Room for (tax) manoeuvre
The issue of when or if expenditure on a rented business property counts as revenue or capital expenditure for tax purposes was the subject of recent Tax Discussion Group (TDG) debates.
At TDG, an accountant explained that they had a client who was a sub tenant in a commercial building owned by a third party. They explained that their client occupied the property under license. Due to business growth they have asked for an additional room, previously used as storage, to be made available to them. They have initially used the room for storage themselves, but recently have needed to use the room for production and printing as part of their business.
They have therefore undertaken building works to convert the additional room to be suitable for their purposes. This involved replacing several doors, repainting the walls, applying heavy duty paint to the floor, as well as installing a suspended ceiling to enable cabling and lighting to be provided.
The works cost £5,000, which is significantly more than the repair costs incurred in preceding periods. The accountant therefore wanted to know if the works were allowable revenue expenditure or whether they would be considered capital expenditure.
In the meeting there was considerable discussion regarding the nature of the expenditure and whether this would be allowable expenditure for a trading business, for the landlord as part of their rental business or capital expenditure.
It was felt that the costs should be allowable expenditure for the trader as they were incurred as part of their business. Some of these costs would be revenue expenditure and the installation of the suspended ceiling would be capital expenditure. As the landlord did not incur the expenditure themselves on the installation of the suspended ceiling, nor required these costs to be incurred as part of the condition of renting the property, they would not be taxable on the monies paid out by the tenant as part of the rental income they received.
A full analysis of these tax issues is beyond the scope of this article, but should be considered by anyone who has similar issues to consider. The most suitable solution for the client will be dependent on their circumstances.
Each month (with the exception of July and August) the Tax Discussion Groups in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend & normally cover over a dozen tax issues raised by those attending.
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