capital or revenue expenditure

Trish

This is my first posting of a message to this forum, so if I get it wrong, sorry!

I have a client who has just replaced a flat roof on part of their premises. It was not a case of repairing the existing one, but of tearing it all off and starting again with a completely new flat roof. I am not sure whether to treat this as capital of revenue expenditure. I would appreciate anyone`s thoughts about this.

Thanking you in anticipation

Regards Trish

T.C.

I would ask the question whether the roof has been replaced with the same type of roof as a type of repair, or, whether the roof has been replaced with a higher quality, new style roof. In either case I would be inclined to call it a building repair. Are we talking about alot of money here?

JodieR

I agree with TC, both repairs and renewals are classed as revenue expenditure, so long as the roof has just been returned to it's original state. If there is an element of imrovement then it will be classed as capital expenditure.

Dean

I think there could be arguments for both here. From my own experience, we've just had a 'repair' done on our garage at home. The felt they use nowa days is unbelievable! That alone would constitue an enhancement.

However as with all these cases, Trish, you are in possession of all the facts! Click here for some bedtime reading!

Regards

Dean

beverly hudson

Dean,

I do not think tax legislation will entirely answer the question.

FRS 16 is more appropriate in these circumstances and the OP should consult those provisions. This sounds to me like capital expenditure.

Beverly.

PGM

JodieR wrote: »

I agree with TC, both repairs and renewals are classed as revenue expenditure, so long as the roof has just been returned to it's original state. If there is an element of imrovement then it will be classed as capital expenditure.

word

Poodle

JodieR wrote: »

I agree with TC, both repairs and renewals are classed as revenue expenditure, so long as the roof has just been returned to it's original state. If there is an element of imrovement then it will be classed as capital expenditure.

Ditto

Poodle

Dean

Hi Beverly

With all due respect I haven't sent the OP to the tax legislation; I've guided them to the Revenue's interpretation of this subject, Capital or Revenue. While I appreciate there can be a different accounting treatment, 9 times out of 10 these questions reside in whether the expenditure is wholly or proportionately allowed against profits. So for this reason I do not see how an FRS can be more appropriate?

Also, isn’t FRS 16 laying down the accounting treatment for Current Tax? I haven’t read the standard; so how does that help in determining whether expenditure is “Capital or Revenue”?

If you re-read my post you should note that the inclination I am giving is also that of Capital expenditure. Any roof of this sort would be very difficult to say that it is just a repair.

Regards

Dean

peugeot

Hmmm - the old 'capital vs. revenue' debate strikes again!!

It's always interesting to hear people's views on this. However, myself and another accounting standards expert (she is a well-respected ACCA P2 tutor) are of the opinion that this could well be revenue expenditure.

My opinion is based on the fact that such a repair would only restore the building to its previously assessed standard and that the roof (presumably) has not been separately depreciated from the rest of the entire building.

The provisions of FRS 15 relating to 'subsequent expenditure' state 3 criteria that have to be met before capitalisation can occur:

where
• the subsequent expenditure provides an enhancement of the economic benefits of the tangible fixed asset in excess of the previously assessed standard of performance
• where a component of the tangible fixed asset that has been treated separately for depreciation purposes and depreciated over its individual useful economic life is replaced or restored
• where the subsequent expenditure relates to a major inspection or overhaul of a tangible fixed asset that restores the economic benefits of the asset that have been consumed by the entity and have already been reflected in depreciation.

I think therefore the replacement roof merely maintains the building to its previously assessed standard of performance and should therefore be regarded as 'repairs and maintenance'.

Best wishes
Steve

deanshepherd

peugeot wrote: »

..myself and another accounting standards expert..

Is that what you are now Steve..

I agree fully with you and your fellow expert's opinion in this case.

peugeot

LOL!!

The problem with some of these standards is that they are so "vague" in some respects, which I think is why there are lots of differing opinions. Even when the international regime kicks in I doubt it will improve because some of the proposed IFRS for small companies are more or less the same as what we have now (i.e lots of grey areas!!)

One accountant I know suggested we have a 'rules' based approach like they have in the US as opposed to our 'principles' based approach which could work better, who knows!

Best wishes
steve

Dean

Hi Steve

My passion for this thread comes from a personal perspective and a friend who is a roofer. A FLAT roofer at that. To me, this is where the difference(s) occur. The new flat roofing system used today is so much more complex than that of the old. Here is a nice diagram of the current system: http://www.superoof.co.uk/product.html

The finished product may look the same as the old but, the new is far superior than the old. The old was effectively a top layer of felt put on by hot bitumen. Today there are 3 layers of breathable membrane before the final layer (felt) is torched on. This technology has only come about in the last 5 years or so.

If this was a pitched roof i.e. slate and tile, then our accounting and taxation rules may stack up. However, with these new flat roofs there appears to be a contradiction, the standards book appears to say Revenue but the tax book says Capital. I think HMRC would be on very high grounds to argue flats roofs of today are not Revenue.

