Hi. I am trying to work out from first principles whether and how relief might be available for post cessation expenses in the following situation:
A single-property UK residential unfurnished letting activity ceases on (say) 05 April 2014 when vacated by the tenant. There is no intention to continue.
The tenant trashed the place before leaving, resulting in substantial repairs expenditure in May 2014. The loss is uninsured.
Ignore, for this purpose, the contentious issue of the abolition of renewals basis and take it as read that the expenditure was of a nature which, had it been undertaken during a continuing letting business, would have been allowable.
So, the security deposit is retained, to match some of the costs, but that is not sufficient to cover the costs. The tenant has disappeared and there is no realistic prospect of recovery from the tenant, although in law there would be good grounds for a claim.
One possible option might be to accrue for the repairs expenditure at 05 April 2014. Since 1994-95 the accounting principles for preparation of rental property profits has been brought into line with trading activities. It would not be a general provision (and hence disallowable on those grounds) being a specifically calculated amount.
Another option might be to claim relief under s.125 ITA 2007 in 2014-15. Going down this route there is some doubt in my mind which heading of "qualifying payment" (s.97) or "qualifying event" (s.98) might be appropriate. There might be an argument for either. In favour of "qualifying event", the expenditure might be regarded as an unrecoverable debt due from the tenant. In favour of "qualifying payment", it might qualify under purpose "A": The product being supplied is the availability of a property for occupation as a residence. That property is defective and the expenditure is to make good that defect. The fact that it is defective by reason of action taken by the tenant is not discussed in s.97 as relevant (although I suspect that the draughtsmen intended that the defect should be caused by the "trader").
So, I am interested in opinions regarding whether there is any hope for relief and, if so, the relative prospects for success under the routes suggested above (or any other method that I have not considered).
For what it is worth, to save anyone hunting, HMRC commentary is in PIM2510. There is a brief but very uninformative paragraph on post cessation expenses where there are no corresponding post cessation receipts. I did not find it helpful.
With kind regards
Clint Westwood
Replies (6)
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The notional property business
I don't think a specific provision helps you.
Whether a provision is general or specific it a trite HMRC argument. If a provision has been correctly made as a matter of GAAP.
A provision cannot be made as a matter of GAAP unless, at the balance sheet date, there is a present (legal or constructive) obligation to incur the expenditure. I don't think there is.
I don't think you can claim relief under s. 125, because s. 97 essentially deals with claims in relation to historic supplies (s. 97(2)(a) - goods supplied, work done, services provided - all past tense) and s. 98 deals with events in relation to debts that have been brought into account [ie as income] in calculating the profits of the [business] (s. 98(2)(a) and s. 98(5)(a)).
However, I believe that HMRC thinking is faulty.
There is no cessation, as such, because of the deeming provisions in ITTOIA 2005, s. 264 and 265 That deem there to be a single property business. In relation to UK properties, s. 264 says that:
"A person's UK property business consists of:
every business which the person carries on for generating income from land in the United Kingdom, andevery transaction which the person enters into for that purpose otherwise than in the course of such a business."
The legislation on farming is similarly drafted (ITTOIA 2005, s. 9(2)), and it has been held that two farms separated geographically were one trade (Bispham v Eardiston Farming Co 40 TC 322). Despite HMRC's assertions to the contrary, there is nothing within these deeming provisions that says that businesses occurring at different points in time are not also part of the same overarching deemed business.
Specifically though a transaction that involves incurring expense on repairs that occurs after an individual business for generating income from land has ended are deemed to be part of the same business, in my view.
I don't think the Post Cessation Expenses regime will assist here.
Will the work be done even if no tax relief is available?
I'm saying that there's no cessation...
... and that that's just an HMRC myth. It is a fact that there was no income or expenditure of the deemed overarching property business after May 2014.
If you ask your client, you might even find that during May they had intended to find a new tenant and carry on the business, but decided against this course of action in June or July.
Have you ever seen ITTOIA 2005, s. 275? :)
Clint W - as the work has been done, I would be inclined to include the amount in the cessation accounts with a commentary in the white space.
It would seem that the balance over the deposit might be debt due from the tenant.
Did you have any problems getting the deposit from the relevant Protection scheme?