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HMRC internal manual

Business Income Manual

Specific deductions: repairs and renewals: what is a repair: the ‘entirety’: examples

The following are examples of how the concept of ‘entirety’ applies in practice. Remember that it is important to establish the facts of the particular case.

Example: replacing the entirety

Fred has a garage in which he stores his taxi. The garage is run down and needs major work. If Fred decides not to spend money on repairing the existing garage and has it knocked down and a new garage built, then that is not a repair, it is a replacement.

It does not matter whether the taxpayer chooses to replace the asset, or is forced to, for instance because the building has burnt down. The cost is capital expenditure and the whole cost is not an allowable expense.

The fact that replacing the asset is the cheapest and most effective option does not make the expenditure allowable; it remains capital expenditure.

Evidence to assist in determining the nature of the work in fact undertaken may include the estimate from the contractor and any written instructions from Fred setting out what he wanted done.

Example: what is the asset - buildings

Peter runs a farm and has diversified so that he has six chalets that are used in a furnished holiday lettings business.

One of the chalets is damaged beyond repair and Peter replaces it with a new chalet of the same model. Most of the cost is covered by insurance, so Peter only has to spend £2500.

The chalet is an identifiable asset in its own right. Peter has replaced an asset and so the £2500 is not an allowable expense.

Example: replacing the whole?

For many years, Peter has only carried out limited repairs to the drive from the road to his farmyard. In the spring, the Dairy Company tell him that the drive has deteriorated to the state that unless it is repaired, their tankers will be unable to call at his farm.

Peter has the drive repaired. The tarmac was removed and the sub-surface repaired. The drive was then re-surfaced and new kerbing added as necessary to bring the drive up to modern standards. As a result of the work, the drive was brought back to standard and there was no improvement involved.

The drive is an asset in its own right but it has not been replaced, merely surfaced. The expenditure is allowable.

This example is based on a case heard by the First-tier Tribunal (G Pratt and Sons v HMRC [2011] UKFTT 416 (TC)) where the Tribunal also emphasised that the drive had not changed as a result of the work; notably it did not allow larger milk tankers to be used.

It is essential to establish all the relevant facts before reaching any conclusions on the nature of the expenditure. Evidence to assist in determining the nature of the work in fact undertaken may include the estimate from the contractor and any written instructions from the taxpayer setting out what work was to be done.

Example: Refitting a kitchen:

Sophia owns a number of residential properties that she lets. The properties are not furnished lettings.

The boiler in one property needs replacing. As the new boiler has to be located in a different position, Sophia decides to modernise the kitchen as a whole.

All the existing base units, wall units and sink etc, are stripped out and replaced, as is the fitted cooker and hob. New units of an equivalent quality are installed but in a different layout to allow for the re-location of the boiler, finally the kitchen is re-plastered and re-tiled.

The entirety is the house, not the fitted kitchen. The new kitchen is slightly different but it does the same job as before. Sophia has simply replaced the old kitchen with a modern equivalent. This is a repair and allowable expenditure.

Shortly afterwards, the fridge freezer breaks down and has to be replaced.

This is not part of the building but is an asset in its own right. Sophia has not repaired an asset; she had incurred capital expenditure on a new asset. As the fridge freezer is used in a dwelling house it is not qualifying expenditure for capital allowances purposes.