HMRC can make renovations and improvements to a pharmacy less expensive – but only if the rules are followed, reports Adam Bernstein

Premises, retail spaces and workshops come in all shapes and sizes – and all will need ongoing repairs and maintenance. While tax should not be the driver behind these decisions, it is important to understand the tax implications of spending on improvements compared with renovations to allow the maximisation of claims for relief.

For David Wright, of the Association of Taxation Technicians, the pivotal question  is whether money spent on the premises is revenue or capital expenditure. As he outlines: “The costs of ongoing repairs and maintenance will normally be revenue, meaning they’re fully deductible in the period incurred, and the business benefits from tax relief relatively quickly. In contrast, if a business builds, extends, or makes improvements to its premises, the money spent is classed as capital expenditure.” 

This means that unless the business can claim capital allowances or Structures and Buildings Allowance, no tax relief is available upfront; it will also have to wait until it sells the premises to get tax relief for the costs of any additions or improvements. 

Revenue or capital? 

In principle, Wright says that the distinction between revenue and capital expenditure should be simple – work done to return premises to the condition they were in at acquisition is revenue; expenditure on enhancing them beyond that is capital. 

For instance, if the roof blows off and the business pays for a like-for-like replacement, that cost should be a repair and therefore deductible for tax purposes in the period incurred. In contrast, if it decides to have the roof replaced in order to add a mezzanine, then the cost will be capital as it is enhancing the building beyond its state when it was acquired. 

If an expense should be treated as capital, any incidental costs are also likely to be capital in nature. For instance, the cost of building an extension to premises would be capital, and therefore so would any associated legal or planning fees.

Detailed invoicing – an easy win

When works are completed a single invoice might cover a range of changes such as an extension and redecorating a staff room. In this instance, Wright explains that the cost of the extension would be capital and only recoverable when the premises are sold, but the redecoration is a repair and so can be deducted for tax purposes when incurred. 

As a consequence,  “whenever a business commissions building work covering more than one task, it should always ask for the invoices to be subtotalled by area or sub-project as appropriate.” He says this will help determine what tax relief is available now and what will be treated as capital. 

Capital allowances

With most capital expenditure on premises, a business will have to wait until it sells to get any tax relief. However, money spent on ‘integral features’ can qualify for capital allowances, meaning that it can get tax relief much sooner.

Wright outlines that integral features are defined as items that make up the premises, rather than plant and machinery used in the business. “Put simply, they are things ‘in which’ rather than ‘with which’ the business operates,” he explains. Qualifying integral features are strictly defined as electrical and lighting systems; hot and cold water systems (excluding kitchen and toilet facilities); lifts, escalators and moving walkways; powered ventilation systems, and air cooling, heating or purification systems; and external solar shading.

The cost of these assets qualifies for an annual Writing Down Allowance at a rate of six per cent, which, says Wright, allows tax relief based on a small amount of the asset’s value to be claimed each year over the course of its useful life.

However, Wright points out that many businesses will be able to get more tax relief sooner by claiming the Annual Investment Allowance (AIA) against the cost of integral features in the year they are acquired. 

AIA, he explains, allows businesses to offset against their income up to £1 million of expenditure each year on new integral features as well as most plant and machinery. “The business can’t claim the two allowances simultaneously though – it’s a choice of either AIA or Writing Down Allowances in the first year,” he adds.

Structures and Buildings Allowance (SBA)

Lastly, it can be painful to wait for tax relief on capital expenditure on buildings. But since October 2018, the cost of buying, constructing, or renovating commercial premises for use in a trade can qualify for SBAs. The allowance is currently three per cent.

Wright explains: “Leaseholders can qualify for SBAs on qualifying building works they pay for, such as fitting out premises for their use, and if the lease is for more than 35 years they may even be eligible for SBAs on the original construction/renovation costs.”

But he offers words of warning on SBAs. Firstly, a business can only get relief once, so the value of assets qualifying for capital allowances cannot also be included in an SBA claim.  Secondly, if it sells the premises, the amount of SBAs claimed will be added to the sale proceeds, so tax will eventually become payable on the amount of SBAs claimed.

Renovating or improving premises is an expensive business, but taking the time to understand the rules and to work to them will save much needed funds.