  Another way of looking at this is that if the repair replaced what was already there, then it is still a repair even if it is better than what was replaced.

This view has been strengthened recently with H M Revenue and Customs losing a case at the tax tribunal (Christopher Wills v Revenue and Customs).

Please ensure that you seek professional advice for your own personal circumstances.

John Simpson (ACA) a director of Montpelier Professional Limited, Newton Stewart.
jsimpson@montpeliergroup.com