Expenditure which is capital in nature is generally not allowable as a revenue deduction in computing taxable profits. Depending on the nature of the capital expenditure it may be possible to claim tax relief by way of capital allowances.
But what is capital, and what is revenue expenditure?
There is no single, simple test that can be applied to decide which items are capital expenditure and which are revenue. This can only be determined by reference to the relevant facts that applied at the time the expenditure was incurred.
Repairs, Improvements or Alterations?
Repair – A repair to an asset restores it to what it originally had been. It is often routine maintenance work that recurs every few years. A repair is normally an allowable revenue expense for tax purposes.
A repair or replacement of a part of an asset using modern materials may look like an improvement, but if the new materials are broadly equivalent to the old materials then the cost is normally an allowable expense. For example, replacing single-glazed windows with double glazed windows would still be classed as a repair.
Alterations – An alteration normally involves improving or changing an asset and so providing an enduring benefit to the business, rather than simply restoring it to its previous state. These are therefore normally capital for tax purposes. Detailed analysis is often required to maximize the tax reliefs.
Expenditure on essential repairs to a newly acquired asset
If an asset cannot be used as soon as it is acquired because of its poor condition and the purchase price was substantially reduced to reflect the need for repairs, then the cost of those repairs may be treated as capital expenditure. This applies when:
- the asset could not be used in the business without being repaired
- the asset could only be used in the short term as its long term use was dependent upon the repairs being carried out
- the purchase price of the asset was substantially reduced because the asset needed repairing
Capital expenditure is an amount spent to acquire a new long-term asset or significantly improve the capacity or capabilities of an existing long-term asset such as equipment, fixtures or buildings, which will provide a benefit to the business for more than one accounting period.