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.
