Chris Williams looks at the possible tax implications for businesses of damage to assets caused by the recent bad weather.
If your business has fallen victim to the bad weather that struck this winter, then you are likely to have been more concerned with getting the business running again than the niceties of how the taxman will treat your expenditure. You may still be waiting for waters to subside, tradesmen to start work or replacement items to arrive. But ultimately you will need to consider how the taxman will view your expenses, and you don’t want to add insult to injury by paying tax just because you have received an insurance payment to cover your loss.
A tip - allowable provisions:
If your repairs are not covered by insurance and won’t be completed before your accounts year end make sure you obtain proper estimates of the costs of all the repairs you will have to make and include them in this year’s accounts to reduce your profit. Provided you are committed to making repairs that have become necessary, this ‘provision’ for their costs should be allowable.
Repair or replacement?
Repairs should not cause tax problems because they are generally allowable regardless of whether they are caused by weather or wear and tear. The one thing to watch out for here is if the work done goes further than simply restoring your asset to its former condition. If the work improves the asset HMRC may disallow the cost. The basis of comparison here can be difficult to determine, but it isn’t just the state the asset was in immediately before the damage occurred. Any work that restores the asset to normal working order, even ’good as new‘, should be allowable so long as the asset had been in full working order and used in the business at some time before it was damaged.
Example - Repairs and improvements:
Morrison acquired his van second-hand, but had used it for years and its engine was worn but working. The floods swamped and ruined the engine and damaged the body. He replaced the engine with a new one and replaced the body with a new, bigger load section, which he fitted out as a workshop.
Replacing the engine counts entirely as a repair, but the bodywork has clearly been improved. The improvement element needs to be analysed out and treated as an addition to the cost of the vehicle for capital allowances purposes. The availability of capital allowances should mean that there is very little effect on his ultimate tax bill, but incorrect recording of the expenditure could lead to time-consuming, potentially costly enquiries.
Insurance:
Insurance receipts will usually be taxable if you have been able to claim a deduction for the premiums. Insurance of a business asset, or to meet costs related to business interruptions and possible client claims should be a deductible expense, so you will have to bring the receipts into account.
If the insurance covers costs that you would be able to claim as a business expense, such as repairs or hire of temporary equipment such as dehumidifiers and heaters, you should include both the full expenditure and the insurance repayments received.
If the insurance related to a capital asset that was destroyed or severely damaged, it may count as a disposal, or part disposal, of the asset concerned, such as a building that becomes unsafe and has to be demolished and replaced.
If you then rebuild your existing premises or buy new you should be able to claim ‘roll-over relief’. If you reinvest all the disposal proceeds in replacement assets you may eliminate the immediate chargeable gain completely.
Practical Tip:
If you have made a gain on disposal of business assets, claiming roll-over relief may not be the best idea if you’re self-employed: if the gain is covered by the annual exemption, use that and your assets will have a higher base cost to set against the eventual disposal proceeds.
