Reclassification of expenditure reduces corporation tax liability

A client came to us to handle the accounting and tax affairs of his property company.

The company was making a loss, however the director expected it to make significant profits in a few year’s time. Upon review of the prior year’s financial statements, we identified that £90,000 of revenue expenditure in respect of repairs had been misclassified as leasehold improvements, which they could not obtain tax relief for. We reclassified this expenditure from leasehold improvements to revenue expenditure via a Prior Year Adjustment to the financial statements, this meant that the company’s losses were enhanced by £90,000. Furthermore, we identified £45,000 of expenditure, which the company had misclassified as capital expenditure in their records for the current year’s financial statements. We reclassified this as revenue expenditure to further enhance their corporation tax losses by £135,000 (£90,000 + £45,000). The corporation tax losses were carried forward and offset against the company’s trading profits for the following year, thereby saving them corporation tax of £28,350.