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Annual Investment Allowance

Annual Investment Allowance

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My question is can you claim annual investment allowance on an asset which is not yours?

I am doing some bookkeeping and the company concerned is entering into a 5yr agreement to rent a property from a landlord.  The company then sublets that property by letting rooms and makes profit by charging higher rents per room than they are then paying on to the landlord.

The company is responsible for all repairs which are going through the profit and loss.

When they initially take on the property there are items of refurbishment expenditure in getting the property in to a fit state to charge high rent.  The accountants have capitalised this and charged depreciation but in the tax return they have claimed annual investment allowance.

I just want to make sure , in my own mind, that you can do this on an asset you don't own.    The company has control of the asset for a number of years but the benefit of that work on refurbs is going to someone else.

Replies (11)

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RLI
By lionofludesch
14th Jul 2020 19:22

I vote no.

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Psycho
By Wilson Philips
14th Jul 2020 19:31

I vote maybe. A good deal more information is required to answer more fully.

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By Anonymous.
14th Jul 2020 19:52

As others have suggested, this doesn't seem right.

https://www.gov.uk/capital-allowances/annual-investment-allowance

https://www.gov.uk/capital-allowances/what-you-can-claim-on

What are the "items of refurbishment expenditure"?

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By Tim Vane
14th Jul 2020 20:02

More info required of course, but on the face of it there is no problem. For instance, in the case of integral features the legislation requires that the expenditure is incurred on a building used by the person carrying on the qualifying activity. There is no requirement for the building to be owned by the person incurring the expenditure.

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Replying to Tim Vane:
Psycho
By Wilson Philips
14th Jul 2020 20:47

Indeed. And specifically in the context of property works where more than one party has an interest in the expenditure it is usually the one with the lower interest in the property that claims the allowances, eg tenant rather than landlord.

“the benefit of that work on refurbs is going to someone else”

No it isn’t - the company is able to charge a higher rent because of it. Ultimately the landlord may derive some benefit as well, but that doesn’t prevent the tenant from claiming the allowances as per above.

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By wanderlust
15th Jul 2020 14:13

I have looked into this more. The property is a house in multiple occupation. Looking at HMRC they say you can only claim AIA for residential if its a furnished holiday let or an item in a common area.
Then 22.10.10 briefing 45.10 it says capital allowances are expressly forbidden in a dwelling house. It goes on to say that if you are living in individual rooms in a house the common kitchen and bathroom areas are part of the dwelling house.
So based on this I think AIA and capital allowances are not allowed.

However, although I've ploughed through the rules I am still not confident. An accountant has put over £60K through which I think is incorrect.

How do others do their research on this? Is there a go to book or subscription service like Croners that people use?

Sometimes I just know that I don't know - so I start to look but there could still be something I am missing as I simply don't know about it. Do other general accountants and bookkeepers use a tax specialist to run things over with? I'm on my own so its difficult. Would be interested to know. Thank you.

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Replying to wanderlust:
By Tim Vane
15th Jul 2020 14:25

It is not unusual to see such P&M claims for common areas in HMOs. The contention is that the common areas do not constitute a dwelling. HMRC disagree, but I am not aware of any case law on this, so probably fine to continue claiming until such time as case law establishes the efficacy of such a claim. Certainly it would be in the client's interest to claim so the accounting firm is probably correct to do so, provided they have advised the client of potential clawback in the event of HMRC querying the claim.

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Replying to Tim Vane:
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By Piltdown Man
17th Jul 2020 13:23

The point was considered in Hora Tevfik v HMRC (TC/2017/05459). Worth a read if your client has similar circumstances.

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By wanderlust
15th Jul 2020 15:18

Thank you Tim....appreciated. I think things black and white in my mind even though tax seems very grey in areas....but this has helped.

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By Piltdown Man
17th Jul 2020 13:36

You cannot claim capital allowances on an asset which doesn't belong to you.

However, in the context of fixtures in property then the answer to your question is yes, you can claim capital allowances on an asset which is "not yours" - provided the fixtures rules at CAA 2001 ch14 treat the asset as belonging to you (despite land law treating the asset as belonging to the freeholder). This essentially means that the person incurring expenditure on fixtures in a property owned by somebody else, must have a land interest for those fixtures to be treated as belonging to them for tax purposes.

Whether or not the items are caught by the dwellinghouse exclusion at s35 is a whole different matter.

Most P&M in a HMO is likely to be caught by the dwellinghouse exclusion, although some P&M in common parts ought to be claimable. The recent Hora Tevfik v HMRC case provides quite a good explanation.

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By raychidell
20th Jul 2020 10:37

As others have said, more information is needed for a full reply, but here are a few pointers.

1. A fundamental condition for claiming plant and machinery allowances it that the person must own the asset (s. 11(4)(b) of CAA 2001).

2. If the assets in question are fixtures, as defined (see s. 173), then special rules are needed. This is because, under general property law, fixtures in a property always belong to the landlord rather than the tenant.

3. The fixtures rules therefore provide for deemed ownership in various circumstances. One such circumstance is where a person has an interest in the land at the time the item becomes a fixture (s. 176).

4. An interest in land can include, inter alia, a lease or a licence to occupy (s. 175).

5. In principle, therefore, the client can claim allowances for qualifying capital expenditure it has incurred on the fixtures.

6. If it is residential, rather than commercial, property, most or all of the expenditure is, however, likely to be disqualified by s. 35.

I hope those pointers are useful. All of these issues are covered in depth in my book Capital Allowances, which I co-write with Jake Iles of Six Forward Capital Allowances, the 2020-21 edition of which is available from Claritax Books.

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