The Accidental Smallholder Forum
Community => Coffee Lounge => Topic started by: Womble on July 17, 2016, 08:28:41 pm
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Hi folks,
I've just sent my first year's smallholding sole trader accounts off for my accountant to review, but they've replied to say that I can't claim capital allowances for "improvements to land or preparation of land for any sort of structure" (we spent rather a lot improving field drainage last year). Likewise, they don't want me to claim for the costs of repairing our hay shed, because it's a fixed thing, and cannot be moved or sold.
I thought this was fine initially, as it could be taken as a revenue cost (i.e. in the same year, rather than depreciated over several years), but it seems now that I can't claim any of these costs at all?
I'm now mightily confused. If a 'proper' farmer improves their field drainage or repairs their hayshed, how on earth do they pay for it if not out of farm money? ???
Can anybody ( [member=26320]doganjo[/member] ?) explain this for me in plain English please? :)
Thanks! :thumbsup:
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I think there are different rules for what can be claimed as expenses by self-employed versus limited companies.
Good luck trying to fathom out the logic of tax rules!
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Get another accountant. Repairs and maintainance are legitimate business expenses, sole trader or otherwise.
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Have you repaired or improved from what was there originally? If repair it's tax allowable, if it is an improvement you can't
The general position is that the cost of a repair is normally allowable expenditure, but replacing the asset or making a significant improvement to the asset as a whole (the 'entirety') will be capital expenditure and not allowable as a deduction.
More details:
Repair means the restoration of an asset by replacing subsidiary parts of the whole asset. An example is the cost of replacing roof tiles blown off by a storm. There won’t be a repair if a significant improvement of the asset beyond its original condition results - that will be capital expenditure. For instance, there will be a capital improvement if the taxpayer takes off the roof and builds on another storey.
A repair is normally a revenue expense that can be deducted in computing rental business profits.
These are normally deductible
• exterior and interior painting and decorating,
• stone cleaning,
• damp and rot treatment,
• mending broken windows, doors, furniture and machines such as cookers or lifts,
• re-pointing,
• replacing roof slates, flashing and gutters.
The cost of land and any buildings on it is capital expenditure. So is the cost of any new buildings erected and any improvements.
capital expenses NOT deductible include:
• expenditure which adds to or improves the land or property; for example, converting a disused barn to a holiday home,
• the cost of refurbishing or repairing a property bought in a derelict or run-down state,
• expenditure on demolishing a derelict manufacturing building to clear space for a new office building;
. the cost of a new building,
• the cost of building a car park next to a property that is let,
• expenditure on a new access road to a property
Head sore yet? :eyelashes: You did ask! :innocent:
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Aha, that makes a bit more sense.
Re-reading the Email, I think they've misunderstood the hayshed repair, thinking it was an improvement (it wasn't, so that should be allowable after all).
I think they're saying that the drainage works aren't allowable because it is "improving the land or property", from your link below Doganjo. On your list, it's a bit like the 'building a new car park next to a property". However, I think there's a decent argument here to say that we were actually repairing the clogged field drains, by digging them up where they were blocked, and replacing those sections. This is of course absolutely true, but I may have inadvertently muddied the waters by recording it as 'drainage improvements'.
Watch this space!
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Addendum - if you are VAT registered you can claim back the VAT on all repairs and some improvements, depending on the nature of these - VAT people are now very helpful. Ask them if unsure but be sure in your own mind exactly what it is you have done before you do.
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Aha, that makes a bit more sense.
Re-reading the Email, I think they've misunderstood the hayshed repair, thinking it was an improvement (it wasn't, so that should be allowable after all). I may have inadvertently muddied the waters by recording it as 'drainage improvements'.
Watch this space!
Exactly - the works have improved your land and your life, but they are not 'improvements' as such to what was already there - i.e there were land drains already, you have repaired and possible replaced bits of them, but you haven't improved them, other than a bit of more modern type of drainage.
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OK, my accountant has read up on this and taken advice from others, and their considered view is that materials for repairing the hayshed are allowable. However, they say that money spent re-laying field drains and demuddifying gateways is not allowed as a tax deductable expense, though we can claim the VAT back.
So, whilst as per the posts below I could probably challenge this further (or get [member=26320]doganjo[/member] to do my acccounts instead ;D ), I'm going to let it go as I want everything to be above reproach if we are ever questioned.
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I think they are wrong - but you can ask the HMRC local office for a definitive answer. They are very approachable these days and will not hold it against you for asking.
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I have a 'repair and maintenance' column in my accounts spreadsheet (made by my accountant, who is also a smallholder herself) drainage works in fields is maintenance - you HAVE to have good fields in order to keep livestock/have a business.
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So, whilst as per the posts below I could probably challenge this further (or get [member=26320]doganjo[/member] to do my acccounts instead ;D ), I'm going to let it go as I want everything to be above reproach if we are ever questioned.
HMRC do not take the approach of whether a matter is being above reproach - they view things by fact only. The best way to find out for both yourself and others on here is to make an appointment with them, take drawings of what was there before and what is there now, if possible, and a full written explanation of it all, including materials used. They will then issue a 'decision' on the matter.
If I am proved wrong then I apologise - but being retired and running two charities I don't really need more work anyway lol :eyelashes: But I'd be interested to know. :innocent:
I did think of asking your accountant's name but thought that a bit awkward, but do you know whether they are 'chartered', 'management', 'financial', or 'cost' accountants?
