Accounting & tax treatment of start up costs

[Just.asking]

Hi,

We're looking to set up a small office and we've found one that has been empty for a while, reason being it's in a sorry state.

The landlords have offered us free rent for a specified period if we spend the money to do the property up. Obviously I understand that the rent isn't "free" in essence.

My concern really is how this would affect our books. We are going to be paying out upfront for work such as electrical re-wiring, plastering & decorating and replacing the carpets.

I'm concerned that we could lose out on tax relief as some of our costs could be considered "improvements" (not even sure this is possible on a rented property?) thus not attracting tax relief which a payment ongoing for rent obviously would.

Can some of the clever people on here enlighten me and think of any further pitfalls that I should be wary of when entering into this arrangement?

Thanks for taking the time.

Dave

 

[Maslins]

A good question, and one I hope David Griffiths comes along to answer correctly

In the meantime, I'll have a stab!

I think you're right to be slightly concerned. In effect, you're paying less rent (no question an allowable expense) instead spending money on improving the property (arguable where the split lies between capital and revenue).

My thoughts are:

Electrical rewiring etc is definitely capital, but this should qualify as eligible integral features. This means the standard writing down allowance rate is only 10% (rather than 20%), BUT, you can still allocate your £50,000 annual investment allowance against these costs. On the assumption as a start up you will not be spending huge sums, this will probably therefore all be eligible as an allowance in the first year.

Decorating & plastering you should be able to treat as revenue.

Carpeting is likely to be capital. What kind of carpeting is it? If the typical carpet tiles you tend to get in commercial places, then it is normally treated as eligible for capital allowances.

On the basis of that, I think you should be ok to get all the above (effectively) written off in the year you incur the costs. Bear in mind if you spend >£50,000 in one year on eligible capital, you will not be able to write the whole thing off. Also bear in mind if you do other work that's more structural in nature the costs relating to that are likely to be capital and ineligible.

Good luck!

 

[Zeno]

Not a tax point but I would be careful how you structure it legally. Say you move in tart the place up then the owner decides to kick you out and get someone who he will be able to charge a higher rent?

It might be worth getting an opinion from a solicitor to see how you could protect your interests here.

 

[Ader]

As Maslins says the isue is whether the expenditure is capital or revenue for tax purposes.

There's a bit of case law (from way back) which means expenditure on newly acquired assets is likely to be capital particularly if it's affected the purchase price - In your case a rent free period is indicative of this being in point.

However electrical wiring/equipment should be integral features as Maslins correctly points out and assuming you're within the £50k limit then a 100% deduction.

On the other items, the question is as to whether they're capital or revenue comes down (in my opinion) to whether they've affetced the price.

I would have thought that it's likely you'd want to redecorate to your own requirements anyway as I'm sure you have a particular business image/colour scheme etc. you want, so I would think that the colour of the walls and the state of the carpets was unlikely to affect your view of the pricing - So painting and light decorating, new carpets ought to be allowable.

More extensive works will be harder to justify - So a complete replaster becasue the walls are falling apart may be difficult, but light touching up of plaster work wouldn't be unreasonable to claim.



In short, I'd be inclined to claim it but expect some push back from HMRC and be prepared to give way on 'extensive' work.

A typical accountant answer - yes/no/Maybe - I know

Oh and don't forget what else counts as integral features so if any costs relate to that then there's capital allowances and if less than £50k a 100% deduction, and shoudl be no problem with HMRC:

(1)an electrical system (including a lighting system);
(2)a cold water system;
(3)a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system;
(4)a lift, an escalator or a moving walkway; and
(5)external solar shading.

 

[David Griffiths]

Thanks Chris. No pressure then! :redface:

The first question to ask is if the work that is to be done is actually specified in any lease, or if it's just left up to the tenants. If the work is scheduled, then the payment for that might be construed as a premium on the lease, which is taxable on the landlord and relieved for the tenants over the period of the lease.

On the guess that there is nothing in writing and it's up to the tenants what they do, then the next question is whether the place has ever been used as an office before. On the basis of the comments made that it's been empty for a while, I'd guess that it has. As Chris points out, the amount of money being spent may also have a bearing on it.

I'd suggest that if the expenditure is simply dealing with past dilapidations then it would all be allowable as repairs, including the electrical rewire, but perhaps exclduing the carpets, which in any event would be capital and available for the 100% annual investment allowance. That's based on the principle in the Odeon Theatres case some years back which established that if a new owner spent money that if spent by the previous owner would have been repairs, then the new owner can claim it as repairs as well. That superceded the Law Shipping case from 1925 (sad, I know!) which said that any expenditure on a capital asset to bring it up to scratch was capital. Those cases apply to expenditure by new owners of assets rather than new tenants, but I don't see why the same principles shouldn't apply.

What would be excluded would be structural alterations, such as the removal of walls or installation of new doorways. If spent on rented premises there is no tax relief because they aren't repairs and aren't plant - it's known as a tax nothing.


So in general, there should be relief for all repair and maintenance costs, plus the annual investments allowance for capital, but nothing for structural work.

