How does flooring/wall coverings lie on the capital/revenue scale?

How does flooring/wall coverings lie on the...

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I believe if I took up the flooring in my (imaginary) rental property and put a shinnier version down, that would be repairs (like for like).  This would be regardless of the state of the floor before I did it.

At what point would it become capital?  Would taking up tiles and putting down carpet be an improvement?  Isn't that a bit subjective (I like carpets, others may consider the tiling an improvement)? 

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Quack
By Constantly Confused
31st May 2012 15:42

And...

... I suppose in a similar vein, if there is a perfectly good kitchen/bathroom in but it isn't to the owners liking, so they remove it and put a new kitchen/bathroom in, is it still a repair?  Extreme example perhaps, but say I buy a house (to later sell) and it has an amazing granite effect kitchen.  I don't like granite, I like chrome, so I gut it and put a new chrome one in for £20,000.  Repair or capital? 

Is there some official guidance HMRC use to decide the more borderline cases of revenue and capital?  I've read the general 'property expenses' pages but they cover more clear cut 'I've replaced the privy with a porcelin self flushing self cleaning toilet' cases.

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By Steve Kesby
31st May 2012 20:21

Purpose versus effect

I'm not sure exactly where you're coming from with this.

There are three levels:

A repair; the purpose of the expenditure is to put right disrepair. If an incidental effect of that expenditure is improvement that doesn't necessarily stop it being a repair, but significant improvement suggests a purpose of letting the repair necessity provide an opportunity to make an improvement.Creation of a new asset. Definitely capital.Renewal of an existing capital item. Probably capital, but HMRC currently allow a non-statutory renewals basis (but it's being withdrawn) and there are also statutory schemes under S.68 ITTOIA 2005 (for tools - implements, utensils or articles - used in the business) and S.308(1)(b) (furniture for furnished lettings) that override the disallowance of capital items.

Replacement of carpeting will probably fall within one of the statutory schemes if it isn't already a repair. Most of the expenditure involved in the pre-dilapidations repairs case of Odeon Cinemas related to replacement of carpeting/furnishings.

Taking up tiles (permanently fixed to and therefore forming part of the floor) and putting down a new (alternative) carpet would be capital in my opinion. As is your nice shiny new kitchen in my view. I don't think you'd get something within one of the statutory schemes if the purpose of the expenditure doesn't make it akin to a repair (ie by being remedial in nature).

HMRC are not the ultimate monitors, these things are up to the courts, and if HMRC did issue more black and white guidance, people would try and abuse it and then fall foul of the margins before the courts, as did Mr Gaines-Cooper with IR20.

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Replying to sandrasparks:
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By mackthefork
31st May 2012 23:43

If the kitchen was the modern equivalent of the one removed

then surely it should be allowed as a repair if the kitchen needed replacing due to being in a bad state of repair.  Say an old 1980s bog standard fitted kitchen, was replaced with a new bog standard fitted kitchen ~£2,000 for units, cupboards and worktops.  I guess it would be a massive improvement but only because the old fashioned one you had is no longer available.  I guess I'm trying to compare this with the logic of replacing a single glazed window with a double glazed one being a repair, not sure if it works, but it should.

Regards

MtF

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By thisistibi
01st Jun 2012 08:51

Part vs. whole

The replacement of a part is a repair.  The replacement of a whole asset is capital.  That is what the above comments are forgetting.  See BIM46903.  The problem is distinguishing what is a whole asset.  Replacing a whole kitchen is a whole asset, and not a repair.  Replacing a whole floor covering is a whole asset (contrasted with replacing some carpet tiles, which is a repair).  

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Quack
By Constantly Confused
01st Jun 2012 09:17

Thanks all

I understand the concept of repair v capital in the vast majority of cases I've come across, and I'm familiar with Law Shipping and Odeon. 

My issue was if someone bought a house, perfectly inhabitable (so no work needed to make it liveable, thus ignoring Law), but they didn't like the kitchen, so they changed it (lets be extreme, they take out a red kitchen and replace it with a blue one, at huge cost as it is a great kitchen).

I'd love it to be capital, as this is a CGT query, but it sounds strictly like it is repairs, as the new asset, to the impartial observer, is the same as the old one.

But then per thisistibi, the entire asset has been replaced, so it would be capital.  But if they left part of the kitchen as it was, does that make it repairs again?

 

IRL, the client has bought a property and spent a fortune on carpet/tiles/surfaces/bathroom items.  I would love to declare it all capital, but if (and I strongly expect this is the case) the work has been done purely because the landlord wanted to give the property a spruce up by replacing everything they could, I suspected this would become repairs as there has been no improvement.  I would be astounded if the items were in desperate need of replacement, we're talking a high value building, not a run down disused shell.

