Capitalised expenses related to commercial building purchase
Discussion
Can anyone could help with the following?
In 2006 my ltd company bought a commercial property to operate from, looking through the 2006 draft accounts prepared by my accountant I see that they have capitalised all of the costs relating to the purchase, (stamp duty, solicitors fees, mortgage security and lending fees etc) whereas I had treated them all as expenses (as I tend to do....). Because these costs have been capitalised my nett profit and hence corporation tax bill have increased.
Does anyone know if these costs should be capitalised and if so, can they be depreciated over time (for tax purposes)?
Thanks in advance for any suggestions.
In 2006 my ltd company bought a commercial property to operate from, looking through the 2006 draft accounts prepared by my accountant I see that they have capitalised all of the costs relating to the purchase, (stamp duty, solicitors fees, mortgage security and lending fees etc) whereas I had treated them all as expenses (as I tend to do....). Because these costs have been capitalised my nett profit and hence corporation tax bill have increased.
Does anyone know if these costs should be capitalised and if so, can they be depreciated over time (for tax purposes)?
Thanks in advance for any suggestions.
Your accountant is essentially correct.
All costs relating to the purchase of an asset - in this case, legal fees, Stamp Duties, search fees etc etc, should be included as part of the cost of the asset.
They are one off costs associated with the basic asset and are not part of the normal trading costs.
That means, of course, that these asset related costs are not available to be offset against normal Corporation Tax profits.
That's the bad news.
The good news is that those costs become part of the "Base Cost" of the asset and will therefore be fully allowable as an offset against any Capital Gains accruing when the asset is eventually disposed of.
Of course, that could be many years down the line.
The correct accounting treatment of an asset (including buildings - but not land - sort that one out
) is to apply depreciation to that asset calculated to write off the cost of the asset over its expected economical life. Unfortunately, in most circumstances, the Revenue do not allow accounting "Depreciation" as an allowable cost for tax purposes. They replace depreciation with their equivalent called "Capital Allowances". Equally unfortunately, Capital Allowances are not available on office premises.
All costs relating to the purchase of an asset - in this case, legal fees, Stamp Duties, search fees etc etc, should be included as part of the cost of the asset.
They are one off costs associated with the basic asset and are not part of the normal trading costs.
That means, of course, that these asset related costs are not available to be offset against normal Corporation Tax profits.
That's the bad news.
The good news is that those costs become part of the "Base Cost" of the asset and will therefore be fully allowable as an offset against any Capital Gains accruing when the asset is eventually disposed of.
Of course, that could be many years down the line.
The correct accounting treatment of an asset (including buildings - but not land - sort that one out
) is to apply depreciation to that asset calculated to write off the cost of the asset over its expected economical life. Unfortunately, in most circumstances, the Revenue do not allow accounting "Depreciation" as an allowable cost for tax purposes. They replace depreciation with their equivalent called "Capital Allowances". Equally unfortunately, Capital Allowances are not available on office premises.Edited by Eric Mc on Saturday 11th August 12:43
Eric Mc said:
Equally unfortunately, Capital Allowances are not available on office premises.
This is not correct. Whilst Capital Allowances are not available for the building itself, there are plenty of items within an office building that are available for capital allowances. Edited by Eric Mc on Saturday 11th August 12:43
These are principally plant and machinery items. On a purchase, an apportionment formula is used comprising the value of the land, the estimated replacement cost of the building and the qualifying plant and machinery. This gives a multiplier that you can use to increase/decrease the value of the p&m and thus your capital allowances claim.
I don't know about your building but there is a good chance there are items within that are claimable and thus can be used to reduce your taxable profit (provided you own the relevant interest)
I was referring to the building - not the internal fittings and plant and machinery purchased for installation in the building.
There is a long and illustrious history of tax case law which has set out over time what the Revenue consider to be "Plant and Macinery" rather than the integral structure of the building.
As ever on PH, I tend to answer questions and queries in as simplified a manner as possible so as not to cause too much confusion.
I am well aware that the detailed legislation and the tortured path of legal definitions can make matters far more complicated than my simple answers can sometimes lead people to believe.
There is a long and illustrious history of tax case law which has set out over time what the Revenue consider to be "Plant and Macinery" rather than the integral structure of the building.
As ever on PH, I tend to answer questions and queries in as simplified a manner as possible so as not to cause too much confusion.
I am well aware that the detailed legislation and the tortured path of legal definitions can make matters far more complicated than my simple answers can sometimes lead people to believe.
Eric Mc said:
I was referring to the building - not the internal fittings and plant and machinery purchased for installation in the building.
There is a long and illustrious history of tax case law which has set out over time what the Revenue consider to be "Plant and Macinery" rather than the integral structure of the building.
As ever on PH, I tend to answer questions and queries in as simplified a manner as possible so as not to cause too much confusion.
I am well aware that the detailed legislation and the tortured path of legal definitions can make matters far more complicated than my simple answers can sometimes lead people to believe.
I already have a valuation of fixtures and fittings booked, sadly I don't think I can get the value above a few percent of the total value of the premises. I'm just a bit pissed that all the entries I had coded as legal and professional fees have been re-coded and capitalized, especially when I consider the paid for time someone at the accountants has spent identifying them all (or most of themThere is a long and illustrious history of tax case law which has set out over time what the Revenue consider to be "Plant and Macinery" rather than the integral structure of the building.
