BIM46906 - Specific deductions: repairs & renewals: what is a repair: effect of change of ownership

A repair, which restores a worn or dilapidated asset, is normally an allowable expense.

If an asset is acquired second hand, then it is quite possible that it will need to be repaired. These repairs do not arise from use in the current business.

• The fact the taxpayer had repairs carried out just after they acquired the asset does not, of itself, mean that the cost of the repair is disallowable.
• The fact that the repairs were needed when the asset was acquired does not, of itself, mean that the cost of the repair is disallowable.
• The cost of the repair will be a capital expense if it is effectively part of the cost of acquiring the asset.

Whether the cost of the repairs is part of the cost of the asset is a question of fact. It is important to establish the condition of the asset and how the price was arrived at. Evidence may be found, for example, in the contract of sale or the negotiations leading up to the contract or in the circumstances surrounding the sale.

What makes a repair part of the cost of acquiring the asset?

Pointers to the expense being just a repair and allowable as a deduction include:

• the repairs are just part of the routine normal maintenance cycles; or
• the price paid was not affected by the condition of the asset; or
• the price was adjusted, but only to reflect where the asset was in the routine maintenance cycle.
• the asset could be used in the longer term in the business without being repaired.

Pointers to the expense being part of the cost of acquiring the asset and not allowable as a deduction include:

• the asset could not be used in the business without being repaired; or
• the asset could only be used in the short term and its long term use was dependent upon the repairs being carried out; or
• the purchase price of the asset was substantially reduced because the asset needed repairing.

For further information on the case law background see BIM35455.

What does all this mean in practice? If we consider some examples:

• Kate moves into new offices. The exterior needs painting. This is a job that has to be done every few years. It is normal maintenance work. Kate can claim this as an expense even though she has had it done just after she has acquired the asset.
• George buys a second hand machine. It does not work until he has had it repaired after which he brings it into use in the factory. This was not routine maintenance. This was part of the cost of the equipment and George cannot claim a deduction for the expenditure.
• Samuel buys a ship in poor condition. He paid a commercial price for the ship, based on its condition. He knows that he can use it on one trip before its certificate expires. The ship will then have to have extensive repairs before it can be brought back into use. Samuel cannot claim the cost of these repairs as they are effectively part of the cost of buying the asset. The fact that he could use the ship does not change this. Samuel knows that he will have to take the ship out of use unless he has the repairs carried out. This example is based on Law Shipping Co. Ltd v CIR [1923] 12TC621, for further information, see BIM35455.
• Samuel buys a second ship, which is also in poor condition. He paid a commercial price for the ship, but because of the demand for that type of ship, the condition is not reflected in the price he paid. Samuel can use the ship and the repairs are carried out several years later. These repairs will be an allowable expense. This example is based on Odeon Associated Theatres Ltd v Jones [1971] 48TC257, for further information see BIM35455.

Costs incurred by a tenant

A taxpayer may lease a property. If as part of the lease, the tenant agrees to restore the property to a good state of repair then the repairs are capital expenditure (Jackson v Laskers Home Furnishers, Ltd. [1956] 37TC69).

In this case, the taxpayer may be able to get relief for the expenditure under the premium legislation. See ICTA88/S34 (2) and (3) and BIM46250 onwards.