As we are fast approaching the self assessment filing deadline for individuals and the amendment window for corporate entities with a year end of March, understanding the importance of what constitutes capital or revenue expenditure, and the risks and benefits associated with it, is extremely important; often we see expenditure incorrectly allocated as revenue deductions.
HMRC enquiries are on the rise across the tax regimes and ensuring accuracy in your return has never been more important and the distinction between Capital and Revenue is not as simple as it may seem and with several large profile cases which have gone through varying stages of legal review focussing around the principles of like for like replacement, modern day equivalents or the concept of entirety.
Where all or large proportions of a capital project have been incorrectly allocated as a revenue deduction, the tax payer themselves could be subject to a fine of up to 100% of the “percentage of tax lost” so for instance on a £1m refurbishment, if this had previously been all classed as revenue expenditure, but actually £500k of this was capital in nature, to an individual the penalty could be upto £225k. The burden of the fine will sit with the tax payer, who have a duty of care to check their returns for inaccuracies.
Expenditure of a capital nature not qualifying for revenue deductions should instead be identified as capital allowances where possible, especially with the generous current 100% full expensing allowances, and prior to that the 130% super deduction, offering considerable tax relief.
We work with a variety of accountants and tax advisors who seek specialist advice in respect of this complex area of tax law. If you require any advice in respect of this matter then please reach out to a member of the Veritas Team who have a strong track record of correctly analysing capital and revenue expenditure on projects, and successfully negotiating these with HMRC where required to do so.