As I’m sure I don’t need to explain, accounting principles and taxation are two different things. For me, the whole essence of this particular question revolves around tax, the business may adopt a different accounting principal but the tax treatment is undeniable.

So as with all these things, the OP is in precession of all the facts. Look at the purchase invoice and really look behind what has been ‘repaired’ and what has been ‘improved’.

Regards

Dean

deanshepherd

Sounds like the old replacing single-glazed windows with double-glazing argument to me.

peugeot

Hi Dean,

Please do not think that I was suggesting you, or indeed anyone else, on this thread are wrong. The area of 'subsequent expenditure' in terms of fixed assets is quite grey and different people will have different views.

I see your point in terms of the tax treatment, however without digressing too much in this area I would have thought that HMRC, in the event of an aspect/full blown enquiry would also consult the provisions in FRS 15 (or indeed the FRSSE equivalent) given that financial statements in the UK must be prepared under UK GAAP. Certainly in the past I have known HMRC to cite accounting standard provisions (especially UITF 40!!)

Based on the facts that the OP has given to us I am of the opinion that the "accounting" treatment of such falls under the provisions of FRS 15 (or the FRSSE equivalent) and as such if it fails to meet the 3 criteria for capitalisation, then it should be expensed as revenue. The key aspect where I am coming from is that it is more likely than not, that the old roof was not separately depreciated from the other components of the building.

Best wishes
Steve

Dean

After reading this i'm astonished but accept it is Revenue.

One a different note, but based on the decisions above, how can HMRC even try and change the VAT rules on house builders? I know it's a slightly different spin on things but I guess this all comes back to "intention". If a builder intends to sell, he wants to sell. Just becuase the market doesn't allow and he rents it for a few months - his intention is still to sell.

For anyone that doesn't know, the Revenue are trying to block the 'zero rating' position and recover the input tax from traders that are now renting their properties.

Regards

Dean

Gill Gittings

Absolutely agree with those that said expense it:thumbup1:. The capitalisation criteria quite rightfully cited by peugeot applies in these circumstances. Also FRS 15 deals with Fixed Assets as opposed to FRS 16 which is Current Tax.

Gill

BIG WAL

I've been followng this interesting discussion, and another angle occurred to me.

Assuming the event took place in this tax year, with the new AIA, would it perhaps be more advantageous to treat this as capital ? (Assuming capital expenditure doesn't exceed 50k in the year)

Whether capital or revenue, the full amount would be tax deductible, but if treated as capital would increase the cost of the asset, resulting in a potential reduction in CGT down the line.

As there are good arguments for both treatments, maybe go with capital and if challenged, there is nothing lost.

JodieR

BIG WAL wrote: »

Assuming the event took place in this tax year, with the new AIA, would it perhaps be more advantageous to treat this as capital ? (Assuming capital expenditure doesn't exceed 50k in the year)

Capital Allowances could only be claimed on moveble plant & machinery, not on premises improvements, someone correct me if I'm wrong but I doubt that AIA can be claimed on premises improvements either.

BIG WAL wrote: »

Whether capital or revenue, the full amount would be tax deductible, but if treated as capital would increase the cost of the asset, resulting in a potential reduction in CGT down the line.

Even if you can claim AIA for the cost of the roof, you couldn't then include it again in the CGT calculation as you'll have had relief twice for the cost.

Nice try though:001_tongue:

BIG WAL

I have a note from a recent course that says :-

"Perhaps surprisingly, the 'first' £50k eligible for AIA will include life long assets and integral fixtures, so these can be included in the £50k limit, and get 100% AIA relief, not the 10% WDA"

My understanding from that is that one could treat the cost of the roof as capital - although I'm sure you are quite right about not being able to claim the relief twice (Pity though). Which means whichever way you go, the result is the same taxwise.

peugeot

Some interesting thoughts there......

What you have to be careful of, however, is that accounting for various expenditure and what happens with that expenditure under tax legislation are two entirely different things.d Accountancy and tax, whilst closely interrelated are completely separate issues.

What might be permissible under tax legislation might not be permissible under FRS 15 and vice versa. Falling back wholly on tax legislation might mean you produce financial statements which fail to give a true and fair view under the Companies Act, which I have seen done and for which I have qualified audit reports. I know in this instance the expenditure is potentially immaterial and the client will be audit exempt, but what I am trying to highlight is that what might be acceptable in the eyes of HMRC may not necessarily be acceptable under UK GAAP (which HMRC insist the UK adhere to when preparing accounts), for which there could be potential consequences for the preparer of the accounts.

Best wishes
Steve

deanshepherd

There are a few instances in relation to Capital Allowances where you can in fact get both income tax relief and capital gains tax relief on the same expenditure.

Most notably in terms of claims for fixed plant under S.562 CAA 2001. As well as claiming capital allowances on a proportion of the purchase price of a commercial building, there is no adjustment to the base cost of the property for CGT purposes when you come to sell. A rare double whammy in tax!

I must admit I have not checked whether the same would apply under the new rules for integral features.

The Capital Allowances Act must be the most complex tax legislation we have, even eclipsing VAT!