Repairing machinery: what can be deducted for tax purposes?

Types of expenditure

The difference between capital and revenue expenditure was once more important than it is today, especially for small businesses. Nevertheless, there are still situations where it’s an important factor when working out the amount of tax deduction that can be claimed. The distinction is particularly tricky where it involves the cost of repairing equipment soon after it’s been purchased.

What HMRC says

HMRC’s internal guidance says that where person A buys an asset, e.g. an item of equipment, that needs repairing from person B, and B reduces the sale price to reflect the condition of the asset, the repair costs aren’t tax deducible for the year of expenditure as a revenue expense. Instead, the cost is capital because the expense is incurred to make the asset usable in the business, which makes it part of the cost of acquiring it.

Therefore, as a rule of thumb, if our trader can’t use a recently purchased asset, e.g. a car, in the business without first repairing it, those costs are capital not revenue.

Example. In its financial year to 31 March 2023 Acom Ltd buys a car for £9,000 and spends £2,000 to get it through its MOT. HMRC says this is capital expenditure. That means Acom can’t claim a tax deduction for the repairs against its 2023 profits. Instead, it must add the repair cost to the purchase price and claim capital allowances (CAs). This can mean spreading the tax relief over many years.

While there are arguments the trader can use to counter HMRC’s view on repair costs, it’s sometimes not worth the effort. They might legitimately be able to obtain tax relief for the full cost of repairs for the year in which they incur the expense using a different method.

Example. If the vehicle that Acom purchased and repaired had been a van rather than a car, adding the repairs to the purchase price might not delay tax relief. As long as Acom has enough of its annual investment allowance (AIA) to spare (the maximum AIA is £1 million per year until 31 March 2023), it can be used to claim the whole cost as a CA in one go, i.e. from Acom’s 2023 profits.

The AIA can’t be used for expenditure on cars and certain other types of asset.

Bookkeeping

Businesses should carefully consider how to record repair costs for recently acquired assets. HMRC is more likely to raise questions about a large amount for repairs included in accounts than it is a large amount for the purchase of assets. Once HMRC has its hooks in it doesn’t usually stop at just one question; it will take the opportunity to start picking over other figures in the accounts. Therefore, careful record keeping can help stay off HMRC’s radar.

If treating the cost of repairs as capital will cause a significant delay in tax relief, traders should record it as a revenue expense. But if the total figure for repairs in the accounts is large, they will need arguments ready to respond to any questions raised by HMRC.