Capital or revenue accounting entries/capital allowances

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT member discussion
A small limited company selling ladies fashions has installed laminate flooring in the commercial property it rents. It has also laid a small amount of carpet in the back of the shop. Given that the director advises that the laminate flooring will be removed if and when the business ceases, what are: 1. the debit and credit entries to be made in the accounts, and, 2. the capital allowances that may be claimed?

Thank you

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Capital or revenue accounting entries/capital allowances

    What are the sums involved? If they are small I would write them off. If they need to be capitalised and capital allowances claimed as with all other fixed assets. Either way the accounting double entry is Dr Asset/Expense account and Cr bank (presumably) account.

    Hope this helps.

    Claudia
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Capital or revenue accounting entries/capital allowances

    Ooo you need to be careful with this. I've had 2 clients this past year who're both in rented premises & have made improvements.
    You need to remember that capital allowances can only be claimed on moveble plant & equipment and therefore flooring doesn't qualify.

    If he's replaced the flooring with the same as what was there before he might be able to get away with calling it a renewal & claiming the whole cost in the profit and loss, but it doesn't sound like this is the case. If he owned the property it would get added to the cost of the purchase of the building, hence reducing his capital gains tax when the building's sold, but, as in the cases of my clients this doesn't apply!

    I phoned the chroner helpline about this & they said that nothing can be claimed in respect of any improvements made to premises, the only thing you can claim is an time-apportioned accrual of the estimated cost of removing the flooring. So if you expect it to cost £100 to remove in 5 years time you can accrue for £20 a year! This is quite ridiculous to even try to work out as the cost is probably going to be negligible and you don't know how long it'll be before the event arises.

    Also, I, like Claudia, would (and have) written off small items, but strictly speaking this is wrong - the size of the cost is irrelevant, if it's an improvement it should be capitalised. I since heard that one of the first things often asked for in an enquiry is a list of what's gone into the 'repairs and renewals' account so I will probably be a bit more careful in future.

    So, after breaking the bad news to my clients, I did have a thought but i've not looked into it any further yet. Am I right in thinking that if, using your example, in 5 years time the company re-locates and pulls up the flooring - say it's then too badly damaged to use again and is scrapped - can the company claim a capital loss of the whole cost and set that against trading income? I'm sure that similar relief is avaliable for sole traders too. :?

    But for now I'd say that you need to Dr 'Premises Improvments' (a fixed asset account) and Cr Bank or however he paid for it.

    And appologies if the director is a she and not a he (highly likely i guess selling ladies fashion :lol: )
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Capital or revenue accounting entries/capital allowances

    Thanks, Claudia and Jodie. So, am I correct to 'dr' Leasehold Improvements A/c (Fixed Asset) 'cr' Bank A/c, then show depreciation in accounts (over the period of the lease?)added back for tax, but no capital allowance?

    Thanks again for your advice.
    Simon
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Capital or revenue accounting entries/capital allowances

    that sounds right to me :)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Capital or revenue accounting entries/capital allowances

    I agree with Jodie.

    As for removing laminate flooring to reuse at a later date..

    ..I'd wager someone told the director (down the pub perhaps!) that would in some way make it tax deductible.

    Don't you just love directors!

    :lol:
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Capital or revenue accounting entries/capital allowances

    So dean am I right in thinking you can claim a capital loss when the item is disposed? It's something that's been puzzling me but not enough to do anything about it!

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