Tax Deductions for New Premises

From time to time clients take a new unit, refit their shop or similar.  Usually the assumption is that all the expenditure will be tax deductible but whilst a lot can be, it is a complex area.  In this blog we unpick the issues.

We will do this by means of an example using a fictitious company,  Blythe Hill Catering who are considering moving their kitchen to a new unit which will require a complete refit.

List the work done

An important starting point for understanding what tax deductions are available in fitting out a new unit is to understand the different elements of the work.  A contractor may give a quote for the entire job but as we will see different elements will attract different tax treatment so we need to understand which elements.  For Blythe Hill Catering the works consist of:

• Making good some leaks £2,000

• Laying a new floor £5,000

• Building an office space within the unit £3,000

• Buying and installing new ovens £4,000

• Rewiring the unit £5,000

• Putting in air conditioning £2,000

• Redecorating £1,000

• Building a counter £1,300

• Fitting shelving and storage £1,700  

• TOTAL £25,000

For Blythe Hill Catering the tax deduction is important.  If it is all tax deductible the outlay will be £5k less than if none is.

Repairs vs Capital Outlay

The next step in the process is to identify which of the elements can be classed as repairs.  Here it is helpful to understand the difference between expenses and capital assets in tax.  

Generally business tax is charged as a % of profit and profit is calculated as Income minus Expenditure (running costs / expenses).  However not everything bought is classed in accounting as expenditure.  When a business buys a piece of equipment, it has lasting value and is seen as an asset.  It no longer forms part of the profit calculation and sits showing as an asset on the balance sheet.

Repairs are seen as running costs / expenses and are therefore automatically a tax deduction for the business.  The rest of the list will be seen as Capital Expenditure.  Some Capital Expenditure will benefit from a tax deduction under Capital Allowances but not all.

Therefore defining repairs becomes important.  The general idea here is that a repair maintains the existing fabric of the space.  If the work upgrades the fabric of the space from its original condition, we need to think about Capital Allowances.

In our list above, redecorating is a clear example of a repair.  The unit was previously painted.  It is being repainted.  This is therefore a repair.  Likewise the work to stop the leaks will be a repair.  

However some works may not be so easy to define.  One example will be the floor.  If the previous floor was lino and the company wishes to upgrade to parquet the work can no longer be defined as repair.  In our example it turns out that the existing lino floor has become degraded and whilst the new lino will be a higher specification the work is generally replacing like with like.  This work is therefore also a repair.

The rewiring is another area to explore.  Here it turns out that the existing 240V system needs to be redone but there is also a plan to bring in three phase electricity for the ovens.  

Again the part of the work that is repairing the 240V will be a repair and we will need to see if the three phase system will attract capital allowances.

Fixtures & Fittings / Plant & Machinery vs Leasehold Improvements

Our next step is to identify which items are Fixtures & Fittings and Plant & Machinery because these categories of expenditure will almost certainly automatically attract a tax deduction via Annual Investment Allowance.  Currently you can’t claim AIA on expenditure above £1million which makes the limit effectively irrelevant for almost all small businesses.

Fixtures & Fittings / Plant & Machinery share a characteristic in common which is that the items can be taken away if the business moves on.  In contrast Leasehold Improvements will be left behind to the benefit of whoever then next takes over the unit.

For Blythe Hill Catering the ovens quite clearly fall into the category of Plant & Machinery and they will get the tax deduction.  This will include the delivery and installation costs.

Most likely the storage and shelving can be classed as Fixtures & Fittings as most shelving can be unfixed and taken away as can most cabinets.  This proves to be the case.

The new office space however will involve building walls, installing a door and a window, none of which can be taken away and used again.  This is then classed as Leasehold Improvements.

How the counter is classed depends on its construction.  If it is built as a stand alone item of furniture it will be a Fixture & Fitting but if it is built into the unit it will be a Leasehold Improvement.  Here it turns out the counter needs to be built in and therefore falls into the category of Leasehold Improvements.  

Likewise the air conditioning requires puncturing the external wall and whilst some of the duct work could be removed it is clear it could not be repurposed elsewhere and will become part of the fabric of the unit.

Integral Features

We are now left with the following that have been classified as Leasehold Improvements:

• Building an office space within the unit

• Installing 3 phase electricity

• Putting in air conditioning

• Building a counter

The general rule with Leasehold Improvements is that no capital allowances and therefore no tax deduction is available.  However we are allowed to claim Annual Investment Allowance for a special category of Leasehold Improvements called Integral Features.

Integral Features are defined as:

• Electrical systems: Lighting, wiring, and distribution boards.

• Space or water heating: Boilers and water-filled radiators.

• Air conditioning/ventilation: Air cooling and air purification systems.

• Hot and cold water systems

• Lifts, escalators, and moving walkways.

• External solar shading.

• Floors or ceilings that are part of the above systems

As we can see the 3 phase electricity and air conditioning clearly qualify.  So for Blythe Hill Catering it turns out the only expenditure which is not tax deductible is the office and the counter.

Summary

Our 4 stage process for getting tax deductions right for fitting out new units is therefore:

• List the works being done

• Identify repairs which can be claimed against trading profits

• Identify Fixtures & Fittings and Plant & Machinery for which we can claim AIA

• Identify Integral Features from the remaining Leasehold Improvements for which we can also claim AIA