The true cost of refurbishing offices or moving into different premises can be significantly affected by the work done and how this is presented to HM Revenue and Customs (HMRC). Without question it pays to consult carefully with contractors and tax advisers before agreeing final specifications.
Works can come under three tax headings:
- Revenue expenditure, such as repairs, redecoration and replacement, is tax-deductible in the current tax year and most tax-efficient
- Expenditure on plant, such as furniture or computers, is tax-deductible over several years
- Capital expenditure, deemed to be an investment in the building itself, carries no immediate tax relief
As a general rule, between 30% and 60% of office fitting-out costs are likely to be classified as plant. When refurbishing existing buildings most other costs can be claimed as revenue, but when kitting out a new office they will probably be classed as capital, as you cannot be repairing when decorating and fitting out for the first time.
However, these distinctions are not always clear-cut. HMRC is likely to regard installing new partition walls as capital expenditure. But if the partitions are movable and you argue that you need this flexibility to cope with future business growth, then they - and associated costs - may be classed as plant expenditure, qualifying for tax relief. Similarly, new toilets might sound like capital expenditure, but if you can show that the old toilets were worn out or unacceptable, a lot of the cost may count as revenue expenditure, qualifying for full tax relief.
An unfortunate side effect of this tax regime is that, because tax relief is higher on "cosmetic" work such as redecoration, owners are tempted to patch up and refurbish old offices rather than making structural improvements or demolishing old buildings and replacing them with something better.
The capital allowances regime has undergone significant change in recent years and further announcements were made in the Emergency Budget on 22 June 2010. From April 2011 allowances on plant and machinery will reduce from 20% to 18% and from 10% to 8%. This further pressure on cashflow is a good incentive to maximise claims prior to April 2011.