My client (who has just started up) has had a cabin erected in her back garden. This cabin has been solely purchased for her to run her counselling/therapy business from and nothing else.
Is this, along with the furniture and fixing costs allowed as a capital allowance? I have researched on HMRC but not entirely sure.
Her profits for her first tax year are very small so If I deduct as a normal expense, which, to me would be wrong as the total value of the cabin is over 4K, she would be coming in at a substantial loss.
I've got exactly the same cunundrum with one of my clients...
Actually...
... For the same business type
... With the same turnover issues
... This business isn't in kent is it? (that would be embarrassing... You would have to send me an ettiquette letter, lol).
I'd actually put the whole thing on the back burner as its an annual client but as you've brought it be good to get this sorted.
I am assured that the cabin is used only for the business (no lawnmower stored up the corner)
My thought is that...
The structure itself would be capitalised and depreciated with no capital allowances available as its a building.
For internal fittings (lighting, plumbing, etc.) capital allowances would be available. (there would be some division between the main and special rate pools).
Furniture used within the building would be capitalised or expensed as normal (dependant upon materialarity).
As basically a glorified garden shed it can be moved in the event of sale of the house so there should be no main residence tax implications.
And then we hit the same problem.
The size of the profits does not justify this type of expenditure. But, my clients argument is that the busienss will grow from the expenditure... Will it grow enough?
And that's where my kununcrum lies as, as far as I can see the expenditure wipes out all current and potential profits of the busienss which in my mind knocks it back from business to hobby status.
What are your thoughts (if we keep batting this too and froe sure we'll get to a definitive answer).
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Your advice pains me a bit, I must say, but I realise that you are right! I actually thought that because the cabin wasn't actually made of brick that it wouldn't be classed as a building (very naive if me)! I've actually told her that I think she will get tax relief on it, so i'm going to have to put her straight on that one.
This is my first client in the two years I have been practising where I have had to start up a pool for capital allowance's so my knowledge on this needs to be brushed up and the cobwebs blown away. I only have one client who when I have took on from another bookkeeper already had a pool open, so I have just easily carried on reducing his balance.
Do you know if there is any online literature that I can read so I can get my brain cogs going again?
I can see what you mean about the turnover increasing to make a healthy profit and account for business expense as well. My client is due to leave her high salary job at the end of the month to concentrate on her new business, so there is no way it can be classed as a hobby but you then ask yourself what else is it if she's not generating a profit? I'm hoping as she will be putting in the majority of her time into it then she will start to increase her turnover.
I'm very happy to help you as much as I can, if I can, your knowledge and experience is far better than mine
I always find this situation is difficult to justify any claim for.
The cabin is clearly a structure from which a business is run, which would not make it P&M, therefore no plant and machinery allowance could be claimed. CA22110 mentions that mobility itself is not enough make it P&M (although it is specifically talking about a chicken shed, I think the same test would apply to any structure that could be dismantled and re erected somewhere else).
A garden shed used for storage of equipment, say for a gardener, may be slightly different, as the business is not being conducted from it, and it could be claimed that it is no more than any other piece of storage equipment (say a filing cabinet). It could be argued that a storage shed was not where business activity took place, just a means to allow a business to carry on. CA22110 quotes St. John's (Mountford and another) v Ward 49TC524
Generally this is another grey area (maybe dark grey)
I would ask what the cabin is made out of and how long is its exspected life? The reason I ask is many structures of this type will not last more than 15 years, and for this reason it could not be consisdered a building, and is unlikely to have CGT implications later!
Capital allowances can be restricted or claimed in later periods. It is more complicated to work out, but not difficult if you know how.
I have actually been to the clients house, the cabin is definitely made of wood but I have no idea of its life span. Is there anyway that you think that she may be able to get some tax relief on this purchase?
The cost of the cabin is surely too much to deduct as a business expense and to carry the loss forward?
Whilst I've been doing a little research this afternoon, I noticed that clients can now claim business mileage from 2012/13 for Self Assessment, is this correct? (Sorry to change the subject).
OK I have researched this over and over again now and I have made it very clear to myself that the cabin is not eligible for capital allowances.
According to CA22030 - Plant and Machinery allowances, the electrics, blinds and furniture are allowable. Do any of you know whether or not the carpet can be included in this, I'm guessing yes but there's nothing like a second opinion.
Also, the guttering for the cabin - would that be part of the cost that should be capitalised with the cabin as a fixed asset or is that eligible for Capital Allowance's?
I will take a look at the link, thank you very much.
I studied Personal Tax and Corporation Tax but you wouldn't think it now that I actually have to put it in to practise, it's such a large scope. I'm so worried I will make a mistake.
