Hi,
My client has opened a coffee shop in rented premises. He has spent a lot of money refurbishing it, including knocking down walls and other building works. He has received a grant to go towards the renovation.
At the moment, I have capitalised the renovation works, and the grant is also in the Grants section of creditors.
Am I correct in thinking that the renovations can't be depreciated, and that there are no capital allowances available for this expenditure? It's the first time that I have dealt with this in practice, and keep finding conflicting advise whilst researching what to do.
Thank you
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Replies (18)
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I think you need to be a little more concise. "other building works" doesn't tell us very much.
And check his lease to see what it says re these works (if anything) or if not within the lease check all the landlord consent documentation received.
What you are looking for could be:
a. did he have consents from landlord?
b. did he have an obligation to do the works as part of the lease agreement with the landlord?
c. what happens to these works at end of lease? (does landlord reimburse/insist on reinstatement etc/)
d. what was original lease term, has that been varied since inception and how long is now left?
Assuming the property works have no economic value at the end of their life or the end of the lease term you'll need to depreciate them down to nil over the shorter of the UEL/lease term. If they do have a value you depreciate down to this instead.
If your client subsequently extends the lease in future years, you may well be of the view that UEL still exceed the revised lease term and therefore you can extend the period of depreciation. This is a change of accounting estimate so would come into effect prospectively from the date of any change to the lease. The complete opposite could also occur.
The grant towards the works will then be amortised to P&L to match your depreciation policy above. Make sure you split < > 1 yr on the balance sheet - often missed.
Capital allowances may be available on assets that qualify but this will depend on a multitude of things, probably all included on the schedule of works, and on what the grant specifically funded. You may need to do some apportioning and it may be beneficial for your client to make use of the services of a capital allowances specialist if you're not sure.
As someone else mentioned,under the lease agreement your client may also be liable for dilapidations ie reverting the property back to an alternate state. Get this done now - book it to P&L not fixed assets (that's stupid) and your client will thank you for the corporation tax relief. Bear in mind this estimate will need to be checked and adjusted if necessary each year.
OK, so I have a little bit more detail. The lease is 10 years from August 2018. There is no requirement to alter anything at the end of the lease. The works were undertaken with the consent of the landlord.
Well, I'm still waiting for information from the client's bookkeeper. They need draft accounts by Thursday, and so I am looking at general advise whilst I await the specifics.
The general tax advice is that you may be able to claim capital allowances on some of the expenditure.
What were the building works?
Work on integral features will qualify for CAs - electrics, plumbing, air conditioning.
You might have some main pool additions - I assume there were counters put in? What about shelving/storage?
Was any of the work decorative, or were they just adjusting the layout/structure?
Did they put in the signage for the shop?
There's a bunch of stuff that could potentially qualify - have a look at CAA 2001 s23, s28 and s33A in particular.
You can sometimes get an itemised schedule from the builders breaking all this down which makes it easy to allocate out.
If you can't get that, then short of getting a professional to come in and value the different elements, then it would be down to a discussion with the client to see what work was carried out, and apportioning a reasonable amount of the total works to the elements that qualify for CAs.
Of course. Any grant funding will reduce the value for capital allowances purposes.
You could be a bit cheeky and allocate the grant funding against the non-qualifying capital work first - just be aware that HMRC probably won't like that and would expect the grant to be apportioned on a "just and reasonable basis" if they were to look into it.
I would always follow the grant literature - in absence of any specific attribution I would apportion the grant across all of the expenditure. There is, IMO, no legitimate basis for any other method.
Thank you so much for your help, it's made things clearer.
If I may ask a further point... I have split out the fixtures and fittings elements already (counters, furniture etc) within the fixed assets. Since the grant covers the whole project (building work, fittings, all of it), and is slightly more than the cost of the project, can any capital gains be claimed at all? And if not, should any of it be depreciated?
Currently I have capitalised the assets and the grant. I have then depreciated the assets, and also brought the corresponding amount of grant through to the P & L. This has therefore had a nil effect on profit.
I'm thinking (possibly incorrectly, please forgive me) that in the tax calculations I will be adding back the depreciation, which will increase the profit, but then be unable to claim back any of the costs via capital allowances. So the company would overall be taxed on the grant received, but not be able to claim any of the costs associated with it? Am I missing something?
I apologise if my questions seem stupid, I'm currently off sick from work with stress and anxiety, so my brain is pretty fuzzy and over-thinking everything too much! I do appreciate any help you can give.
Thanks
Wait! What? The grant is greater than the expenditure?
EDIT 1
Anything expenditure that you're claiming capital allowances on will first need to have the attributable grant deducted from it.
EDIT 2
Ah, if the grant is funding capital expenditure it isn't going to be taxable, but I'd imagine that any part of it that isn't spent ought to be required to the grantor. If not, arguably that excess is not a capital receipt and should be treated as income of the business.
Great, thank you very much. So am I best to not depreciate the assets, to just leave them "whole" in the balance sheet, along with the whole grant?
Great, thank you very much. So am I best to not depreciate the assets, to just leave them "whole" in the balance sheet, along with the whole grant?
No. For accounting purposes, I think you should do the accounting properly; and I believe your proposal to hold the asset and grant separately and release them to the P&L by way of depreciation/release to match with one another. If there's an amount of the grant that isn't going to be spent and that the client can keep, NOW is the time to recognise it as income.
For tax purposes though, capital allowances should only be claimed on the net expenditure.
But what about adding back the depreciation in the tax calculation? Won't that leave them with a massive tax liability? Sorry, so confused about it all!
