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Comment: Get store refurbishment finance strategies in shape, says Natasha Frangos of Haysmacintyre

Most retailers will undergo a refurbishment of their space at some point, whether this be a total change in direction or regular refresh. Many are particularly eager to renovate the shop floor at the start of the year, but there is a serious financial commitment involved with this decision.  Understanding how to handle your funds to minimise any loss to the bottom line is crucial - careful consideration needs to be given to how this will impact cash flow and the availability of capital allowances.

Cash flow

Monitoring cash flow is a critical element when undergoing a shop refurbishment. To minimise risks, make sure you know your budget and be strict in sticking to it - although it is sensible to allow for some overspend from planned costings. A detailed budget should be maintained and can be aided by obtaining thorough work schedules from contractors.

There are many debt providers available; shop refurbishments are classic lending opportunities for banks and other finance providers who specialise solely in this area. Remember that servicing the debt will need to be factored into the cash flow and it’s worth keep a watchful eye out for any charges or covenants that are required.

Another key financial element to consider is the pay-back period for a shop refurbishment. Make sure you know the schedule and work out how quickly the company will make back the money spent. This will mean factoring in the additional costs required, such as extra staff, increased rent, rates, debt financing and IT costs. For a retail outlet that is having a complete makeover, such costs might include the loss of business whilst the building work is underway and additional hire charges for new equipment. To break even, it is essential to create a sales budget and know the level of turnover needed to be achieved each week to be cover the increased costs.

Following the refurbishment it is a good idea to track footfall, especially in the early days, to keep track of:

 

Capital allowances

Capital allowances are available to all companies and are a very useful tool in reducing corporation tax liability following the purchase of assets for use in a company’s trade.

Retailers often spend large sums of money on refurbishments of shops but maximising the capital allowance claim is rarely given the attention it needs, resulting in a lost benefit for the company. More often than not adequate detailed breakdowns aren’t kept for the refurbishment spend and chances to make use of capital allowances are simply missed.

There are numerous allowances available, including the annual investment allowance. This is available to companies in the year in which qualifying assets are purchased and allows for a deduction of 100% of the cost of the asset against the taxable profit. The level of AIA fluctuates from time to time, so the timing of asset purchase is key to ensure relief is maximised. The type of assets that may qualify for relief include fixtures, fittings and furnishings. Expenditure which has not been covered by AIA is entitled to a yearly writing down allowance at 18% or 8%, depending on the nature of the asset.

Energy saving or green equipment also attract a 100% deduction against taxable profit in the year of purchase. There are of course a number of asset types that do not qualify for capital allowances, such as those which make up the fabric of a building. Where a significant refurbishment is undertaken, it is definitely worth seeking professional advice to maximise a capital allowances claim and avoid losing out on a potentially sizable tax benefit.

Refurbing your shop can be an exciting, but daunting time. But with the right processes in place, and by keeping on top of your finances, it doesn’t have to be a headache. Taking the time to consider the tax relief available and how you plan to manage your cash flow are important first steps and will pay in the long run. As the saying goes, “by failing to prepare, you are preparing to fail”!

Natasha Frangos is a partner at Haysmacintyre

 

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