How tax funds can be used to improve your business

Premises and workshops come in all shapes and sizes but, whatever yours looks like, it will need ongoing repairs and maintenance. While tax shouldn’t be the driver behind these decisions, it’s important to understand the tax implications of spending on improvements compared with renovations to allow you to maximise claims for relief.

For David Wright, a technical officer at the ATT, the pivotal question for tax is whether money spent on the premises is revenue or capital expenditure. As he outlines, “the costs of ongoing repairs and maintenance will normally be revenue, meaning they’re fully deductible in the period incurred, and the business benefits from tax relief relatively quickly.

In contrast, if you build, extend, or make improvements to your premises, the money spent is classed as capital expenditure.” This means, as he explains, that unless you can claim capital allowances or Structures and Buildings Allowance, no tax relief is available upfront for capital expenditure; you’ll also have to wait until you sell the premises to get tax relief for the costs of any additions or improvements.

Revenue or capital?

In principle, Wright says that the distinction between revenue and capital expenditure should be simple – work done to return the premises to the condition they were in at acquisition is revenue; expenditure on enhancing them beyond that is capital.

For instance, if the roof blows off and you pay for a like-for-like replacement, that cost should be a repair and therefore deductible for tax purposes in the period incurred. In contrast, if you decide to have the roof replaced in order to add a loft-conversion, then the cost will be capital as you’re enhancing the building beyond its state when it was acquired.

It needs to be said that if an expense should be treated as capital, any incidental costs are also likely to be capital in nature. For instance, the cost of building an extension to your premises would be capital, and therefore so would any associated legal or planning fees.

Detailed invoicing – an easy win

When works are completed a single invoice might cover a range of changes such an extension and redecorating an MOT waiting room. In this instance, Wright explains that the cost of the extension would be capital and only recoverable when the premises are sold, but the redecoration is a repair and so can be deducted for tax purposes when incurred.

As a consequence, he advises that “whenever you commission building work covering more than one task, always ask for the invoices to be subtotalled by area or sub-project as appropriate.” He says that doing this will help determine what tax relief is available now and what will be treated as capital.

Capital allowances

With most capital expenditure on your premises, you have to wait until you sell to get any tax relief. However, money spent on ‘integral features’ can qualify for capital allowances, meaning you can get tax relief much sooner.

Wright outlines that integral features are defined as items that make up your premises, rather than plant and machinery used in your business – “put simply, they are things ‘in which’ rather than ‘with which’ your business operates.” He says that qualifying integral features are strictly defined as electrical and lighting systems; hot and cold water systems (excluding kitchen and toilet facilities); lifts, escalators and moving walkways; powered ventilation systems, and air cooling, heating or purification systems; and external solar shading.

It needs to be remembered that the cost of these assets qualifies for an annual Writing Down Allowance at a rate of 6%, which, says Wright, “allows tax relief based on a small amount of the asset’s value to be claimed each year over the course of its useful life.”

However, Wright points out that “many businesses will be able to get more tax relief sooner by claiming the Annual Investment Allowance (AIA) against the cost of integral features in the year they’re acquired.” In explaining what AIA is, he says that “it allows businesses to offset against their income up to £1m of expenditure each year on new integral features as well as most plant and machinery… you can’t claim the two allowances simultaneously though – it’s a choice of either AIA or Writing Down Allowances in the first year.”

Structures and Buildings Allowance (SBA)

Lastly, it can be painful to wait for tax relief on capital expenditure on buildings. But since October 2018, the cost of buying, constructing, or renovating commercial premises for use in a trade can qualify for SBAs. The allowance is currently 3%.

Wright explains that “leaseholders can qualify for SBAs on qualifying building works they pay for such as fitting out premises for their use, and if the lease is for more than 35 years they may even be eligible for SBAs on the original construction/renovation costs.”

But he offers words of warning on SBAs. Firstly, “you can only get relief once, so the value of assets qualifying for capital allowances can’t also be included in an SBA claim” and secondly, “if you sell the premises, the amount of SBAs claimed will be added to your sale proceeds, so tax will eventually become payable on the amount of SBAs claimed.”


Renovating or improving premises is an expensive business but one thing is certain – taking the time to understand the rules and to work to them will make a project much less expensive.

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