Refitting a shop requires time, thought, plenty of expense and an understanding of how HMRC treats expenditure as, unfortunately, the rules are as clear as mud.
The first thing to get straight is whether your refitting costs relate to repair or improvement. If the costs relate to repair, they are deductible from your taxable profit. If the costs relate to improvement, say a new shopfront, the taxman will consider them to be capital expenditure: as such, no deductions from taxable profit will be allowed.
HMRC’s manual, written as a guide for HMRC inspectors, gives the example of a company that needed to have its roof repaired and decided to open up the roof area for extra office space. The fact that the roof was unsound and needed to be repaired was beside the point; the additional work that got done on the roof makes what happened improvement, not repairs.
Whether your fittings count as fixed assets or stock determines how you will be taxed when you sell the assets on. The sale of stock is taxed as a taxable income; the sale of fixed assets is taxed as a chargeable gain. The latter is taxed at a lower rate. If it’s your business to sell (say) kitchen units, then HMRC will assume that the kitchen unit displayed in your showroom is intended for sale, and therefore is trading stock.
In terms of capital expenditure, the good news is that if you can’t claim deductions on your refitting costs, you may still get tax deductions in the form of capital allowances. The Annual Investment Allowance (AIA) allows you to claim tax deductions on 100 per cent of qualifying expenditure, up to £200,000. This is available on both ‘plant’ and ‘machinery’ and integral features. Over and above the AIA limit, lower capital allowances are available each year.
To qualify as plant and machinery, the expenditure has to be kept ‘for permanent employment in the business’, so this excludes stock in trade or expendable equipment with a life of less than two years; and function as ‘an apparatus employed in carrying out the activities of the business’. Anything that can reasonably be expected to form part of your building – for example, walls, partitions, ceilings, floors, doors, windows and lighting – should be considered to be premises and not plant.
Lastly, if the allowances for plant don’t apply you can look at special rate allowances that are available on assets, which are integral to buildings, such as electrical systems and cold water systems.