PRACTICE MAKES PERFECT NO . 8
PRACTICE MAKES PERFECT NO . 8
TAX DEDUCTIONS ON REFITTING PREMISES
BY YEN-PEI CHEN , CORPORATE REPORTING AND TAX MANAGER AT THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS ( ACCA )
� Investing money to fit out a practice is crucial for bringing in patients but , come tax return time , complex tax rules might make your investment feel more like a curse than a blessing . Electrical wiring , plumbing , lighting or x-ray protection may all be subject to different tax treatments depending on specific circumstances . To make sure that you are getting the most out of the tax deductions available , good record-keeping and some forward planning are essential . If your refitting costs are substantial , it ’ s well worth taking qualified tax advice .
So , what are the rules ?
REPAIR OR IMPROVEMENT ? The first thing to get straight is whether your refitting costs relate to repair or improvement . The distinction might seem pedantic , but they make all the difference . If the costs relate to repair , they are deductible as an expense from your taxable profit . If the costs relate to improvement , however , the taxman considers them to be capital expenditure : as such , no deductions from taxable profit are allowed .
Essentially , replacing or fixing something to get your practice back into working order is fine as repair , but do anything further and you could stray into the clutches of capital expenditure . The fact that you have a maintenance problem that must be dealt with doesn ’ t necessarily make your refitting costs deductible as repair – the taxman will want to know what actually happened .
HMRC ’ s manual , written to guide to HMRC inspectors as they scrutinise tax returns , gives the example of a company that needed to have its roof repaired and decided to open up the roof area for extra office space . The fact that the roof was unsound and needed to be repaired was beside the point : the additional work that got done on the roof makes what happened improvement , not repairs .
HMRC also gives the example of a shop owner who had a new shop front put in when he took over the premises . The replacement of a shop front would normally be deductible as revenue expenses , but the fact that the shop owner adapted the shop front to his specific needs makes it an improvement , and therefore capital expenditure .
STOCK OR FIXED ASSET ? Whether your practice fittings count as fixed assets or stock determines how you will be taxed when you sell the assets on . The sale of stock is taxed as taxable income ; the sale of fixed assets is taxed as a chargeable gain , which could be reduced using indexation allowance ( if you operate through a company ) and other tax reliefs .
Because tax on chargeable gains usually works out as less than tax on straight income , there is a long history in case law of businesses trying to get disposals of various assets to be taxed as chargeable gains .
The key question that HMRC will ask is : “ what is the nature of the business ?” If , for example , you sell kitchen units , then HMRC would assume – barring strong evidence to the contrary – that the kitchen units displayed in the showroom were intended for sale , and therefore were trading stock . But as you serve patients with some tangential retail sales you are unlikely to have any problems here ; clearly practices aren ’ t in business to sell dental chairs or autoclaves .
CAPITAL ALLOWANCES ON CAPITAL EXPENDITURE It ’ s time to look at the other refitting costs – the capital expenditure .
The good news is , if you can ’ t claim revenue deductions on your refitting costs , you may still get tax deductions in the form of capital allowances . The Annual Investment Allowance ( AIA ) allows you to claim tax deductions on the full amount of qualifying expenditure , up to £ 200,000 . This is available on both plant and machinery and integral features , which we will look at in turn below .
Over and above the AIA limit , lower capital allowances are available each year , on a reducing balance basis . This is currently at 18 % for plant and machinery and at 8 % for integral features .
There ’ s an easy tax planning point here : Prioritise integral features over plant and machinery when making AIA claims . This is because capital allowances are available
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