I suppose the easiest way is to find a reason it was an improvement, some factor that makes the new bits markedly better than the old.

 

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By Steve Kesby
01st Jun 2012 09:19

Not forgotten

I'd certainly not forgotten the entirety concept. I think you'll find that it's encompassed within my point 3. However, the OP and Mack's kitchen are both framed within the context of a rental business and both carpet and kitchen replacement would be permitted by S.308(1)(b) ITTOIA 2005, to the extent that they're not permitted by S.68.

S.31 Tells us that permissive rules (such as S.68 and S.308(1)(b)) override prohibitive rules (such as S.33). There are equivalent provisions for corporates.

With regard to replacement carpets, I have argued the point with HMRC in relation to nursing homes for the elderly, and they have accepted that the entirety means all the carpeting in the home. They accepted that the piecemeal recarpeting of individual rooms and common areas was a repair. That follows the decision in Odeon Cinemas, where it was accepted by both sides that the recarpeting/refurnishing of entire cinemas would normally be a repair. The only point at issue in Odeon was whether its pre-dilapidation nature meant that it remained a repair, in the context of Law Shipping

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By Steve Kesby
01st Jun 2012 09:39

I'm still not sure what outcome you'f prefer?

The revenue/capital distinction is less relevant for CGT purposes. In order to obtain CGT relief, the purpose of the expenditure needs to be to enhance the value of the asset and needs to be reflected in the state of the asset at the time of disposal (S.38(1)(b) TCGA 1992).  Relief can't be given thought where relief has been obtained for income tax purposes (S.39).

In the case of the replacement kitchen at acquisition, I doubt that it would satisfy the definition of enhancement expenditure, because come disposal any value it's added over the existing is unlikely to be reflected in the state at sale. Unless, of course, you were "doing it up" for a quick sale, when you'd probably be trading and the expenditure would be a cost of sales anyway.

If you have a landlord though, surely you want to find arguments that it's a repair. That there's something wrong with the existing condition (ie that red kitchens are entirely unsuitable for the intended young upcoming professional tenants, who empyrical evidence shows prefer blue kitchens), that requires it's replacement.

 

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Quack
By Constantly Confused
01st Jun 2012 09:55

Perhaps

We're only involved in the CGT side of things, the rental business side was dealt with by another accountant and we can't get details of what was included (if anything) on the first rental pages.

If the client has come in and taken out 1900's era items and put in all mod cons, I'd say we have a strong case to say the improvements are stll reflected in the property (if it was bought with tin baths and wooden surfaces that would have been reflected in the purchase price; if subsequently the olde world items made way for chrome and steel, that would be a lasting improvement).

However, it may be the client has just decided to give a face lift and replaced like with like, in which case I'll be writing to them saying 'none of the £50k you spent will be allowable on the sale, hopefully your earlier accountant put it all on your returns'.

Who'd be a tax advisor! 

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By Steve Kesby
01st Jun 2012 10:04

Hysterically speaking...

... I'd have expected these items to have been claimed.

HMRC used to argue the statutory position more vigorously than they now can as the language of the legislation was less clear. However, the non-statury renewals basis for these sorts of things in rental properties was generally accepted.

I'd agree though that if expenditure involved modernisation then it will be reflected in the state on sale.

I'd also agree that relief shouldn't be claimed though, unless you're clear that income tax relief hasn't been obtained (that was probably available under the non-statutory scheme).

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Replying to User deleted:
Quack
By Constantly Confused
01st Jun 2012 11:28

Thanks

Steve Kesby wrote:

... I'd have expected these items to have been claimed.

I'd also agree that relief shouldn't be claimed though, unless you're clear that income tax relief hasn't been obtained (that was probably available under the non-statutory scheme).

I'd hope they had been claimed, but who knows?  And it'd be a shame if all that expenditure got no relief, either from rents or sale proceeds.

But I agree, I think the circumstances are such that unless the client can categorically confirm a sizeable uplift in quality or that the item was not a replacement at all, we will just have to disallow the costs for CGT.

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By [email protected]
04th Nov 2019 06:52

How does flooring/wall coverings lie on the capital/revenue scale

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Replying to [email protected]:
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By The Dullard
04th Nov 2019 10:33

RTFT

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Replying to The Dullard:
By JCresswellTax
04th Nov 2019 12:53

I think they were probably just 'tagging' the thread for future use.

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Replying to JCresswellTax:
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By The Dullard
04th Nov 2019 12:59

Such people should be publicly flogged IMHO.

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Replying to The Dullard:
Lone Wolf
By Lone_Wolf
04th Nov 2019 13:30

Seconded.

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