Tax rules allow businesses to claim capital allowances on the cost of equipment. You can also claim tax deductions for installation costs, but how far can you stretch this rule?
Plant or machinery?
Where you spend money on plant or machinery (PM) for use in your business, the rules say that you can claim a tax deduction for it in the form of capital allowances (CAs), which is the Taxman's version of depreciation. It's fairly easy to spot a piece of machinery, but what on earth is plant?
Function over form
Tax law doesn't give a definition of plant, so it's been left up to the courts over the years to decide on a case-by-case basis. The decisions in these cases have produced a rule of thumb that says plant is any asset that plays a functional role in your business but isn't machinery or part of the building. A good example is a hand rail on a stairway or a sink. So you can now spot an item of PM, which means you won't miss claiming CAs on these, but what about the cost of altering the building to accommodate the PM; can CAs also be claimed on this?
A fine distinction
As a general rule, the cost of installing PM can be added to the cost of the asset itself and CAs can be claimed on the lot. This includes alterations to a building that are needed for PM to function. This point has led to some titanic battles with HMRC over the years. But the good news is that the tax tribunal's final decision in the five-year battle between J D Wetherspoon (JDW) (the pub group) and HMRC should mean making a claim will be easier in future.
For a building alteration to count as part of the installation costs of PM, it must remain identifiable as a separate structure from the building. So in the case of JDW, the company could claim CAs on the cost of bricks, mortar and tiles, and the labour in putting these together to form a toilet cubicle. The cubicle could easily be identified separately from the rest of the building. This principle opened up more possibilities meaning JDW was entitled to CAs on raised flooring leading up to some machinery, as well as splash-back tiles surrounding sinks etc.
Tip 1. Don't overlook the cost of the associated paperwork. Not only does the building work qualify for CAs but also a corresponding amount of professional fees and costs, e.g. architect's and planning fees etc. If the building work linked with installing the PM is only part of a larger building project, the tribunal said it was OK to estimate the proportion of the total costs.
Tip 2. As well as applying this new guidance in future, think back to any building work in the four financial years prior to the current one. Whether it's new toilet cubicles or steps leading to a lift or mezzanine floor, to name just two examples, the cost of constructing these can qualify for CAs.