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Hmmm, They are 'proper' chartered accountants, though it must be said not that experienced with farming matters. They therefore took advice on this from another accountant who does more work in this area, and received this response which they forwarded on to me:
There used to be an Agricultural Buildings Allowance (similar to Industrial Buildings Allowance) which allowed capital allowances on buildings and land related improvements such as drainage work, but unfortunately that was phased out and disappeared around 2011/12. This leaves farming to apply the same repairs/capital expenditure principles as for other businesses with capital allowances only being claimable on items that can be recognised as plant and work on land/buildings only being claimable on the usual repairs/replacement
Unfortunately in your client's position, it looks more like improvement work to the land which won't qualify for relief.
The honest truth is that I'm just happy to have nice grass growing in my field, and to be able to drive the Landy across without getting stuck! ;D
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Yes, I know about those changes, but that's Capital allowances they're talking about. What you have done is normal maintenance not 'improvements'
Stuffy is the word. Do you pay a lot of tax on your enormous income from the smallholding? :roflanim: Perhaps they're not worth their supposedly enormous fees.
You could use a software package and submit your own tax returns :innocent:
Funnily enough someone asked me for a small farm package the other day - haven't looked for one yet. Do you use excel for recording everything?
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You know, I'd really rather not talk about my enormous smallholding income too much. I'm embarrassed to admit just how much money we make for so few hours effort :roflanim: .
I've been using Excel to date, but I'm just about to switch to Free Agent (http://www.freeagent.com/) for recording the accounts, as that's what I use for my main job (http://www.processlogic.co.uk/), so I'm really familiar with it.
That's the same reason for sticking with the same accountant for everything, even though they're not farm specialists. They are willing to treat the farm income as an add-on to my tax return, so this works out cheaper.
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CA and ACCA.
However, I'm a Chartered Engineer myself and I still make mistakes! ;D
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I was an apprentice CA, failed my finals(when I look back and in view of current ideals, it was totally due to discrimination - no working experience allowed to me on the subjects required - I was used as a checker effectively)
That said, I took an HNC in accounts after I had my kids, and reached A passes in all subjects, then worked ina number of NHS, commercial, and oil company posts as Company accountant, lead accountant, etc, and now accountant for two charities - 3rd Sector - - so I am what most people call QBE.
I know there's not a great sum involved, but I feel there's a principle involved here. I still think you should ask HMRC, explaining exactly what you did.
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DJ & SD - I think you could be right!: (see page 4 here (http://www.whitingandpartners.co.uk/Pages/DocumentManager/Farming_Group_Newsletter_Winter_2013.pdf))
New or repairs? Once a simple question but
now complicated by recent changes in tax
legislation. Any farmer considering a new build
or remedial works to infrastructure should take
advice and proceed with care.
Until their abolition in 2011 Agricultural
Buildings Allowances offered tax relief on
capital expenditure on new buildings and other
works. Although no reliefs or capital allowances
normally apply to the shell of a building, some
integral features may qualify for relief as may
anything that qualifies as plant and machinery.
Moving away from items specifically qualifying
for capital allowances we reach the accountants’
favoured ‘grey area’ where the division between
capital and revenue expenditure is blurred.
If expenditure can be categorised as repairs,
a full write off can be claimed. Lawyers dine
out on the case law around the definition of
‘repairs’ and HMRC‘s guidance notes seem
to deny relief where there is some element of
improvement although, for example, there are
specific paragraphs in the Revenue Manuals
confirming that a drainage scheme can
qualify as repairs provided it replaces a prior
comparable scheme.
Works which restore buildings or infrastructure
to their original function are in line with the
general principle of ‘making good’ provided any
element of improvement represents no more
than the application of contemporary materials.
Where there are elements of improvement and
of repair, costs should be split. Giving earlier
thought to this can enable the gathering of
appropriate evidence in support of the claim
for relief.
In our case, we had two areas of the field where 'springs' were bubbling up out of the ground. When I dug holes to see what was going on, I hit old clay field drains, which were blocked downstream of the 'spring', and were hence leaking water out which then bubbled to the surface.
The repair involved getting a digger in to dig up the existing blocked / shattered clay drains from the 'spring' down hill, and to replace them with plastic pipe. So, if that's not a repair, what is? Just got to convince my accountant now! ;)
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Copy and paste this into your letter - and tell him you are going to ask HMRC for advice. As I said a few hundred pounds tax isn't the issue here. Just don't let this feel like part of your 'day job' :roflanim:
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Don't forget you're paying your accountant to be on your side. Is he making enough of an effort?
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With regard to asking HMRC about tax issues, we went on a course run by HMRC for new small business owners. All the way through the course it was emphasised that if we were in doubt, to contact them for advice, and contrary to some views, if you do ask questions, seek advice etc it is less likely to prompt a visit from the inspectors, as they will categorise you as someone who is trying to get it right. In this case I would definitely ask HMRC for their view. In my lay person view, fixing land drains is a repair not an improvement.
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couldnt there be an arguement for both sides though? For example it is definitely the repairing of a drain, but they could argue that the improvement part is when you replaced the clay for plastic? Thus improving the drain and its efficient working. :thinking: Soz I am just trying to see both sides of the coin here :innocent:
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Except new plastic is far cheaper than new clay.....
I've bounced it back to my accountant anyway (which will be funny if they google this, because this thread is now the second hit when searching for tax treatment of farm drainage :roflanim: ). I'm not going to fall out with them over it though - our smallholding is primarily about living an enjoyable sustainable life; I have enough accountancy worries without overcomplicating the farm stuff!
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Yes, but they need to get it right for other clients!