I have a client who is a pattern cutter and has recently installed a log cabin in her garden to work from.She was working from her home previously but now wants her house back! She only has a turnover of 30k p.a. but has been vat registered for many years and she has claimed all the vat back on this log cabin.Is this correct and if so should I claim the whole purchase as AIA, capital allowances or as an expense in the accounts or should I take a portion for private use.I know this can be a bit of a grey area with HMRC.
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No capital allowances?
VAT reclaim OK but no capital allowances - its not plant
Surely there would be at least some plant and machinery upon which capital allowances could be claimed.
Integral features like lighting etc.
Not an expense
Should I claim it as an expense in the accounts then and if so under what?
No. It's capital.
There may be some minimal plant included in there but the only tax relief you're going to get is Capital Gains Tax Acquisition costs when she sells it.
Minimal?
Not a surveyor myself but I would have thought something like up to 25% of the cost might qualify? Hard to say without greater possession of the facts.
Even if it was as little as 10%, if this cabin cost, say, £15k that is still £1.5k that could be written off against profits in the year of the spend, which for a pattern cutter working out of her back yard could be a decent result.
OP - looking back at your opening comment I don't follow the question about private use. Is there private use of this cabin then or is it just "to work from" as you first suggested?
Just a thought, but I could be wrong:
If the cabin is moveable (i.e. is not permanently fixed to the land but is free standing on, say, a concrete base) then would that make it a chattel - so chattels exemption would apply.
What's more, if the cabin has an expected economic life of less than 50 years that would make it a wasting asset and, therefore, potentially CGT exempt.
Usually, if an asset is a wasting asset but is used in a trade or profession then a chareable gain could arise on disposal but only if capital allowances could have been claimed on it (whether CAs were actually claimed being a moot point).
Since you can't claim CAs on the cabin this would mean that the cabin is still a wasting asset and thus CGT exempt?
I agree that there may be a claim for integral features (electricity supply, water supply, thermal insulation including double glazing etc,) included in the contstruction costs of the cabin and also for other internal features (such as free standing desks, worktops, shelves etc.) where the removal of such items would not result in the cabin collapsing (i.e. not part of its basic structure)..
The reason for my uncertainty is whether the cabin is moveable or whether it could reasonably be presumed that the cabin has an expected economic life of less than 50 years.
Any views on this?
Moveable?
The log cabin was only put in her garden to work from and is only a small one costing just under 5k.Only said about private use as obviously it now forms part of her home that she owns.It is free standing on a concrete base.Knew this was a bit of a grey area but with more and more people working this way I better find out what's right!
Does "free standing on a concrete base" mean it is moveable?
Confused
Oxford English Dictionary says the definition of a buiding is A structure with a roof and walls
Capital allowance manual says
CAA01/S281
A commercial building is a building that is used for the purposes of a trade, profession or vocation. A building used as an office is also a commercial building.
Why would you think that this could be a chattel? or a wasting asset
I'm not sure why...
... it satisfying the OED definition of a building excludes it, necessarily, from being a chattel or a wasting asset.
From a legal point of view a chattel is any tangible personal property, as opposed to real property. It's real property if it is land or is permanently attached to land. The concrete base is real property, but the same isn't necessarily true of the log cabin.
Whether or not it satisfies the definition of building for the purposes of excluding it from capital allowances, if it isn't permanently attached to land it's tangible moveable (personal) property.
If it's got a life of less than 50 years (as short leases have, for example) it's a wasting asset, irrespective of whether it's personal property or real property.
If it's personal property, then it's useful life may not be of relevance given the value involved (ie a new one would cost you £5,000). So, I think Triggle may have a point on the CGT in relation to the log cabin itself.
Nonetheless, there will be a part of the garden (that the cabin and it's concrete base now occupy) that may be used exclusively for business purpose during the occupation of the main residence, when it comes to be sold. Sounds like a good place for the kids to go and do their homework?
I agree though that there would be no CAs other than on integral features and other fixtures and fittings.
@Steve
Morning
Thanks for your input.
My reaction was because I would have automatically classed it as a building, not considered capital allowances apart from kitting it out, and looked to Capial Gains consequences not Revenue.
I would have leaned further towards talking to the client to occupying it for mainly private use in order to see if it could qualify in the long run for PPR so Chattels was an unexpected turn. We have a few log cabin based buildings around here which are very substantial, and I think have a life expectancy of more than 50 years. class them as wasting assets - it would depend on the brochure spec for support for that one I think.
