Capital improvement

What it means

A capital improvement is spending on extensions, conversions, reconstruction or upgrades exceeding EUR 1,700 in a year. It changes the purpose or parameters rather than restoring the original state.

A repair keeps the asset serviceable and goes straight to expenses. An improvement raises the cost and depreciates with the asset in its depreciation group.

The concept is not limited to buildings and machinery. An intangible asset can be improved too, for instance by adding new functions to software; a routine version update or a bug fix is maintenance and goes to expenses.

How it works in practice

The distinction is substantive, not bookkeeping: replacing windows like for like is a repair; insulating the building is an improvement. What changed in the asset decides, not the wording on the invoice.

A tenant can depreciate an improvement to leased property if agreed in writing with the owner. Without that agreement a dispute arises over who claims the cost.

An improvement enters the cost only once it is completed and put into use. While the work is under way the spending builds up as assets under construction and is not depreciated, so for a building or other tangible asset we ask the client for a dated handover record.

What to watch out for

Splitting one refurbishment across several invoices under the threshold does not work: the limit applies to the total for the period. An audit adds it up and moves the cost into depreciation with tax due.

For VAT a capital improvement counts as capital goods. If the improved building is put to a different use in later years, such as exempt letting of flats, the deducted tax is adjusted and part of it has to be paid back.