On 9 April 2013 HMRC published new guidance on repairs and renewals expenditure. This will replace current guidance set out in the business income manual from BIM46901 onwards.
New guidance is now also included in relation to ‘integral features’, together with more detailed examples of the type of expenditure that can cause problems in deciding whether a deduction is available.
Unfortunately, although many of the examples are clearly based on established case law, there are no case references. This means that it is not always clear where the application of examples moves away from case law to HMRC opinion.
One example, which illustrates a number of key concepts underlying the availability of relief for expenditure is as follows:
Example: Refitting a kitchen
Sophia owns a number of residential properties that she lets. The properties are not furnished lettings.
The boiler in one property needs replacing. As the new boiler has to be located in a different position, Sophia decides to modernise the kitchen as a whole.
All the existing base units, wall units and sink etc. are stripped out and replaced, as is the fitted cooker and hob. New units of an equivalent quality are installed but in a different layout to allow for the re-location of the boiler, finally the kitchen is re-plastered and re-tiled.
The entirety is the house, not the fitted kitchen. The new kitchen is slightly different but it does the same job as before. Sophia has simply replaced the old kitchen with a modern equivalent. This is a repair and allowable expenditure.
Shortly afterwards, the fridge freezer breaks down and has to be replaced.
This is not part of the building but is an asset in its own right. Sophia has not repaired an asset; she had incurred capital expenditure on a new asset. As the fridge freezer is used in a dwelling house it is not qualifying expenditure for capital allowances purposes.”
In this example the key issues are:
- The entirety of the asset is the house not the kitchen;
- Although the kitchen layout was changed the new units were of equivalent quality;
- The kitchen serves the same purpose as before.
These factors mean than the whole of the expenditure is allowable as a repair.
The example contrasts this with the replacement of the fridge freezer. Here, the key issues are:
- The entirety of the asset is the fridge freezer;
- The new one is a new capital asset, even though it is of similar size, quality etc;
- Capital allowances are not available because it is in a dwelling – if the fridge freezer was in a commercial property, capital allowances, either as AIA or WDA at 18%, would be available.
BIM 46945 now covers ‘integral features’ in the context of repairs:
“If the expenditure represents the whole, or more than 50% of the cost of replacing an integral feature, then the whole of the expenditure is to be treated as capital expenditure on the replacement of an integral feature for capital allowances purposes and not a repair.
This applies either where the cost is incurred all at once or where the cost is incurred within any period of 12 months. For further guidance on this point see the capital allowances manual at CA22310.
For guidance on integral features see CA22320. An integral feature is replaced if the expenditure incurred on it is more than 50% of the cost of replacing it. For guidance on replacement of integral features see CA22340.”
This means that where commercial premises are involved, the interaction between repairs shown in the profit and loss account, and the way the ‘integral features’ legislation in s 33A CAA 2001 works must be taken into account.
Finally, the guidance confirms the removal of the non-statutory renewals basis.
Before the introduction of plant and machinery capital allowances, the renewals allowance was extended to machinery and plant so that, subject to certain conditions being met, relief was given for the costs of replacement assets when they were acquired (excluding any part of the cost attributable to improvements or additions) less the scrap value or realised price of the old assets which are replaced.
The guidance confirms that this relief will not apply to expenditure incurred on or after 6 April 2013 for income tax purposes and from 1 April 2013 for companies.
The revisions to the business income manual do not contain any surprises, but have been brought up to date, and now include some useful examples. The guidance in relation to the ‘integral features’ legislation is also welcome.