Keeping on top of your bookkeeping is paramount when running a small business, but it is especially important for expenditure on buildings and equipment. And did you know, accurate small business bookkeeping can also save you tax?
Small business bookkeeping
There are plenty of reasons why small business bookkeeping is important – whether it’s for tax purposes, expenses, cash flow, or profitability and growth. But one of the biggest benefits of bookkeeping is that it helps you claim the tax against expenditure on buildings and equipment that you’re entitled to, correctly. However, choosing the right heading for expenditure on buildings equipment isn’t always that straightforward.
Repairs v improvements
From a HMRC standpoint expenditure on repairs to an asset is an allowable item for tax purposes and is fully deductible from any profit made. But, if the asset is altered, improved or replaced the expenditure is capital expenditure and is not allowable. This needs to be noted as an increase in value of the asset with the deduction from profit spread over more than one year as depreciation charges.
In general terms if the entire asset has been replaced this will be viewed as capital expenditure, whereas if less than the entire asset has been replaced this will be viewed as revenue expenditure and is therefore tax deductible.
For example: A business has a driveway leading to the collection point for its goods, the driveway is in very bad condition as the last time it had any attention was over 20 years ago. As a result, the delivery drivers are refusing to collect their goods as the driveway is causing damage to their vehicles.
The business has the driveway repaired at a cost of some £50,000. The tarmac is removed and the sub-surface repaired. It is then re-surfaced with a new kerb to bring it up to today’s standards.
As the driveway has been resurfaced and not replaced in its entirety, the expenditure is allowable for tax purposes as a repair. However, had the business owner decided to widen the driveway or increase the load bearing weight, it would have been seen as an improvement, therefore not allowable.
The HMRC equivalent to this is capital allowances (CAs), which has its own rules and timeframes for tax deductions. Incorrect recording of your expenditures can lead to an incorrect tax bill. Don’t be tempted to wrongly record repair work as improvement expenditure as this can leave you with extra tax charges when you vacate the premises.
Claiming back CAs for business expenditure
When the time comes to sell your business premises any CAs you have claimed for expenditure on improvements can potentially be claimed back. The buyer is entitled to claim CAs on the cost of whatever they paid for fixtures. This means they will be keen to settle on a high value. The reason that this is beneficial to you is because if the value you agree is greater than the original cost minus the CAs you have claimed for, you can claim tax on the difference.
Example: A business spends £50,000 on refurbishing its premises, and allocates £40,000 to fixtures, of which CAs are claimed. They then sell the premises and agree an amount of £15,000 for the fixtures. This means the business claimed £40,000 of CAs for the fixtures and £15,000 of these would be clawed back and taxed as extra profit.
Alternative tax options
If the £40,000 had been allocated to repairs instead of improvements, claiming back on CAs would not be an option. Instead, any money received would be included as proceeds in the capital gains tax (CGT) sum. It is possible that this could give you a lower tax bill overall.
How to decide which option is better for you
If your business is unincorporated a tax saving is more likely, as money back from CAs is taxed at income tax rates of up to 45%, whereas CGT is payable at just 10% or 20%.
It’s important to ensure any invoices / bills you receive for work on your premises are clearly titled and sit comfortably under either repairs or improvements. This will save you a lot of legwork at a later date. If you are not sure, err on the side of caution and categorise it under repairs.
Trusted West Midlands chartered accountants
Small business accounting can be challenging and this is an area where the incorrect tax treatment can cause potential difficulties with HMRC. The key to getting it right is being organised and staying on top of the bookkeeping.
If you need advice on small business bookkeeping then Thomas Nock Accountants are on hand – just head to our website today. Alternatively, call 01384 261300 to find out more on our small business accounting services.
If you have found this blog helpful, you may wish to read our previous blog on Landlord Expenses.