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Aborted project and architects fees - allowable?

Aborted project and architects fees - allowable?

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We have a client that sold their multi dwelling building, when tidying up the paperwork this year we have come across a large payment to an architect for an abandoned project to refurbish the building that was sold. It was a hotel that was used as an HMO, turns out our client was planning to turn it into individual flats but got sick of the hassle and sold it at auction.

Are the architects fees allowable against Corp Tax, this was the only property in the company so the company will now be wound up.

Replies (27)

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By Accountant A
27th Nov 2019 21:30

What is your technical analysis?

I suspect that a definitive answer depends on information not given.

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Replying to Accountant A:
Psycho
By Wilson Philips
27th Nov 2019 21:36

I agree

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Replying to Accountant A:
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By Tax Dragon
28th Nov 2019 10:45

I love that someone has thanked the comment agreeing this reply, but not the reply itself! Where's the logic?!

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Replying to Tax Dragon:
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By The Dullard
28th Nov 2019 10:48

Perhaps the person with the reply was thanking the person that agreed with them?

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By chicken farmer
27th Nov 2019 23:22

This is capital expenditure which is not allowable in computing the chargeable gain as it was not reflected in the asset when sold

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Replying to chicken farmer:
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By Tax Dragon
28th Nov 2019 06:18

I agree - on the assumption that the OP would have said if, for example, the company's business had been the trade of property development.

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Replying to chicken farmer:
Psycho
By Wilson Philips
28th Nov 2019 07:28

Did the OP PM you with the missing information? Or have you just made some unstated assumptions?

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Replying to Wilson Philips:
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By Tax Dragon
28th Nov 2019 08:53

Only one assumption: that the OP would have provided any information pertinent to an alternative view. Refer to my use of the words "on the assumption" and "for example".

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Replying to Tax Dragon:
Psycho
By Wilson Philips
28th Nov 2019 09:46

I was replying to CF. But “for example” suggests more than one! (But I agree, essentially one)

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Replying to Wilson Philips:
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By Tax Dragon
28th Nov 2019 10:17

Wilson Philips wrote:

I was replying to CF.

Oh yes.

Not the first time I've missed that point, in this forum format.

We're effectively told the expenditure didn't increase the value of the property. I'm (also) not seeing anything from the OP to refute CF's "assumption" - and I still agree the answer.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
28th Nov 2019 10:29

"our client was planning to turn it [the HMO 'hotel'] into individual flats"

If there was suitable evidence of a firm intention (the architect fee is itself prima facie evidence, although it may simply have been explorative), then it seems to me that the appropriate treatment would have been to appropriate the asset from fixed assets (assuming that's where it was) into stock. The architect fees then become abortive development costs, and allowable. Not reducing the gain directly, but creating a loss to offset it.

I therefore still agree with the first response - more information is required.

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Replying to Wilson Philips:
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By Tax Dragon
28th Nov 2019 10:43

I had assumed (OK, I knew) that that was what you were getting at. It's true that the OP does not seem a very inquisitive type, so it could be that we're not being told enough because the OP has not found out enough. [IMHO, no-one that has so far responded to the question has been wrong! :-)]

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Replying to Wilson Philips:
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By chicken farmer
28th Nov 2019 09:25

No need to make any assumptions. It's abortive capital expenditure and a 'tax nothing'. The questioner's response below does not offer any further information which changes that view.

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Replying to chicken farmer:
Psycho
By Wilson Philips
28th Nov 2019 09:48

Would your answer be different if the OP had told us, as suggested by Tax Dragon, that the company’s trade was property development? Or if, some time before sale, there had been a conscious intention to (re)develop the property for sale (which is indicated in the question)?

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By CW2012
28th Nov 2019 09:14

The property was disposed of in the last set of accounts, if I capitalise the cost £8500 now I've got an asset that's worthless, can I reopen last years accounts ? The property was disposed of at auction, I don't think the aborted project architects fees formed part of the sale, so in essence what do I do with the £8500 Dr.
Thanks

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Replying to CW2012:
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By chicken farmer
28th Nov 2019 09:27

What would you do with any asset that is worthless? Write it off.

How did you treat the expenditure in the last set of accounts?

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By CW2012
28th Nov 2019 09:36

The payment didn't arise in last years accounts, I was wholly unaware of it until I reviewed this years bank transactions. As there was only ever one property then this cost must have been entered into before the sale and therefore does it become an additional capital cost presale, therefore do I open last years accounts and amend the assets and amend the CT return to reduce the capital gain.

Thanks

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Replying to CW2012:
Psycho
By Wilson Philips
28th Nov 2019 09:49

If it was correctly a capital gain then you cannot reduce the gain - the expenditure does not qualify under section 38 of TCGA 1992

There is, though, the possibility that the accounts (and in particular tax) treatment of the sale was incorrect.

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By The Dullard
28th Nov 2019 10:48

Oh come on OP! The suspense is absolutely fuching killing me.

On a proper analysis of the facts, was it originally held as, or had it before sale been appropriated to, trading stock or not? What did the company intend to do with the flats post-development?

In one situation you get CT relief for the expenditure, in the other you don't.

Thanks (1)
Replying to The Dullard:
Psycho
By Wilson Philips
28th Nov 2019 11:00

Yes, post-development intention is just as important - missed that one! (Or perhaps there was just an unstated assumption on my part that the property would be sold)

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By CW2012
28th Nov 2019 11:18

The intention as far as I'm aware was to convert the HMO into flats (a lot less hassle) and rent the flats out, unfortunately one of the HMO tenants started a small fire so the owners (it was a company owned property) decided that was the final straw and auctioned it off. Last years accounts transactions were cr assets dr P & L profit on disposal (bizarrely there was one). The architects fees have only just come to light, at least with me, can I include these as part of last years disposal account and reduce the gain, leaving an accrued expense to clear in the current year.

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Replying to CW2012:
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By The Dullard
28th Nov 2019 11:25

Not allowable then, unless the client is predisposed to alter your awareness. As has been said, it is a capital cost, which, because it was abortive, is not deductible in calculating the capital gain. Write it off to P&L and add it back in the tax comp.

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Replying to The Dullard:
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By CW2012
28th Nov 2019 12:40

Thank you "The Dullard" that clears it up.

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Replying to The Dullard:
Hallerud at Easter
By DJKL
28th Nov 2019 16:22

Would you vary that view if the architect fees were in pursuance of say planning permission that was obtained and the existing property was sold with the benefit of that planning permission which enhanced the price received?

Works might not have been started on said conversion but the planning permission itself might be said to be reflected in the value of the property.

In effect would this be covered by this bit of HMRC's guidance?

"In practice, the sole test of allowability is whether the purpose in incurring the expenditure was to enhance the value of the asset"

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg15200

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Replying to DJKL:
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By Tax Dragon
28th Nov 2019 16:49

That (or similar) thought appears to have been in my head at 10:17 this morning.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
28th Nov 2019 17:11

There's another point that I missed. I would agree that if the costs were incurred in successfully obtaining planning permission a deduction in computing the gain should be allowed. A perfect example of not being able to provide a definitive answer without being in possession of every single fact.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
28th Nov 2019 23:03

Excellent- we may have one like that in the new year, an office that has not been let since 31/10/19 but we have been marketing it to let now for a few months with little response/interest and, in anticipation of it likely being a hard let ,obtained in the autumn a planning permission to change it to a two bed flat, just in case. (Not that the cost was anywhere near £8,500)

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