Correctly recording transactions in your business records is always important but especially so for expenditure on buildings and equipment. How can accurate bookkeeping save you tax?
Bookkeeping trouble spot
Even a small business records thousands of financial transactions every year. Most will be straightforward so that even a novice bookkeeper won’t have trouble allocating them to the correct heading for your accounts. However, choosing the right heading for expenditure on buildings equipment can be more tricky.
Repairs v improvements
For accounting and tax purposes expenditure on repairs of buildings and equipment is fully deductible from profit. Whereas expenditure on improving buildings and equipment should be recorded as an increase in value of the asset and the deduction from profit (for accounting purposes) spread over more than one year as depreciation charges. The tax system’s equivalent to this is capital allowances (CAs) which has its own timetable for tax deductions. So wrongly allocating expenditure can affect your tax bill.
Trap. Recording repair costs to, say, a building as improvement expenditure can result in extra tax charges if and when your business moves premises.
Clawback
When you sell a business premises the CAs you’ve claimed for expenditure on improvements can be clawed back. Usually, the buyer will be keen to attribute a high value to fixtures because they will be entitled to claim CAs on whatever they pay for them (see The next step ). If the value you agree is greater than the original cost minus the CAs you have claimed for, the difference is taxable.
Example. In 2014 Acom Ltd spent £50,000 refurbishing its premises. The bookkeeper allocated £40,000 to fixtures for which Acom’s accountant claimed CAs. In 2020 Acom sells its premises and agrees a value for the fixtures with the buyer of £15,000. This means as Acom claimed £40,000 of CAs for the fixtures, £15,000 of these will be clawed back and taxed as extra profit.
Alternative tax treatment
To the extent Acom could have reasonably allocated the £40,000 to repairs instead of improvements (fixtures) there would have been no clawback of CAs. Instead the money received from the buyer would have been included as proceeds in Acom’s capital gains tax (CGT) calculation. This might have produced an overall lower tax bill (see The next step ).
Tip 1. A tax saving is even more likely if your business is unincorporated because a clawback of CAs is taxed at income tax rates of up to 45%, whereas CGT is payable at just 10% or 20%.
Tip 2. Critically analyse bills for work on your premises to ensure expenditure is recorded correctly as relating to either repairs or improvements. Where it falls into a grey area, err towards repair costs rather improvements.