Capital allowances on an office fit out

Capital allowances on office refits

Great news! That shiny new office fit out as well as looking amazing can also save you some tax!

Most people are aware that they get tax deductions for what is deemed a ‘repair’ and goes through their profit and loss account. But what about the extensive investment in the office refit which has been put in the accounts as a fixed asset? 

Thankfully all this expenditure isn’t wasted. Although it doesn’t hit your profit and loss account in the actual accounts there are certain tax adjustments to be made prior to the tax liability being calculated. The one that is of interest in relation to the office fit out is called capital allowances.

You can claim capital allowances when you buy assets that you keep and use in your business such as cars, printers, computer etc. However, you can also claim on items called fixtures and fittings and integral features such as air conditioning, work surfaces, heating systems and sanitary wear. 

Qualifying capital allowance items can be included within lump sum costs for substructure works so considering costs and obtaining detailed breakdowns from contractors can be essential to maximise your claim.

Example

You have had your office refit and the bill is as follows:

  
New office furniture 7,000
Air conditioning 8,000
Decorating 4,000
New flooring 4,000
Staff cinema room 12,000
 35,000

What are the potential tax savings involved?

Firstly, we need to consider annual investment allowance or AIA. Each year a business gets an annual investment allowance. If the expenditure on qualifying items does not exceed the AIA then the entire investment can be deducted from your profits before calculating the tax. AIA changes but at present and until December 2020 it is £1m!

What if we run out of AIA?

AIA is currently pretty extensive but if you run a business that invests heavily in machinery there is the potential that you will exhaust your AIA prior to taking into account your office refit. If this is the case, then tax allowances are still available but they are spread over a number of years. For items of plant and machinery and fixtures and fittings you get a deduction of 18% per annum on a reducing balance basis, for integral features you get a deduction of 6% per annum on a reducing balance basis. 

Therefore, it is important to plan and review your capital spend across financial years to maximise AIA.

What if we have used grants to fund to expenditure?

Tax relief is only available on the actual cost to the company. Therefore, where a grant has been used to fund a purchase only the net amount (cost – grant) is available for tax relief

So what does it mean in numbers?

New office furniture – This is known for capital allowance purposes as plant and machinery and therefore qualifies for AIA. Thus, in the above example we can deduct the £7,000 from our profits before calculating the tax. As the current corporation tax rate is 19% this is a saving of £1,330.

Air conditioning – This is known for capital allowance purposes as an integral feature and also qualifies for AIA. So, from our example we can deduct the £8,000 from our profits before calculating the tax. Using the 19% rate again the tax saving is £1,520.

Decorating – This should be classed as a repair and go through the profit and loss account in the accounts. Although not part of our capital allowances claim it is still a tax-deductible expense therefore does save £760.

New flooring – Now this is a trickier area. In relation to our capital allowances, flooring does not qualify so we will not get a tax deduction from this perspective. However, the question we need to ask is ‘is it a capital improvement or is it a repair?’ This is an area HMRC have looked into a number of times and there is a lot of case law surrounding it. In relation to flooring, if we put in a brand new floor refurbishment i.e. marble flooring where we previously had laminate, it is clearly a considerable improvement to the property and therefore the cost will be considered capital on which no capital allowance can be claimed. However, if we replace laminate with laminate of the same quality then we would have the basis to argue it is simply a repair and then a tax deduction is available.

Staff cinema room – In this example we are assuming that in a storeroom we have put in comfy seats, a large screen, audio equipment and a projector. All these things are plant and machinery and qualify for AIA. Therefore, using the figures in our example, a tax saving of £2,280.

Therefore, if we rework the cost of our refit:

 InvoiceTax savingNet cost
New office furniture 7,000(1,330)5,670
Air conditioning 8,000(1,520)6,480
Decorating 4,000(760)3,240
New flooring 4,000CAPITAL4,000
Staff cinema room 12,000(2,280)9,720
 35,000(5,890)29,110

It is now nearly 17% cheaper!

If you need more advice on what capital allowance you can claim for office fit out, then please get in touch by emailing: accountants@charnwoodaccountants.co.uk