Café refurbishment: repairs, equipment and the extension
Priya runs a café as a sole trader. Her accounts for the year show a profit of £85,000 after deducting the following items, all of which she has treated as expenses: a new espresso machine £6,000; a replacement grinder £800; a new laptop for the till and bookings £1,200; repainting and repairing the café roof after storm damage £2,500; building a two-room extension for extra seating £30,000; and legal fees of £1,500 to negotiate a new ten-year lease. The old espresso machine was scrapped; it had been fully written off. The roof repair did not improve the roof. The extension includes new electrical wiring and lighting, but no separate integral-feature claim is made. Priya says all the spending was necessary to keep trading and should reduce her tax. She has not claimed capital allowances.
1. Classify each item as revenue or capital and explain the principle you apply.
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The distinction is between expenditure that maintains an asset and expenditure that creates or improves an asset. The espresso machine, grinder and laptop are plant used in the trade; they are capital assets, not repairs, so they are not deductible as revenue expenses but qualify for capital allowances. The roof repair is revenue: it restores the roof without improving it, so it is deductible. The extension is capital because it creates new seating space and enhances the property; it is not plant and machinery, so no capital allowances. The legal fees for the new ten-year lease are capital, as they relate to acquiring a capital asset (the lease), so they are not deductible.
2. Calculate Priya's taxable trading profit, showing add-backs and capital allowances.
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Start with the £85,000 accounting profit, which is after deducting all the items. Add back the capital items: espresso machine £6,000 + grinder £800 + laptop £1,200 + extension £30,000 + legal fees £1,500 = £39,500. The roof repair £2,500 stays deducted. Taxable profit before allowances = £85,000 + £39,500 = £124,500. Claim the annual investment allowance on the plant: £6,000 + £800 + £1,200 = £8,000. The extension and legal fees do not qualify. Taxable trading profit = £124,500 - £8,000 = £116,500. The AIA limit is £1 million, so the £8,000 is fully covered.
3. What difference would it make if the extension had included a separate integral feature, such as a new heating system, and why?
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An integral feature such as a new heating system is specifically treated as plant and machinery for capital allowances, even though it is part of a building. It would qualify for the AIA, so the £30,000 extension cost would need to be apportioned: the integral feature element could be claimed, while the building work itself would remain non-qualifying. Priya should obtain a professional apportionment. The same logic would apply to the electrical wiring and lighting if they were integral features, but on the facts no separate claim is made.