Capital allowances
and Tax reliefs available to retailers

Gemma Brindley, Director at national audit, tax, advisory and risk firm, Crowe UK, looks at capital allowances in retail businesses and discusses the claims and tax reliefs which are available to retailers with regards to new builds, refurbishments and fit outs.

What is allowable?

As a retailer, whether you rent or own your own property, it is vital to business cashflow to understand what claims and capital allowances are available to you. Retail sector owners often overlook substantial tax allowances.

Obvious qualifying items such as chairs, tables and shop displays are claimed. However, when fitting out or refurbishing a retail unit, allowances can also be claimed on integral features such as water systems, heating, air conditioning, lifts, escalators and others, as well as fixtures such as bathrooms and kitchens.

The first thing to think about is whether the work you are carrying out is an improvement or a repair. If it is an improvement, then the cost is treated as capital expenditure (for example, replacing an old kitchen with a new and upgraded one). If you are replacing an item like for like then it can be treated as a repair.

There may be other items during the work that could potentially be claimed for. For example: building work in connection with mechanical and electrical services; acoustic and thermal insulation within existing buildings, and plywood support to partitioning in association with display fittings. It is important to obtain detailed analyses of fit out/refurbishment expenditure so your accountant can identify expenditure qualifying for tax relief. Expenditure to create ambience can also be allowed.

There is no definition of what ‘ambience’ qualifies as ‘plant and machinery’ (P&M) but this can include specialist wall finishes or significant artwork (which is important in the retail trade). It is not always obvious what is significant, which is why a huge level of detail will help in the long term when working through the list to find ways to operate more efficiently.

Changes in allowances

The recent 2018 Autumn Budget announced that the Annual Investment Allowance (AIA) has temporarily increased from £200,000 to £1 million for two years. Before the Budget if someone had spent £200,000 on qualifying expenditure this could be claimed in full in the tax computation. The extension to up to £1 million creates much more scope for tax savings.

The Writing Down Allowance (WDA), the percentage of the value of assets that a company can include in its profit calculation for a particular period to reduce the amount of tax it pays, has been reduced from 8% down to 6% for items integral to the building such as electrics, insulation and other aspects.

"It is important to ask builders for a detailed schedule of works and to be sure to use builders who have the experience to do this"

Also enhanced capital allowances (ECA) should be considered, where 100% allowances can be made as a reward for energy efficiency in refurbishments and fit outs. The government is keen to continue to reward energy efficient lighting and heating, details of which can be found on the energy efficiency list along with other items. To find out what is eligible take a look at the government’s guidance.

Also announced in the 2018 Autumn Budget was the structures and buildings allowance (SBA) for non-residential structures and buildings. This means that there will be allowances on eligible construction costs incurred on, or after 29 October 2018 at an annual rate of 2% of cost.

Get your tax advisor involved from the start

Seeking specialist advice is always a good idea. It can be difficult to claim after works have been completed, so it’s very important to get your tax advisor involved as soon as you can. For example, if a factory is installing a large piece of machinery that is heavy, then it will need a reinforced floor that costs more to install.

If the builders know this then the tax advisors can be informed and this cost can be accounted for. Retrospective claims are possible, but typically the majority of the detail is lost which restricts the claim.

One example of this relates to the extension and renovation of a hotel on which Crowe were advising. Total spend of the extension and renovation was around £10 million. A retrospective claim secured a very large capital allowances sum for the client. However had Crowe been involved at the start we would have been able to claim significantly more.

It is important to ask builders for a detailed schedule of works and to be sure to use builders who have the experience to do this kind of detailed work in relation to accounting. It could make a significant difference to the amount of tax that can be saved.

Gemma is Corporate Tax Director at national audit, tax and advisory firm Crowe UK and has worked with commercial and residential clients for over 17 years.