Office Fit Out Tax Relief (Intro)
Are you preparing for an office fit out, and looking for ways to minimise the cost? You know that tax relief is available and is worth exploring. However, you’re not sure what is available, much less the best way to use it. If this sounds like you, you’ll be looking at how to maximise capital allowances for your office fit out.
Corporation tax in the UK is currently at 25%, up from 19% last year. This means maximising the available tax relief schemes can save you up to 25% of your office fit out costs. Investing in an office fit out can also be a very tax-efficient way of re-investing operating profits.
In this article, we’ll explain why repairs are automatically deductible. We’ll then go through the most important capital allowance schemes for office fit out. We’ll also explain how you can apply these to your office fit out. By the end, you’ll have a good understanding of how to carry out your office fit out in the most tax-efficient way. You’ll be able to work with your project designer and tax accountant to do so.
Before we start, you should know that all of the guidance in this article is specific to taxes and legislation in the UK, correct at the time of writing. Tax law varies from country to country and regularly changes. You should always consult with a qualified tax accounting expert before proceeding.
To learn more about office fit out costs, download your office fit out cost guide. It’s one comprehensive guide to help you understand office fit out costs per sq/ft, what affects office fit out costs, how to choose your fit out specification, why some fit out companies are more expensive than others, and how to define your office fit out project needs. Download your costs guide here.
Are Office Fit Outs Deductible?
Most companies know that a lot of expenditure for office refurbishments is tax deductible because they are classed as a repair, which is a revenue expense. What is less known is that the same tax relief schemes apply to the fit out of new offices. These can generate significant after-tax savings of up to 25%. Almost every office fit out will be able to benefit from some form of tax relief.
Because it is not well understood, many companies don’t claim all the tax reliefs to which they are entitled. This is often due to a design that doesn’t suit relevant tax schemes and poor communication between you, your design & build company, and your finance team. However, with clear planning and good communication you can ensure your office is out is as tax efficient as possible.
If your scope involves repairs, they can be classed as a revenue expense. This means they are 100% tax deductible- creating effective savings of 25%. According to the UK government website, “If as a result of the work the asset can simply be used to do the same job as before then it is likely to be a repair and therefore allowable expenditure.” This applies to any repair works, regardless of whether you are carrying out a refurbishment or fit out. However, fitting out a new office will not typically require much repair work.
Common examples of works classed as repairs include HVAC maintenance and office redecoration. It’s also important to note that the “repair” doesn’t necessarily have to be a like-for-like replacement. It can also be a “modern-day equivalent”. An example of this would be replacing single-glazed windows with double-glazed alternatives.
If the changes to your office involve installations of new features or upgrades to existing ones, then this is classed as an improvement. As a result, it cannot be classed as a tax-deductible revenue expense. However, this doesn’t mean there are no tax reliefs available. There are various tax schemes designed to encourage investment and reduce the after-tax cost of property improvements. Here, we’ll explain the two most important. These are the annual investment allowance (AIA) and the writing-down allowance (WDA).
Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) is a form of tax relief designated for the purchase of business equipment. Eligible purchases qualify for a 100% tax deduction – creating effective savings of 25%. The AIA has an annual cap of £1,000,000. How much you save on your office fit out depends on how much you are already investing in eligible assets and the amount of tax you are currently paying.
Most assets purchased for business purposes can be claimed as qualifying expenses for AIA. The categories most relevant for office fit out are:
- Office equipment including computer hardware and certain types of software, and office furniture
- Parts of a building referred to as integral features
- Certain fixtures, such as air conditioning, fitted kitchens, or bathroom fittings.
The AIA is the most beneficial tax relief scheme for office fit out, as it will cover most of the work and is a 100% tax reduction. This should be used as much as possible for your project.
Writing Down Allowance (WDA)
If your office fit out is more than £1,000,000, or you have already used your AIA for other investments, you can make use of the writing down allowance. The WDA lets you deduct a percentage of the value of certain items from your profits each year. This is grouped into 3 sections:
- Main pool - 18% deduction
- Special rate - 6% deduction
- Buildings rate - 3% deduction
The main pool rate includes all plant and machinery. This is defined as items that you keep to use in your business, excluding leased items, entertainment items, land, structures, and buildings. The special rate pool applies to integral building features and insulation. The buildings rate pool covers the purchase, construction, or renovation of all buildings.
Under the WDA, furniture would qualify for the main pool, HVAC works would qualify for the special rate pool, and solid partitions would be covered by the buildings rate pool. As this tax relief is a lot more restrictive and not as generous as the AIA, it should only be used where the AIA does not apply.
How to Maximise Tax Benefits for Your Office Fit Out
Your project and tax situation are both unique, so you should consult a qualified tax accountant about your office fit out. However, as a general rule, you should classify everything you can as a repair. As an expense, they are automatically tax deductible, and have no limit. You should then use your AIA as much as possible, as this is also a 100% tax deduction. If you have already exceeded your AIA, you can use your WDA. This has no cap, but the deduction percentages are much smaller.
Below is a simplified cost summary for a fictional project. This is to demonstrate how tax savings can reduce the costs of your office refurbishment.
Partitioning & Joinery
Power & Data
*This amount can be deducted from your tax liability annually. As the other schemes are 100% deductions, they only apply to the first year.
In this example repair and decoration are first assigned as expenses, a total of £65,000. Partitioning and joinery are part of the building, so have been assigned under WDA at the 3% rate. Normally, everything else would then be assigned to the AIA. However, this exceeds the £1,000,000 limit, so the CCTV has been assigned to the WDA.
It may not always be possible or practical to use different tax allowance schemes for the same project. You will need to work with your office design & build company to create an appropriate design and scope of work. You should always consult a qualified tax expert before proceeding.
Planning Your Office Fit Out
Making sure your office fit out is as tax efficient as possible is crucial to a successful project. It can save you up to 25% of your project costs – funds that can be used to increase the quality of your office, or reinvested into other areas of the business. Because of this, it’s a very tax-efficient way to re-invest operating profits from your business operations.
You now know about the most important ways of saving tax on your office fit out. You're now ready to work with your design & build company and your tax accountant to create an office fit out plan that maximises tax relief. This will create significant savings for your project.
To learn more about office fit out costs, download your office fit out cost guide. It’s one comprehensive guide to help you understand office fit out costs per sq/ft, what affects office fit out costs, how to choose your fit out specification, why some fit out companies are more expensive than others, and how to define your office fit out project needs. Download your cost guide here.
To learn more about the best ways to pay for your office fit out, read The 4 Best Ways to Finance Your Office Fit Out. We’ll explain each of the top 4 office fit out financing options in turn, and then help you make the right decision for your company.