Capital Expense vs. Revenue Expense
Before we look into furniture specifically, let’s clarify the difference between capital and revenue expenses.
This type of expense involves purchasing assets that provide lasting benefits to a business. These assets are typically used over several years and are considered investments. Examples include buildings, machinery, and, as we’ll see, certain types of furniture.
Revenue expenses, on the other hand, are costs incurred in the day-to-day operation of a business. These expenses are deducted from the revenue generated during the same accounting period. Common examples include repairs and maintenance, office supplies, utility bills, and employee salaries.
Furniture as a Capital Expense
Furniture purchased for use within a business can indeed be categorised as a capital expense
This means that you can claim capital allowances on the full cost of the items. This also means that first-year allowances, such as Annual Investment Allowance (AIA) may be available. Note that in property law furniture items, also often called “movable” items of fixtures and fittings, are usually classed as chattels. This differentiates them from property embedded fixtures and fittings (see below).
Property Embedded Fixtures and Fittings (PEFFs)
PEFFs are items which are integral to a building
Property Embedded Fixtures and Fittings (PEFFs) refer to items that are integral to a building, and these can include furniture elements. The catch is that the definition of “plant and machinery” which includes PEFFs, is not explicitly defined in tax law. This can lead to confusion for many taxpayers.
While some pieces of furniture may be straightforwardly considered capital expenses, others may fall into a grey area. A radiator, for example, is a chattel until it becomes fixed to a wall. At this point, the radiator becomes a PEFF. Built-in cabinets and specialised lighting fixtures might be classified as PEFFs rather than standalone furniture. Or even certain types of flooring that are part of a building’s structure. PEFFs can potentially generate tax savings as well as stand-alone furniture so they shouldn’t be ignored.
Balance Allocation of Assets
There is another difference when it comes to balance sheets…
Another distinction between “movable” items of furniture and PEFFS is the way they are treated in the balance sheet of a business. PEFFS would normally be included in land and buildings and not depreciated. Whereas “movable” items of furniture and fixtures are included in separate headings and written down in value by depreciating the assets. This differential may not affect your entitlement to capital allowances, but it will help to reflect the asset values in your accounts more accurately.
Why It Matters
Understanding the classification of furniture and PEFFs matters because it affects the way you can claim capital allowances on your assets. Capital allowances allow you to deduct a portion of the cost of qualifying assets from your taxable income, reducing your tax liability. It may also matter how the items have been classified if you sell the property.
If you fail to correctly categorise and claim PEFFs allowances, you may miss out on potential tax benefits. To ensure that you are claiming all the capital allowances to which you are entitled, it’s advisable to consult with a tax professional or accountant who specialises in property and asset taxation.
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Our expert team are here to help answer any of your capital allowances questions or enquires you have about your commercial property.