Is it capital or is it a repair?
Where assets are bought in defective condition or repairs are needed shortly after purchase.
Sometimes when an asset is purchased, it is in need of repair and shortly after acquisition, money is spent on its repair. The expenditure would have been treated as repairs had ownership of the asset not changed. The repairs are normally revenue.
Cases where this general rule will not apply are where:
- The asset was not in a fit state for use until the repairs had been carried out
- There is evidence that the purchase price of the asset was reduced to take account of the dilapidated state of it. However, this does not apply to the reduction in value of an asset due to normal wear and tear
- Where the asset purchased is a lease, if one of the conditions of the lease is a covenant to reinstate the property to a good state of repair
HMRC guidance states that if abnormally heavy repair expenditure is incurred on an asset shortly after a change of ownership it is likely to be capital. But expenditure that recurs at intervals of a few years (e.g. external painting) which in the normal course of events falls to be spent shortly after acquisition should be allowed.
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