Is it a repair?

‘Repairs and renewals’ is an awkward expression: repairs are usually tax-deductible, while renewals are usually not.

In considering whether a cost is a tax-deductible repair, the first step is to identify the asset on which the cost is incurred.  To be a repair, the work must be the making good of an existing asset, without changing its character, following deterioration in the course of use by the business.

Making good an existing asset

The making good of an existing asset includes the replacement of component parts, such as the roof or doors of a cattle shed, or a fitted kitchen (or the electrics) within a let house.  But not the replacement of the whole asset: thus, the demolition of a shed and construction of an identical replacement would be capital expenditure.

Without changing its character

There are multiple aspects to the character test:

• An alteration, extension or improvement is capital expenditure, and there is no longer any tax deduction for the cost of repairs that were needed but were obviated by the improvement project.  This means there is sometimes a tax opportunity in breaking a project into two completely separate ones, undertaken at clearly different times – the repair project and the improvement project.

   

• The replacement of a stoned lane with a concrete one is a capital improvement, as is the replacement of an existing 4” concrete lane with 9” reinforced concrete designed to accept much higher loading.

• Different materials do not deny a repairs deduction where the intended function (including extent of use) is unchanged and the improved materials are just the technologically modern equivalent.  The usual example is that changing a deteriorated, softwood, single-glazed window to a upvc double-glazed one is a repair.

• Similarly, replacing old, fused electrics with modern circuitry with similar loading capacity and power points is a repair, but a replacement system with much higher loading capacity and many extra sockets would be improvement.

Deterioration in the course of business use

It is prudent to delay major repairs for a year or two following acquisition of an asset.  Where, say, a shed is purchased at a reduced price because it needs a new roof, the cost of the roof – like the shed – will be capital expenditure.  But if the shed was fit for its intended use at purchase, and the price paid was unaffected by the roof condition, the cost of replacing the roof after a few years of use will be a deductible repair.

And if the roof simply needed routine maintenance, such as painting, that would be a repair even if undertaken soon after purchase.

Building works are expensive and there are sometimes opportunities to achieve a good tax saving with appropriate planning.  Please contact us if you would like to discuss your project.