Salon refurbs - what can you claim against tax?

Refitting a salon isn’t an exercise that can be done on a shoestring. It requires time, thought, plenty of expense and understanding of the law. Those planning a change need to understand how HMRC treats their expenditure. Turning first to tax treatment, it’s a given that HMRC wants tax on any profits that a business makes. But by extension, it also allows firms to set off certain costs that relate to a refit. However, as might be expected, HMRC’s rules are as clear as mud and need careful navigation. Repair or improvement? Yen-Pei Chen, a corporate reporting and tax manager at ACCA, one of the UK’s professional tax bodies, says the first thing to get straight is whether your salon refitting costs relate to repair or improvement. “If the costs relate to repair, they are deductible from your taxable profit. If the costs relate to improvement, the taxman will consider them to be capital expenditure: as such, no deductions from taxable profit will be allowed.” It’s a crucial difference. Essentially, replacing or fixing something to get your salon back into working order is fine as a repair, but doing anything further – say putting in a skylight or building a new storeroom - and you could stray into the clutches of capital expenditure. HMRC’s manual, written to guide to HMRC inspectors as they scrutinise tax returns, gives the example of a company that needed to have its roof repaired and decided to open up the roof area for extra office space. “The fact that the roof was unsound and needed to be repaired was beside the point,” says Yen-Pei, “the additional work that got done on the roof makes what happened improvement, not repairs.” Whether your fittings count as fixed assets or stock determines how you will be taxed when you sell the assets on. The sale of stock is taxed as a taxable income; the sale of fixed assets is taxed as a chargeable gain. According to Yen-Pei, the question that HMRC will ask is ‘what is the nature of the business?’ She says that if it’s your business to sell kitchen units, then HMRC will assume that the kitchen unit displayed in your showroom is intended for sale, and therefore is trading stock. If you use racks and other units in the salon which aren’t items you’d ordinarily sell you should be fine. It’s time to look at the other costs – capital expenditure The good news is, says Yen-Pei, if you can’t claim deductions on your refitting costs, you may still get tax deductions in the form of capital allowances. She outlines how the Annual Investment Allowance (AIA) allows you to claim tax deductions on 100% of qualifying expenditure, up to £200,000 (from 1 April 2014 to 31 December 2015 (2015 is correct Matthew), £500,000). This is available on both plant and machinery and integral features. Over and above the AIA limit, lower capital allowances are available each year – these are currently 18% for plant and machinery and at 8% for integral features. And this is where matters get murky says Yen-Pei: “To qualify as plant and machinery, the expenditure has to be kept ‘for permanent employment in the business’, so this excludes stock in trade or expendable equipment with a life of less than two years; and function as ‘an apparatus employed in carrying out the activities of the business’ and not as part of the premises in which the business is carried on.” In a retail setting, the basic principle is that anything which can reasonably be expected to form part of your building – for example, walls, partitions, ceilings, floors, doors, windows and lighting – should be considered to be premises and not plant. If the allowances for plant don’t apply you can look at special rate allowances that are available on assets which are integral to buildings, such as electrical systems (including lighting) and cold water systems. But Yen-Pei suggests considering what you’re putting the electrical systems in for. If an electrical system is installed purely to support qualifying plant and machinery – burglar alarms, for example – the cost of the electrical system will count as plant and machinery, and will be eligible for higher plant and machinery allowances. There is one final piece of advice from Yen-Pei, and that’s to keep clear records, and separately identify each item of expenditure. She advises that rather than amalgamating all your costs under one-line item called "premises fittings’ in your tax return, “you will have a much better chance of claiming capital allowances successfully if you break down your costs into specific headings – storage, lighting and electrical wiring for air conditioning.” Likewise, she notes that when you claim for a revenue deduction on repairs, be prepared to back up your claim with invoices and a breakdown of the works carried out if and when the tax man asks you for details.