What is a ‘renewal’?
It is well known that a deduction is generally available from trading profits for expenditure on repairs to fixed assets. However, the position is perhaps less clear in relation to the cost of renewing assets, or so it would seem in HMRC’s view.
When dealing with renewals expenditure, a distinction needs to be made between the costs of replacing the whole of an asset, or only part of it. HMRC states (in BIM46900):
“…some people, for example, use ‘renewal’ to mean either a complete replacement of an ‘entirety’ or a replacement of, or repair to, an ‘entirety’”.
This statement suggests that only the partial replacement of an asset can qualify for a revenue deduction. However, what about the full renewal of assets with only a short useful life? HMRC also states (in BIM35415):
“In some instances a tangible asset may have a very limited economic life. Where the life is less than one year you should accept that expenditure on it is of a revenue nature.”
However, in terms of determining whether expenditure on an asset constitutes plant for capital allowances purposes, HMRC states (in CA21100):
“You should accept that an asset that has an expected life of two years or more (the 2 year test) is sufficiently durable to be plant”.
In some cases, renewals expenditure which cannot be claimed as a revenue cost may qualify for 100% capital allowances under the ‘Annual Investment Allowance’ provisions instead.
Special rules apply to certain expenditure (e.g. repairs) on integral features in buildings etc, such as lighting or water heating systems (CAA 2001, ss 33A-B). In broad terms, if the amount of such expenditure is more than 50% of the cost of replacing the integral feature, it is treated as being in respect of a replacement (i.e. a capital cost, rather than revenue expenditure). Integral features qualify for capital allowances, but at a ‘special rate’ of 10%.
The ‘renewals basis’
In the case of furnished lettings, it can be possible to claim a deduction for the cost of renewing furniture, furnishings and chattels. ESC B47 states that the cost of the original cost of the original items is not allowable, but the cost of renewing them is allowable.
ESC B47 also deals with the 10% ‘wear and tear’ allowance, which is an alternative to claiming a deduction for the costs of renewing furniture, furnishings or chattels such as suites, carpets or cookers (nb capital allowances cannot be claimed for expenditure on plant and machinery for use in a let dwelling house (CAA 2001, s 35(2)). ESC B47 is being withdrawn, but is expected to be replaced by legislation allowing taxpayers to elect for the 10% wear and tear allowance.
However, the renewals basis is a separate concessionary practice to wear and tear allowance. HMRC is still considering the future of the renewals basis, and a further announcement will be made in due course. In the meantime, the draft legislation on wear and tear allowance is available via the Chartered Institute of Taxation’s website.
The above article is reproduced from ‘Practice Update’ (September/October 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd. See the Newsletters section.