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Roof repairs - Revenue / Capital

A question about roof repairs - revenue vs capital

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A flat roof is repaired - at a cost of £100k.

Would you treat this as an addition to fixed assets?

(swirling memories of Odeon cinemas and ships come to mind).

I kind of think it should, on the basis of cost and enduring benefit, but part of me is saying I had a roof before and have a new (better) roof now - but no new assets as a whole. (again, thinking of furnace chimneys and the like)

 

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By David Ex
25th Sep 2021 14:42

tom123 wrote:

A flat roof is repaired - at a cost of £100k.

Would you treat this as an addition to fixed assets?

Not if it’s a repair but then you suggest later it’s some improvement.

Not sure that, without significantly more information, it’s possible to give any useful opinion.

It’s a lot of money. (Not that that is directly relevant!). What kind of building is it? Size/value/ specialist construction?

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By Paul Crowley
25th Sep 2021 15:20

To me this depends upon when building bought and condition of roof when bought.
Pretty much all new anthings are better than the prior, as knowledge and building regs keep changing.
All rooves have a shorter life than the building they are on.
I would start with repair as the default, unless the building bought with a known need for a roof replacement. See surveyors report when purchased
I would also go all or nothing on whether it was an improvement
HMRC now accept current standard (which may be so much better) is still a repair for most building items, esp Boilers and windows

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Replying to Paul Crowley:
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By David Ex
25th Sep 2021 16:48

Paul Crowley wrote:

To me this depends upon when building bought and condition of roof when bought.

Maybe reference to “Odeon cinemas” does point to it being a recent purchase. I’d made the mistake of assuming ….

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By Hugo Fair
25th Sep 2021 15:21

Limited knowledge of flat roofs (and none in the commercial, or presumably education, sector). But I seem to recall big changes fairly recently in both materials and regs ... partly to increase effective life (from the previous notoriously short duration), but mostly to massively increase insulation (through construction methods that couldn't be retro-fitted without demolition/re-construction).
Although I'm burbling, that last bit might be relevant to the repair/improve issue?

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Replying to Hugo Fair:
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By tom123
25th Sep 2021 17:21

Yes, you guessed it, education - I was trying to be evasive :)

Building will be 1960s, I guess. New roof on two blocks. 30 year guarantee.

I'm just trying to pick the right kind of heading prior to my audit starting in a week - which is a baptism of fire into my new job.

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Replying to tom123:
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By Hugo Fair
25th Sep 2021 18:18

Good luck ... you obviously like living on your nerves!

Only partially relevant (windows not roofs) but might be worth a quick read of https://www.accountingweb.co.uk/any-answers/single-glazing-replaced-with... ... where general (but not universal) consensus was 'repair'.
Warning: contains links that might be helpful or send you to sleep!

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Replying to tom123:
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By David Ex
25th Sep 2021 18:17

tom123 wrote:

Yes, you guessed it, education - I was trying to be evasive :)

If it’s purely an accounting matter then “swirling memories of Odeon cinemas and ships” are irrelevant assuming you are referring to tax cases.

You need to have a look at whatever the accounting standard is for fixed assets. That presumably gives some guidance on criteria to consider re capitalising expenditure.

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Replying to David Ex:
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By Hugo Fair
25th Sep 2021 18:20

Good point ... think I was wearing my 'tax specs' and forgot to take them off!

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Replying to tom123:
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By Paul Crowley
26th Sep 2021 11:51

I was a school Governor once
Sounds like a similar school, mine had flat rooves.

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By Bilal trainee accountant
25th Sep 2021 19:52

To my knowledge, repairs to a roof should be recorded as an expense - repairs and maintenance, regardless of how much it cost. You'd credit the bank/cash book and debit the repairs and maintenance account in the ledgers.

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By Bilal trainee accountant
25th Sep 2021 19:53

It would only be an addition to fixed assets if it was the purchase of a property.

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Replying to Bilal trainee accountant:
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By David Ex
25th Sep 2021 20:52

Bilal trainee accountant wrote:

It would only be an addition to fixed assets if it was the purchase of a property.

I don’t think that’s what the accounting standard says exactly.

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By the_drookit_dug
25th Sep 2021 22:19

FRS102 specifically mentions roof replacements:

"17.6 Parts of some items of property, plant and equipment may require replacement at regular intervals (eg the roof of a building). An entity shall add to the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the replacement part is expected to provide incremental future benefits to the entity. The carrying amount of those parts that are replaced is derecognised in accordance with paragraphs 17.27 to 17.30 regardless of whether the replaced parts had been depreciated separately. If it is impracticable for an entity to identify the carrying amount of the replaced part, it may be estimated using the current cost of the replacement part as a proxy for the original cost of the replaced part and adjusting it for depreciation and impairment. Paragraph 17.16 provides that if the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life."

When I worked in a school as a Finance Manager, pretty much all roof repairs were expensed, including significant works - this was never challenged by the auditors.

