Repairs – What is the distinction between a capital repair or a revenue repair
The tax treatment between the two is very different. A capital repair is relieved against the sale of the asset whereas a repair which is classed as revenue expenditure is relieved wholly against the profits of the Business.
Sometimes it is clear which category the expenditure falls under but it is now more often than not extremely hard to determine and incorrect treatment can prove to be costly.
A repair would restore an asset to what it originally had been and would normally be treated as a Revenue expenses e.g. the cost of replacing roof tiles blown off in a storm. However if the roof area was extended the whole cost would be regarded as capital as this would be an alteration to the existing roof.
There can also be difficulty where work results in the reconstruction, replacement or renewal of the asset or substantially the whole of the asset. Such a repair would constitute capital expenditure but unfortunately there is no definition in this case of what would be classed as substantial – not very helpful.
Another common area of concern is where a repair is carried out which may improve the asset e.g. a dirt road leading to a warehouse, farm etc is potholed and in need of repair. The road is concreted as this would be more durable – is this a repair or is it capital because the road has been improved.
Determining whether a repair is capital or revenue is not black and white. The Inland Revenue are known to be examining closely such expenditure and care needs to be taken by Tax payers to ensure that full records of the work undertaken are maintained to support their claims.
Mistakes can prove costly but with the right advice can be avoided. For more information contact Barbara at Green & Co.