Ask an UK Tax Question, Get an Answer ASAP!
Hi I have already asked this question earlier in the year but am now in the process of completing my company corporation tax computations and just wanted further assurances that i'm treating these costs correctly - I will post my original question below and will post the other follwing correspondence once i get a reply to give you the full picture, thanks (the costs im referring to are capital leasehold improvements and I am really now trying to identify the % of capital allowances or A.I.A's that i can claim to reduce the CorpTax bill. (previous expert said probably 100% AIA but i have a feeling after researching HMRC site it could be wrong?)
ORIGINAL QUESTION: " I am just doing my month end accounts for my Ltd Company and am after some advice as to classification of expenditure relating to our recent design studio refurbishments. We only occupy the studio, and pay a monthly rent to the landlord so in terms of enhancing the value I guess this is irrelevant as the building is obviously not on our balance sheet. The total cost of the refurbishment was £7.9k (including £1k project management fee for the work and associated labour costs) We basically expanded into other offices and the refurb costs cover removing some walls, putting in new support columns, plastering, electrical works, data cabling, decoration. Also included was cost for our air-conditioning units serviced and repositioned and bought an additional unit £2150). I am trying to decide whether this is P&L expenditure as Repairs and renewals or to capitalise some of these costs - in terms of tax I guess it doesn’t make too much difference as if P&L reduces the annual profits, and if balance sheets assume we claim 100% anyway under the A.I.A? Please advise thanks"
Thank you for your question. Please ask for clarification until you are satisfied with my answer. If you are satisfied please press accept button this is the only way I can get paid.=====================I hate to disagree with other expert but it looks to me as only some of the cost incurred will be treated as capital improvements. It looks like some of the work done was to decorate the property and bring it to usable condition and this part of the cost would simply be revenue expenditure.
There might have been sizeable proportion of improvement in it but majority was only repair. Repair would simply be revenue expenditure and capital.
please advise when yo are online thanks
The decorating element of the costs is hard to determine as I was given one invoice by the management company that did the work saying :
OFFICE RENOVATION WORKS
Removing walls, new support columns for existing false ceiling
Plastering, electrical works, data cable wiring and decoration,
New air con unit, re-site and service existing two units,
All labour and materials as per estimate. £7,900
We previously only occupied one room on the top floor of this warehouse and in order to expand had all the walls knocked out and some cabling done for our network along with the 2 existing aircon units moved + 1 new one.
I guess we have two things to consider, the treatment of the cost in the accounts as to whether P&L expenditure (all allowable in the year of spend?) and then the % to apply for the capital allowances within the Corp tax computation. At the moment, based on previous advice, I have capitalised the entire amount (incl the £1k management fee that was part of the £7.9k) and am hoping I can claim 100% of this on the A.I.A scheme as per the HMRC CA 23084 http://www.hmrc.gov.uk/manuals/camanual/ca23084.htm
(which implies that I am free to allocate what I want to the A.I.A. if within the threshold of £25k)?
I hope you can help?
Thanks for your help so far, much appreciated
ALSO – just fyi – this is the prevouis discussion I had with the previous expert:
Although you do not own the building, I would treat the costs as capital expenditure as a tangible fixed asset and classify the costs as leasehold improvements.
The basis to depreciate the asset will be over the life of the lease. As an example, your total spend was £10k (£7.9k refurb plus £2.1k aircon unit) and assuming you have 5 years left on your lease, you depreciate the asset by £2k a year (obviously this depends on the length of the lease).
If you were to leave them in the profit and loss, this would certainly reduce your profit for the year and would have an impact on the distributable reserves.
Turning to the tax element - you may struggle to obtain AIA's on all of the improvements and will obtain intergral features on elements of the refurbishment. Getting to the point - you should get 100% relief on some of the costs but not all.
HI Mark many thanks for the info.
If you left them in repairs, HMRC would look to disallow some of the costs therefore my advise would be to capitalise them.
I dont actually have a lease with the Landlord, itsa very casual set up, I know these leaves me exposed if he wants us out as he would derive the benefit of the works that we have paid for.
Also onbvioisly much of the costs (labour etc) is not tangible should this also be capitalised?
Although you don't have a lease, I would still capitalise the costs and depreciate them over what you determine to be the realistic time you will spend in the premises (a period of less than 20 years is normal - anything over 20 years gets complicated accounting wise)
just also looking at worst case scenario if we were to fold in the future, would be very difficult to take out cabling / aircon etc?
Labour works can also be capitalised - you need to capitalise the cost element to the company only.
Should i also capitalise the building project management fee of £1k, i guess this was part of the total cost but could be professional fees?
I agree, you can't rip out the cabling / aircon but essentially you are apportioning the cost of the spend over a period of time. If the company did fail, it doesn't matter too much whether you have capitalised the costs or not.
Management fee is also ok to capitalise, it is all part of the cost of the asset.
Cool, it costs us £7.9 including aircon bits so I am probably going to capaitalise that amount under 'Leasehold improvements' as you say and depreciate over 4 years. How should i determine how much capital allowances to claim in my year end corporation tax comp?
I guess the whole incentive of the A.I.A is to stimulate growth in businesses so I guess this expansion / improvement expenditure should qualify 100%?
I presume you don't have an accountant who calculates your tax? This will fall under integral features and I will need to refresh myself on what is and isn't allowable (HMRC don't make the rules easy!). AIA's work well until you spend money on an asset that isn't essentially yours - i.e. leasehold improvements.
If this is ok with you, can I read up on the small print of integral features and come back to you in an hour or so?
Perfect Mark, thanks, XXXXX XXXXX to get my head around best way to treat these costs - & nope don’t have an accountant, used to be one for 10 years in a previous life but a lot has changed since my days - thanks mate
I'll back to you as soon as I can - I have a book on it at home so worse case, I'll be in touch this evening but hoping I have a book at work.
Ok - looked at the integral features of a building are electrical systems, cold water systems, space or water heating systems, powered ventilation systems (air con included), movable walkways. Providing you haven't used up your AIA pool, you can claim 100% on these as integral features, if you have gone over the AIA limit, you can only get 10% on these.
By the way, moveable walls are ok as an integral feature (partition walls) - looking at it, you might be ok to get 100% on most of the everything.
sorry to have just bombarded you there Berduchwal, Im sure you're a very busy man, thanks
I need some time now.
cool, thanks very much
New air con - capitalNew support column and walls removal - capitalData cable - capital===========Plastering, electrical works - repairDecoration - repairwork on other air con - repair===========I suggest you guess-timate proportion of cost for those above and apportion overall labour and management.Capital can be claimed as AIA Repair can be claimed on P&L
I do not agree that plastering and decoration is capital. It most certainly is not. It is therefore revenue expenditure NOT capital.
Prepare internal document something like: "work acceptance and categorisation statement" In which you write down what do you class as what and why. Include calculations and then based on this documents apply to the accounts.
Simplest and shortest reference I can find is here:http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm
Do to heading: Repairs etc after a property is acquired
That makes great sense berd, thanks very much. One final thing the £1k management fee included in the bill - Pro fees, or iincluded in the capital?
Divided between the two as per % of costs.
thats great thanks very much