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Replying to the_drookit_dug:
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By Bobbo
27th Sep 2021 08:48

the_drookit_dug wrote:

FRS102 specifically mentions roof replacements:

When I worked in a school as a Finance Manager, pretty much all roof repairs were expensed, including significant works - this was never challenged by the auditors.

Something not being challenged by the auditors does not necessarily mean it is correct. Source: I am an auditor :)

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RLI
By lionofludesch
25th Sep 2021 22:29

It might be a better roof than the one you had last week (or whenever) but is it a better roof than the old roof was when it was new?

My money would be on repair at this stage but feel free to tell us more about why you think the roof is capital.

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paddle steamer
By DJKL
26th Sep 2021 00:02

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46915

A Ltd trades from premises that consist of a showroom and warehouse. They decide to modernise their premises. They completely renew the roof; refurbish the staff kitchen; they extend the showroom by demolishing an interior wall and building a new one and installing a new floor and false ceiling to modernise the extended showroom area.

The new roof simply returns the roof to original condition. It is neither an alteration nor improvement; it is simply a repair of the building. In the same way, the refurbishment of the staff kitchen is simply a repair of the building. These are allowable expenses.

The work carried out on the storeroom/showroom has resulted in a larger showroom to a higher standard. This is an alteration and improvement. The expenditure is capital expenditure and therefore not an allowable deduction.

For further information on these issues, see BIM35445.

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By tom123
26th Sep 2021 09:40

My thoughts are actually repair - , but my 'audience' will be assuming this kind of thing is capital - because of it's value, and life etc.

Thanks everyone for their thoughts. I will go with repair.

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By memyself-eye
26th Sep 2021 20:45

The real question is:
"Does it leak?"

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By Bobbo
27th Sep 2021 08:57

I responded with a lil joke to the last sentence of The Drookit Dug's post. But their main paragraph is the what i think you need to consider here.

FRS 102 provides that fixed assets such as buildings which contain various parts with differing useful lives and thus differing replacement cycles should be analysed as such for accounting purposes. From a background of housing charities and housing associations, this is often called 'component accounting'.

Basically, if your 100k is merely repairing the existing roof then you're probably good with a repairs expense, but, if your 100k has substantially replaced the existing flat roof with a new flat roof then you have a fixed asset addition (and a theoretical disposal to calculate).

(No idea what the tax impact of fixed asset treatment would be, my housing clients are thankfully exempt from corp tax on charitable grounds.)

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Replying to Bobbo:
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By Tax Dragon
27th Sep 2021 12:03

Bobbo wrote:

No idea what the tax impact of fixed asset treatment would be...

I've been wondering about that too. Making a couple of sensible assumptions and subject to info that Tom hasn't provided, I'd say (applying the old case law tax tests) that this was not a capital cost and is therefore not disallowed by s53 CTA 2009. But s53 stops a deduction that's in the accounts*; it doesn't provide for a deduction that isn't. And s46 provides that "the profits of a trade must be calculated in accordance with generally accepted accounting practice".

So, putting those together, it follows that you could have a cost that would be allowed by tax law being denied relief because of (changes in) GAAP. I'm not comfortable with that - but it seems to be the position.

* For example, I have a "capital items expensed" box on my software - other Awebbers seem to use cheap software that doesn't have this box.

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Replying to Tax Dragon:
paddle steamer
By DJKL
27th Sep 2021 15:23

If you are not happy with UK GAAP re disallowing costs then take a peek at what happens taxing unrealised gains on various types of investments under FRS102- effectively if a company buys shares in an investment trust it is okay but if same company buys an instrument that is not equity in the entity, but effectively does the same job (What I would have called a unit trust years ago) ,then you need to start revaluing the investment annually and recognising gains and losses for tax purposes based upon price movements. (see 11.5 and 11.6 re definitions Basic Financial Instruments https://www.frc.org.uk/getattachment/69f7d814-c806-4ccc-b451-aba50d6e8de...(March-2018).pdf )

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Replying to Tax Dragon:
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By paulwakefield1
28th Sep 2021 11:40

With the two very major caveats that I am not a tax person and this is not legislation, does BIM42215 not help to at least claim such expenditure ("capitalised repairs" for want of a better phrase) over a period of time presumably equal to the depreciation charge?

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Replying to paulwakefield1:
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By Tax Dragon
28th Sep 2021 13:21

Good point well made. I concur.

(Aside: the line "there is no rule of law that enables a business to obtain relief for revenue expenditure that has not been charged to the profit and loss" encompasses - and widens out - my comments on s46, which I had limited to the s53 issue on hand.)

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By ireallyshouldknowthisbut
27th Sep 2021 10:01

For tax and stat accounts its probably a repair

For management accounts - as ever it depends if you want a profit or a loss.

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By mancini51
30th Sep 2021 11:18

If it was a business premises then I would show it as a repair

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By Agutter Accounts
30th Sep 2021 12:29

Does it add value to an existing asset? I worked in the property industry and we revalued properties all the time, and that led to having a Revaluation Reserve in the Balance Sheet under Capital.

However, I would thought if it is merely part of regular maintenance to keep a property asset in its current state of good repair then it is definitely a revenue item.

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