When it comes to buildings, tax laws can produce some strange outcomes. Often in domestic situations we see perfectly good houses knocked down and rebuilt. One of the reasons is that VAT can be recouped on a new build, while this is not the case with repairing a house, no matter how extensive the repair might be. Then when it comes to farming, or any other business, there is an incentive to do the opposite. This is because repairs and maintenance can be written off against tax as a single sum, while a capital investment in a building is depreciated over a lengthy time. This adds a new relevance to make do and mend, which can be more attractive from a tax standpoint. But this is an area where the Revenue may challenge your decision.
When it comes to a building there are effectively three options. These are: new build, which includes an extension; fixtures; or repairs. New build is obvious, but there are grey areas over repairs. Fixtures and fittings are easier, in that they are defined in law as an asset that is ‘installed in or fixed to a building’. Examples would include cold stores, machinery, counters in a farm shop, CCTV in a cattle house, and it is fairly obvious what can be included. There can be grey areas where something has to be built for machinery or to bring in services, but in general this is a reasonably simple area with the Revenue.
When it comes to repairs things are more difficult. The onus is on a business to prove that work carried out was indeed a repair. One thing that will help prevent a challenge is a set of before and after photographs; also potentially useful would be a report from a surveyor stating that the work needs to be done, or if it is a health and safety issue a letter from your insurance company. If the work is being carried out by a builder, make sure the invoice makes clear that it is for repairs and that it defines what these are – for example repairing, as opposed to replacing a roof, rewiring or replumbing.
It is possible that work will involve a mixture of old and new work and this should be specified. For example, if a yard is resurfaced that would be a repair, but if it is extended that would be new work. The same would apply to a farm lane. Under these circumstances the bill can be split between the new build element and the repair.
It is important with plans that they should make clear what the work is, and again whether it is a repair or a mix of repairs and new work – for example ‘repairs to roof and extension to front of building’. Success or otherwise in your tax treatment can depend on something as simple as how an estimate, contract or invoice is worded, so make sure these are not abbreviated for convenience, for example ‘new yard’ when what was meant was ‘repairs to existing yard’.
Unlike a domestic situation, where the person will not be VAT registered, there are no complications with a VAT registered business. Whether the VAT covers repairs, fixtures and fittings or a new build it can be reclaimed on a normal VAT return. On the general tax side, whether a sole trader, partnership or limited company, in general it is a good principle to secure tax relief on expenditure as soon as possible. While the state of farming is such that tax might not be an issue for 2014, making a claim for expenditure as soon as possible can trigger a refund, because of how the balancing charge estimates tax due for the following year. A successful claim for repairs is down to making sure the evidence trail is robust.