I shall have to do more reading I think
Edit : there is text showing I deleted and can't see in the edit screen about wasting assets
Help Henry please
clarify above
The line ........class them as wasting assets.... to .......I think
should not be there
Agree with Marion
Whether or not it's a building in the OED definition, it's the setting in which the trade is carried on.
Surely ........
@ lion
I think everybody agrees that it's a building and the setting in which the trade is carried on meaning that it isn't eligible for CAs (other than in respect of integral features, fixtures and fittings).
The point was that whether or not it's a building or the setting in which the trade is carried on has no relevance to the CGT position if the log cabin is sold. It's possible that it might be a chattel and a wasting asset for CGT purposes, meaning that such a sale would be exempt from CGT. It's also possible though that it would be neither.
I'm not necessarily disagreeing with Marion, as such, but simply pointing out that Triggle's point is also not necessarily incorrect.
LOG CABIN VAT
In your original posting you said that VAT had already been claimed back.
The fact that VAT can and has been claimed back,suggests that the VAT office are not treating
it as a building as such.This is because some types of log cabins have VAT added to the net
price, because,in the eyes of HMRC,they are being classed as a garden addition.
As this is the case,they may qualify for Annual Investment Allowance,as the person has incurred
capital expenditure on the provision of plant that is used wholly or partly in the business.
The definition of plant is equipment that is used in carrying out an industrial business.
VAT CLAIMED BACK
The fact that the cabin had VAT charged on it,in the first place suggests that it is being
treated as a garden addition and not as a new building (for VAT purposes anyway). Have you
had sight of the original invoice,to ascertain exactly how it was described on the invoice and
also was VAT charged at 5% or 20%?
VAT
If it's used wholly for business, I don't see why she can't claim the VAT. If it was a real, proper, bricksandmortar building, nobody would have even thought reclaiming VAT was an issue.
VAT CHARGED
My own thoughts are -
It was perfectly,in order to have claimed the Vat back.
It would be classed as plant and as there has been capital expenditure on plant,you can
claim Annual Investment Allowance on the net amount before VAT.
Plant?
My own thoughts are -
It was perfectly,in order to have claimed the Vat back.
It would be classed as plant and as there has been capital expenditure on plant,you can
claim Annual Investment Allowance on the net amount before VAT.
How do you come to the conclusion that it's plant ?
RE PLANT/LOG CABIN
HMRC VAT,in the case of smaller log cabins,do not class them as buildings,they are classed as garden additions/equipment and as such charge VAT on them.
The larger log cabins are classed as buildings and do not have VAT charged on them.
Because of this classication and the fact that there has been capital expenditure on an asset which is expected to last for more than two years and is
used to carry out the trade and is not for resale, is the reason for this to be plant. Your comments would be appreciated.
Agree
HMRC VAT,in the case of smaller log cabins,do not class them as buildings,they are classed as garden additions/equipment and as such charge VAT on them.
The larger log cabins are classed as buildings and do not have VAT charged on them.
Because of this classication and the fact that there has been capital expenditure on an asset which is expected to last for more than two years and is
used to carry out the trade and is not for resale, is the reason for this to be plant. Your comments would be appreciated.
Afraid the VAT and Capital Allowance rules just aren't the same. If you're going to base your Capital Allowance claim on the fact that the VAT's deductible, you're doomed to failure.
Hi Swampy
Leaving aside my esoteric (and not particularly relevant to your problem) point re the chattels treatement (which I would only use as an argument if the amount involved was material and the client was happy to take the risk) as regards claiming AIA on the purchase of the cabin then the answer is no.
See:
http://www.hmrc.gov.uk/manuals/camanual/ca22110.htm
The relevant case is St. John's School (Mountford and Knibbs) v Ward (Inspector of Taxes).
I would say that she can.
If there is a private use element of the cabin then the VAT claimed should have been reduced on a fair and reasonable basis to reflect that private use.
I am asuming here that she operates as a sole trader and not through a limited company and that she is not on the VAT flat rate scheme.
Mixing VAT and CA rules
@ SIMPLETON
My comment is that the VAT position for any structure has no bearing on whether an asset qualifies for CAs.
CAs are not available for land or buildings from which trade is carried on. Masses of case law confirming that position for large, small, permanent and temporary structures - see earlier posts above.
I'd have thought...
... that these things were pre-fabricated and assembled on site, meaning that the supply is a supply of services, such that it's a standard-rated supply, regardless of size, in any event.