A client has spent £7,000 demolishing an old shed on his farm due to it being in an unsafe state. He has no plans to rebuild it.
Is this a capital item, or can it be claimed as a revenue deduction along the lines of it being general farm maintenance work?
Thanks
Replies (20)
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Revenue
As there is no asset left after the shed has been demolished, it cannot be capital expenditure.
Really?
Enhancement of the land.
Is this really enhancement of land?
I suppose if it were prime building land where a potential developer would have to demolish the shed in order to build on the land - yes perhaps it's enhancement.
However, the majority of farmers I have come across are unable to sell their land to a developer (green belt and various other local authority restrictions) which effectively renders the land pretty valueless (especially the area I would expect a farm shed to cover).
Personally, I would say "revenue"
Revenue
The shed being unsafe, it's a payment made to keep the business intact - no enhancement
If demolished and rebuilt, it seems to be capital (as an "entirety").
I don't think the lack of re-building will transform it to revenue.
While I accept that there are differences of opinion ...
... there really is some rubbish posted on this site.
Arguments in favour of 'revenue'
OK to add some substance to the debate, here are the arguments in favour of ‘revenue’:
Facts: There is an assumption here that a trade or business (“business”) is being carried on and in order to continue to be in that business unhindered a shed, which was unsafe, had to be removed.
The basic accounting argument:
FRS102 Para 17.4 says that an entity shall recognize the cost as an asset if, and only if, it is probable that future economic benefits associated with the cost will flow to the entity. Surely, demolishing a shed will not result in any future economic benefits flowing to the entity!
Tax argument:
Expanding on the basic accounting argument above, it was observed about a century ago (British Insulated and Helsby Cables Ltd v Atherton (1926) that the expense can be capital only if what business gets in return for that expense is of an enduring character. In this case the business got nothing in return; in fact the expense was incurred merely to protect it from incurring further costs and damages.
Expanding it further, a payment made to keep the business intact was held to be a revenue item, again in an old case (Southern v Borax Consolidated Ltd (1940): the nature of expense referred to the case was about legal costs though.
Over to the 'capital' camp.
Communique from the 'capital' camp.
The farmer spent £7,000 on demolishing the shed, this implies that the shed is not like your garden shed but is a substantial building that covers a reasonable amount of land, say a chicken shed that covers 50 square metres of otherwise useable land.
In those circumstances I would say that the value of those 50 square metres has been enhanced by removing the impediment to its use.
The fact that it is substantial does not alter my opinion, even if it was just a two metre square garden shed you would be enhancing the value of that two square metres by getting rid.
I would also suggest that protecting the business from incurring further costs and damages is of enduring benefit, so capital.
Expanding on the basic accounting argument above, it was observed about a century ago (British Insulated and Helsby Cables Ltd v Atherton (1926) that the expense can be capital only if what business gets in return for that expense is of an enduring character. In this case the business got nothing in return; in fact the expense was incurred merely to protect it from incurring further costs and damages.
mea culpa
Apologies to the imprudent accountant for the errors in my post. I know two square metres is not the same as two metres square and two metres is plural so it should be those, not that. I have no excuse, mea culpa.
Capital
This is not expenditure to repair an asset. It is expenditure to alter an asset. At the end of the process they no longer have a shed, they have pile of rubble.
Are you suggesting that the cost of demolishing an asset should be revenue even where the whole cost of demolishing it and building a new shed would be capital?
Basil's suggestion that demolishing it would be a revenue cost if that was cheaper that repairing it is incorrect, as is his suggestion that a notional repair could be be treated a revenue cost. (Lawrie v CIR, and the Water Company with the reservoir which I cannot remember).
Robert Addie v CIR is also in point. The cost of restating the land (removing roads and buildings) was found to be capital
There are plenty more out there confirming that expenditure to acquire, alter, enhance or dispose of a capital asset is capital expenditure
@Basil - repairing the entirety of a building is very likely to be capital according to case law.
1) You are suggesting that a notional repair cost is allowed,
2) In Addie the buildings were demolished so that they were no longer there. Addie did not put the land to any use after they left.
The purpose of the OPs expenditure was to dispose of the capital asset. He did not make the building safe.
'Revenue' argument
Basic accounting again: the 'capital' camp please answer the following questions:
1. Which account this £7000 should be debited to?
2. How long will it remain on the ledger? or
3. What will happen to that ledger account?
Purpose
The purpose of the expenditure was to get rid of a capital asset. I cannot accept that the disposal of the asset was an incidental effect of demolishing it . It was the purpose of demolishing it. The effect may be a safe site, but that would be be an enduring benefit.
Your are still suggesting that the cost of notional repair is allowable. Let us be clear. The building is not repaired, so you cannot claim the cost of a notional repair.
The accounting treatment is not relevant. I would take it to the P&L account, but would add it back in the tax computation, like I do with other capital expenditure.
Put it another way
An equally plausible explanation is that the purpose was to make the site safe (why should one consider the OP to be lying) and that a side-effect is an enhancement of the site's value (a debatable point in itself).
For what it's worth, I don't go with the notional repair argument - the cost will either be capital in its entirety or revenue in its entirety. So far I'm not convinced either way - and, without examination of the site and related photographs etc, it's unlikely that I ever will be.
@thehaggis
There is no suggestion that it was a repair. A certain payment was made to remove a shed that came the way of continuing with the business. As observed in a recent successful appeal Vaines v Revenue & Customs (2013) UKFTT 576 (TC) (15 October 2013 no enduring advantage was brought into existence by the payment made, and …. this payment was made to preserve and protect the trade, and therefore a revenue expense.
PS: I must, however, add that the whole thread is based on the two sentences appearing in the OP, and to that extent could be based on incomplete information!
I would think Chimneys here
In my experience a solitary farm building is unusual - more normally there are clusters or connected buildings so a look at before and after pictures would be vital.
If the shed is a standalone, and none of the demolition cost related to the removal of dangerous elements (such as asbestos ) I would lean towards capital.
If part of a cluster then you have only demolished part of the whole and it is a repair,
The cases I am thinking of found that the demolition of a chimney standing apart from the factory was capital but the removal of a chimney inside the factory/ cluster of buildings was found to be repairs. Safety was involved in both of these cases I believe