Many property owners are currently refurbishing their properties and making significant investments in capital reconstruction, plant & machinery and repairs. The challenge for the property owners is to claim the maximum tax relief through either repairs or capital allowances without getting it wrong. We have advised many property owners on how best to maximise allowances whilst meeting Revenue guidelines. Owners of Hotels, Restaurants, Data Centres, Nursing Homes, Commercial Units, Office Blocks, Industrial Buildings, Distribution Centres, Manufacturing Units, Supermarkets/Shops, Motor Garages, Farms, Stud Farms etc, all face the same challenge how to split the expenditure between capital, plant & machinery and repairs.
If the expenditure qualifies as straight repairs expense the good news is that 100% of the expenditure can be claimed in year one.
If it is not a repair then it is capital and you need to decide if it is Building Costs or Plant & Machinery.
- Building costs on non-qualifying property – no write off can be claimed but the costs incurred is added to the original cost of the property
- Building Costs on qualifying assets – you may be able to claim Industrial Building Allowance (IBA) which allows you to claim a write off at 4.0% per annum.
- Plant and Machinery – you may be able to claim wear and tear allowances (WTA) which allows you to claim a write off at 12.5% per annum.
The categorisation of the spend under the appropriate headings is complex and frought with difficulty, it is not as simple as you may think and to get it wrong can be significant in terms of tax, interest and penalties.
When assessing whether expenditure can be treated as repairs for tax purposes it may be helpful to consider the following questions;
- Was the expenditure incurred on a similar replacement where there was no element of improvement to the asset?
- Was the asset replaced with the nearest modern equivalent?
Tests used to determine whether qualifying as Plant & Machinery;
- Function Test – relates to the function of the item
- Business use test – whether the item is employed in carrying on the business
- Premises test – whether the item is part of the premises
- Setting test – whether the item itself plays a part in conducting the trade or is simply part of the decoration
- Completeness test – whether the building would be complete without the item
When refurbishing a building you need to consider all elements of the spend such as plant, electric’s, heating, partitions, flooring, fit-out, windows, doors, roof, lighting, painting, decoration, car parking, fees etc.
There is huge amount of case law available which has to be considered. Every case is different and should be considered on its own merits. You will need a very experienced Tax Accountant to get the split correct. Make sure to ask your advisor do they have they the necessary experience to advise on this and don’t be afraid to get a second opinion.
O’KellySutton has successfully claimed capital allowances for all types of property investments for a diverse section of clients. Our extensive experience has enabled us to develop a tried and tested methodology for preparing fair and complaint claims.