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Will HMRC question this

Will HMRC question this

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This is a question prompted by an earlier thread and one I had put on the "to do later" pile as it is not the clients YE until December.

Client in question took over a High Street shop, it has been trading for many many years. On purchasing the business they also took over the lease and on day 1 closed the shop for three weeks for a refit.

When they reopened the shop was all shiny and new and the work carried out was ALL replacements except installing a new toilet area which I will treat differently.

The refit consisted of new flooring (wood floor replacing old lino), re-plastering cracked walls and painting, replacing lights with new ones (I am considering capitalising these as CAs should be available using the Wimpy decision but at under £1k not a major item) . NO structural works and NO improvements except it looks far nicer. The reason I ask is that this work cost over £25k - which for a small business with a turnover this year of under £100k it stands out like the proverbial sore thumb.

According to HMRC manuals BIM46900 et seq and case law such as Odeon Cinemas, there is no reason for any of it to be questioned as all the boxes are ticked and the improvement/change (the new loo) - is excluded.

Am I just worrying over nothing........

Replies (6)

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By johngroganjga
24th Sep 2013 15:34

Yes they may question the high repairs charge, but you have all the right answers to justify the treatment don't you.  You have clearly taken great care to ensure that you treat everything correctly so why worry?

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By Ding Dong
24th Sep 2013 15:44

Thanks John

Why worry - because that's what I do best !

I have been sure to ensure (is that grammatically correct?) we will only be claiming what is allowed but still, just seems high so as always a second opinion is nice to have.

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By Vaughan Blake1
24th Sep 2013 16:54

Yes but...

The Odeon Cinema case was based on the fact that the purchaser could have used the building as purchased as a fully operational cinema though be it seedy and a bit grubby (an original fleapit).

If the taxpayer here could have used the shop as purchased for their particular trade then all the refit will be tax deductible.

If the trade has remained the same that should help as well. 

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By Ding Dong
24th Sep 2013 17:28

@ Vaughn

Yes - That is why I cited (and will be relying on) Odeon.

Shop is exactly same trade, same trading name and even a lot of the same stock (it was in storage during the refit) 

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By Alfie Bet
24th Sep 2013 17:38

Odeon Associated Theatres Ltd v Jones...

... wasn't decided on the basis that the cinemas could be used as they were. There was a moratorium on such refurbishment expenditure in the years immediately after the war, which meant they had to be used as they were.

It was distinguished from Law Shipping, on the basis that the dilapidated state of the building wasn't reflected in the purchase price, as a result of that restriction.

It was then held that if the restriction hadn't been in place, then at the time that Odeon Associated Theatres incurred the expenditure, they would have (again) been incurring the expenditure anyway, and it did no more than restore the cinemas to the state they would have been in if there had been no restriction.

It's a dangerous precedent to rely on, in this respect, because of its particular facts.

Assuming there was no restriction in the purchase price attributable to the lease to take account of the repairs, then to the extent that they are repairs, like the replastering and decorating, they will be allowable.

Where I'd feel nervous, is replacing the lino floor covering with wood, which does sound like an improvement. Happily, capital allowances are available for floor coverings (but not raised floors), like lino and carpets (see CA21200). I don't see why it should differ for wood/laminate panels, whose purpose is simply to make a perfectly serviceable existing floor look nice.

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By Vaughan Blake1
25th Sep 2013 18:16

Good Point Alfie

On revisiting the case I also see that the refit expenditure was incurred over a ten year period.  So as a matter of fact the trade actually was carried on in the fleapit setting for some time.

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