Incidentally, if there is more than £50k spent on capital, you can choose which expenditure is included, so would choose things like electrics and plumbing to be in that, and items with the 20% allowance to be excludeded.

I'd also say that if you are spending over £50k, then take advice for your specific circumstances.

Zeno's point is also very valid

 

[Maslins]

That's based on the principle in the Odeon Theatres case some years back which established that if a new owner spent money that if spent by the previous owner would have been repairs, then the new owner can claim it as repairs as well. That superceded the Law Shipping case from 1925

Yes, that was my exact line of thought!

 

[Just.asking]

Electrical rewiring etc is definitely capital, but this should qualify as eligible integral features. This means the standard writing down allowance rate is only 10% (rather than 20%), BUT, you can still allocate your £50,000 annual investment allowance against these costs. On the assumption as a start up you will not be spending huge sums, this will probably therefore all be eligible as an allowance in the first year.
Carpeting is likely to be capital. What kind of carpeting is it? If the typical carpet tiles you tend to get in commercial places, then it is normally treated as eligible for capital allowances
quote]

Thanks Chris, that makes perfect sense, our investment should (hopefully!) be quite a way under 50K so I imagine the AIA will be available for all items. The carpeting is just likely to be standard office carpet, nothing special. Probably not tiles though, not sure if that has a bearing on your answer as perhaps it is not as moveable therefore not elegible for Capital allowances?

Other answers posted shortly!

Dave

 

[Just.asking]

You can tell I don't use forums regularly! Couldn't even quote properly!

 

[Just.asking]

Not a tax point but I would be careful how you structure it legally. Say you move in tart the place up then the owner decides to kick you out and get someone who he will be able to charge a higher rent?

It might be worth getting an opinion from a solicitor to see how you could protect your interests here.

Absoloutly, this is something we are discussing with the agent at present. They actually do have a break in the contract in 2011 and if they were to exercise it we would be re-imbursed the balance of "free rent outstanding"

I think it's unlikely they will be able to turf us out for any other reason as proper contracts will be in place. I will take advice though.

Thanks for your input.

 

[Just.asking]

Thanks Chris. No pressure then! :redface:

The first question to ask is if the work that is to be done is actually specified in any lease, or if it's just left up to the tenants. If the work is scheduled, then the payment for that might be construed as a premium on the lease, which is taxable on the landlord and relieved for the tenants over the period of the lease.

On the guess that there is nothing in writing and it's up to the tenants what they do, then the next question is whether the place has ever been used as an office before. On the basis of the comments made that it's been empty for a while, I'd guess that it has. As Chris points out, the amount of money being spent may also have a bearing on it.

I'd suggest that if the expenditure is simply dealing with past dilapidations then it would all be allowable as repairs, including the electrical rewire, but perhaps exclduing the carpets, which in any event would be capital and available for the 100% annual investment allowance. That's based on the principle in the Odeon Theatres case some years back which established that if a new owner spent money that if spent by the previous owner would have been repairs, then the new owner can claim it as repairs as well. That superceded the Law Shipping case from 1925 (sad, I know!) which said that any expenditure on a capital asset to bring it up to scratch was capital. Those cases apply to expenditure by new owners of assets rather than new tenants, but I don't see why the same principles shouldn't apply.

What would be excluded would be structural alterations, such as the removal of walls or installation of new doorways. If spent on rented premises there is no tax relief because they aren't repairs and aren't plant - it's known as a tax nothing.


So in general, there should be relief for all repair and maintenance costs, plus the annual investments allowance for capital, but nothing for structural work.

Incidentally, if there is more than £50k spent on capital, you can choose which expenditure is included, so would choose things like electrics and plumbing to be in that, and items with the 20% allowance to be excludeded.

I'd also say that if you are spending over £50k, then take advice for your specific circumstances.

Zeno's point is also very valid

Thanks David,

Glad to hear you are backing up the previous views expressed.

I'm not too sure though about your first point, it will all be in writing that x amount spent = x months free rent but aside from that it will be down to us (with building inspections from them) as to how we do the work. Not sure what you feel about this affecting things? In principle I don't see it as a premium.

It has been used as an office in the past and all costs are really just bringing everything up to a modern equivalent. Yes everything would have to have been completed by the previous tenant in order to continue trading, you should see the place!

As mentioned previously I don't expect it to run over 50K.

One further question though the landlord took the electricity supply to add extra power to another building below (it's a bank!) Which means we also need to pay the electricity board around 3K to re-install the power.

How would we treat that one? The supply was previously there obviously!

Thanks again everyone,

Dave

 

[Ader]

One further question though the landlord took the electricity supply to add extra power to another building below (it's a bank!) Which means we also need to pay the electricity board around 3K to re-install the power.

How would we treat that one? The supply was previously there obviously!

Thanks again everyone,

Dave

No question in my mind - That's deductible - it's simply part of the cost of getting electricity - Horribly expensive though

 

[David Griffiths]

No question in my mind - That's deductible - it's simply part of the cost of getting electricity - Horribly expensive though

[Can't resist] Shocking! [/Can't resist]