Capital Allowances
When calculating a trading profit, expenditure on items that have a useful life of less than one year are generally referred to as ‘revenue expenses’.
The full cost of that expenditure can usually be claimed against the relevant source of income, providing it is incurred wholly and exclusively for the trade.
Capital assets with a longer useful life have an enduring benefit to the business and as such the full cost cannot be deducted at the time of expenditure.
However, relief can be available by way of what is known as capital allowances for some assets purchased and used in the trade, such as plant and machinery.
Other than that, there is no relief for expenditure on capital assets.
No tax relief is available on the capital cost of a new building; however, the plant and machinery within that building may well attract allowances.
There are different forms of calculating relief for capital allowances. The Annual Investment Allowance (AIA) gives 100% relief for purchases of plant or machinery, currently up to £200,000 per annum. Any balance of expenditure not covered by an AIA would qualify for a writing down allowance either at 18% or 8% depending on the type of expenditure.
The rules on Capital Allowances are complex and it is advisable to seek specialist advice.
Expenditure deductible from trading income
If the club is trading (making profits from non-members) then it can claim relief for expenditure incurred wholly and exclusively for the trade.
The claimable expenditure will generally fall into one of the following three categories:
- Wholly for members
- Wholly for non-members
- Both for members and for non-members
It is easy to see that the expenditure incurred wholly for members will not be allowable (as the income from members is exempt) and expenditure wholly for nonmembers will be allowable (as the income from non-members is taxable).
The difficulty is deciding how much of the mixed expenditure should be allowable as a deduction. HMRC will normally allow an apportionment on a just and reasonable basis i.e. number of member’s vs non-members.
Bar income from members and non-members
As only profits from non-members are taxable it is essential to be able to identify the income from non-members as opposed to members.
Income from Property
Allowable costs include insurance, repairs, management fees, rent and rates. Any other costs incurred purely in connection with the rental of the property will normally be allowed as a deductible expense. Investment Income – i.e. bank interest.
No expenses should be incurred in respect of investment income and as such no deductions are available.
Disposals of Capital Assets – such as land and buildings
The original cost of the asset, the costs of purchasing that asset (such as solicitor’s fees, stamp duty), the costs of sale (again solicitor’s fees and estate agent’s costs) and any expenditure incurred on ‘enhancing its value’ (such as an extension) will be deductible.
There is also a measure of relief that aims to counteract the effects of inflation and is called ‘indexation’.
The above costs are all added together to create the overall ‘base cost’ of the asset and this is deducted from the proceeds to calculate any gain / profit on the disposal.
These guidance notes provide details of corporation tax which are relevant to community rugby clubs. It is written in general terms and cannot be relied upon to cover specific situations. Clubs are reminded that they should therefore seek their own independent professional advice. The notes have been prepared by Jerroms Business Solutions Ltd and is correct to the best of their knowledge and belief at 30th June 2017.The author takes no responsibility for any consequence of a user or club placing reliance on this guidance.
