Taxing question of repairs classed as improvements

Maintenance of farmworkers' cottages, farmyards, farm buildings and machinery is an annually recurring overhead. The sums can be significant and it is important to budget and ensure the tax relief is understood.

Depending on the nature of the expenditure, a tax deduction against farming profits may be available in the year of expenditure, but this type of business expenditure may fall into two categories, revenue or improvement (capital) costs.

Revenue (repairs) treatment will result in 100 per cent deduction against taxable profits in the relevant year and will be available on expenditure incurred on repairs, providing there is no private or no capital element.

Tax relief for capital expenditure, to include improving or altering an asset or acquiring a new asset, will mean the tax relief available would vary from a full deduction against income, a phased deduction, or no deduction at all.

A repair would generally be defined as maintaining or replacing a part of an asset, whereas improvement or capital cost would be the replacement of the whole of an asset, alteration or improvement to an asset.

From a farming perspective, the most recent tax case of G Pratt and Sons v HMRC is useful as this set out certain parameters.

HMRC challenged the tax relief claim on work to a farm driveway. They argued that resurfacing with new kerbs provided an entirely new and better surface. On this basis, the works were not repairs.

The farming partnership contested this, saying nothing new had been added.

If there had been just been a “muddy track” there before, HMRC would have had a stronger argument, but in this case, there was an existing hard surface track which was repaired.

You should consult your tax advisor before undertaking any capital expenditure on a property or substantial repairs projects to agree on the nature of the works and tax planning options and tax relief available.

Roy Jackson, Partner at Whittingham Riddell.