BIM46904 - Specific deductions: repairs & renewals: what is a repair: improvements

If the taxpayer repairs the asset, that is restores it to what it originally had been, then that would normally be an allowable expense.

However, the fact that the taxpayer has to deal with a maintenance problem does not mean that the expenditure is allowable. So that you can decide whether or not the costs are allowable, you have to look at the nature and extent of the work carried out.

An alteration or improvement is not a repair

If, instead of simply repairing the asset, the taxpayer has the asset altered, improved or upgraded, that is makes it better than it had been before, then all the cost of the work is capital expenditure. No revenue deduction can be allowed for any part of the expenditure.

If we consider a few examples:

• Kate’s office needs repairs to its roof. She decides to have the roof space opened up and additional windows put in so she can use it as additional office space. This is an improvement and is capital expenditure. Kate cannot deduct the cost in her accounts.
• Peter takes over a shop. He has a new shop front put in. The replacement of a shop front is a usually a repair of the shop (which is the asset or ’entirety') and the cost would normally be revenue expenditure, but in this case Peter has spent money adapting the newly acquired premises to his needs. This is capital expenditure on an alteration.

For further information see BIM35465 - BIM35470.

Small amounts of improvement may be incidental and allowable

Whether the taxpayer has had the asset repaired or improved is a question of fact and degree.

An improvement element may be sufficiently small to count as incidental to the repair. In the absence of other capital indications, the entire cost can then be regarded as revenue expenditure.

Notional repairs

If the asset had not been improved, then the business would have had to have the asset repaired. The cost of these repairs would have been allowable. The business does not get relief for the repairs it would have paid for, the ’notional repairs'.

The business did not have the asset repaired. That is not what happened. The taxation depends on what happened. The business chose to have the asset improved. This is capital expenditure. It is not an allowable expense.

For example, in the example above, Kate had to have repairs to her office roof, as it was unsound. She cannot claim the cost of these repairs, as they did not take place. She chose instead to have additional work done. That was what actually happened. She cannot claim the cost that she would have spent, that is not what she did.

For further information on this, see the discussion of Margrett v The Lowestoft Water & Gas Company [1935] 19TC481 at BIM35330 and the discussion of William P Lawrie v CIR [1952] 34TC20 at BIM35465.

Changing technology

Problems can arise with old assets over where is the dividing line between a repair and an improvement.

The fact that the method chosen is the cheapest and most effective is neutral. It does not deprive expenditure of its capital character. Replacing an object may be cheaper and better than patching and mending.

A repair or replacement of a part of the asset using modern materials may look like an improvement because of the greater durability, superior qualities, etc of the new material. If the new materials are broadly equivalent to the old materials then the cost is normally an allowable expense.

• Kate has the windows of her offices replaced. The old windows were singled glazed. She just wants to replace the old units. Building standards have improved and the types of replacement windows available from retailers have changed. The replacement windows are double-glazed. This shows the effect of changes in technology. At one time replacing single-glazed windows with double-glazed windows was regarded as an improvement and therefore capital expenditure. But times have changed. Double-glazing is now standard and is the modern equivalent. Replacing single-glazed windows by double-glazed equivalents counts as allowable expenditure on repairs.
• George has the water system in his factory replaced. He cannot replace it with an identical system as it was designed using imperial measures. He uses piping and storage tanks of the closest available metric size. This results in a slightly increased capacity. In this case it is not an improvement. The trivial increase in performance or capacity arises solely from the replacement of old materials with newer but broadly equivalent materials.
• George also has the electrical system replaced. He installs a system of greater capacity to cope with additional equipment. He had not simply replaced his outmoded system with a modern system. This is an improvement and is capital expenditure.

For further information on these points, see BIM35460 and BIM35470.