As ever on PH, I tend to answer questions and queries in as simplified a manner as possible so as not to cause too much confusion.
I am well aware that the detailed legislation and the tortured path of legal definitions can make matters far more complicated than my simple answers can sometimes lead people to believe.
).Maybe you should chat to CQ8 to see if those legal and related purchase costs can be included in any formulae which attempts to extract from the overall purchase of the building that portion of the total costs which might relate to internal fixtures and fittings and/or plant and machinery which might be eligible for a normal Capital Allowance claim.
When you bought the building, did it come with much in the way of internal fittings. As CQ8 said, certain fittings can be claimed on - examples being moveable partioning or moveable furniture. Evem wood panelling has been allowed (in one rather odd case).
When you bought the building, did it come with much in the way of internal fittings. As CQ8 said, certain fittings can be claimed on - examples being moveable partioning or moveable furniture. Evem wood panelling has been allowed (in one rather odd case).
Eric Mc said:
I was referring to the building - not the internal fittings and plant and machinery purchased for installation in the building.
There is a long and illustrious history of tax case law which has set out over time what the Revenue consider to be "Plant and Macinery" rather than the integral structure of the building.
As ever on PH, I tend to answer questions and queries in as simplified a manner as possible so as not to cause too much confusion.
I am well aware that the detailed legislation and the tortured path of legal definitions can make matters far more complicated than my simple answers can sometimes lead people to believe.
Sorry Eric, wasn't questioning your knowledge, just clarifying something. You are the accounting guru here, and the knowledge you have demonstrated above is probably more than all the accountants combined that I have dealt with! And that includes people who work for the big 4 and specialise in capital allowances!!There is a long and illustrious history of tax case law which has set out over time what the Revenue consider to be "Plant and Macinery" rather than the integral structure of the building.
As ever on PH, I tend to answer questions and queries in as simplified a manner as possible so as not to cause too much confusion.
I am well aware that the detailed legislation and the tortured path of legal definitions can make matters far more complicated than my simple answers can sometimes lead people to believe.
As for the fees these would usually be included within the apportionment for both the qualifying and non-qualifying items. Essentially, when you bought the building you also were buying the p&m within and therefore the fees you paid in the purchase apply to those items as well as the fabric of the building and the land. When you apportion the fees over everything it should result in an increase in your claim.
Highest value items to claim in offices would be all heating/air-con (inc suspended ceiling if the void acts as a plenum), carpets, lifts, a percentage of the electrical installation (but not all), fire alarms & sprinkler, sanitaryware, anything with an electrical motor (ie roller shutter doors but only the motor), some fixtures (ie furniture but based on fixtures legislation). The list goes on but there are many items that most people would not consider to be immediately claimable.
Depending on the area the building is located (hence land value part of the apportionment) and the level of P&M within the building, I would expect you to get more than a few percent of the purchase price. A very, very broad rule of thumb for an office building is 25% of the purchase price.
CQ8 said:
Eric Mc said:
I was referring to the building - not the internal fittings and plant and machinery purchased for installation in the building.
There is a long and illustrious history of tax case law which has set out over time what the Revenue consider to be "Plant and Macinery" rather than the integral structure of the building.
As ever on PH, I tend to answer questions and queries in as simplified a manner as possible so as not to cause too much confusion.
I am well aware that the detailed legislation and the tortured path of legal definitions can make matters far more complicated than my simple answers can sometimes lead people to believe.
Sorry Eric, wasn't questioning your knowledge, just clarifying something. You are the accounting guru here, and the knowledge you have demonstrated above is probably more than all the accountants combined that I have dealt with! And that includes people who work for the big 4 and specialise in capital allowances!!There is a long and illustrious history of tax case law which has set out over time what the Revenue consider to be "Plant and Macinery" rather than the integral structure of the building.
As ever on PH, I tend to answer questions and queries in as simplified a manner as possible so as not to cause too much confusion.
I am well aware that the detailed legislation and the tortured path of legal definitions can make matters far more complicated than my simple answers can sometimes lead people to believe.
As for the fees these would usually be included within the apportionment for both the qualifying and non-qualifying items. Essentially, when you bought the building you also were buying the p&m within and therefore the fees you paid in the purchase apply to those items as well as the fabric of the building and the land. When you apportion the fees over everything it should result in an increase in your claim.
Highest value items to claim in offices would be all heating/air-con (inc suspended ceiling if the void acts as a plenum), carpets, lifts, a percentage of the electrical installation (but not all), fire alarms & sprinkler, sanitaryware, anything with an electrical motor (ie roller shutter doors but only the motor), some fixtures (ie furniture but based on fixtures legislation). The list goes on but there are many items that most people would not consider to be immediately claimable.
Depending on the area the building is located (hence land value part of the apportionment) and the level of P&M within the building, I would expect you to get more than a few percent of the purchase price. A very, very broad rule of thumb for an office building is 25% of the purchase price.
Further to my comments regarding the new Capital Allowance regime coming in next year, here is Rebecca Benneyworth's take on the implications of the changes. It makes interesting reading.
http://www.accountingweb.co.uk/cgi-bin/item.cgi?id=171408&d=1032&h=1019&f=1026&dateformat=%
http://www.accountingweb.co.uk/cgi-bin/item.cgi?id=171408&d=1032&h=1019&f=1026&dateformat=%
Edited by Eric Mc on Sunday 12th August 13:00
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