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Another capital or revenue question!

Replacement of central heating system in residential property

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Good afternoon everyone.

I have a feeling I'm mixing up my tax law here and overcomplicating the situation.

Client has residential property income.  He has replaced the central heating system in one of his properties.  I'm reasonably confident with the issues surrounding whether something is considered a repair, and that modernisation doesn't necessarily make it an improvement etc.  My question is whether it has to be treated as capital expenditure because it is an integral feature (I think) and has been replaced in it's entirety.  If this is the case then any discussion surrounding whether it is an improvement is presumably irrelevant.  Or is it being an integral feature not relevant in residential property and I'm making this more complicated than it needs to be?   In which case it is presumably a judgement call.

We have access to an 'expert' tax line.  I did call them to discuss it.  They basically seem to search the HMRC guidance and read what it says.  They had to phone me back twice to change what they had originally told me, and I just don't feel confident that they are advising from knowledge - more from google! 

Any help would be gratefully received.

Many thanks

BG

 

 

Replies (31)

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RLI
By lionofludesch
18th Dec 2020 16:12

Did the old system work ?

Why did he replace it ?

Had the client just bought this property or had he owned it for some years ?

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Replying to lionofludesch:
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By Batty Girl
18th Dec 2020 16:23

The old system had failed.

He replaced it because there are no longer parts available for the old system and it could not be repaired.

He has owned it, and rented it out, for many years.

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Replying to Batty Girl:
RLI
By lionofludesch
18th Dec 2020 16:32

I vote repair.

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Replying to lionofludesch:
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By the_drookit_dug
18th Dec 2020 16:45

I agree.

It doesn't fall within the integral features rules, whilst normally the asset in its entirety in this context is the whole property, of which the central heating is but a part.

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Replying to the_drookit_dug:
RLI
By lionofludesch
18th Dec 2020 16:53

the_drookit_dug wrote:

I agree.

It doesn't fall within the integral features rules, whilst normally the asset in its entirety in this context is the whole property, of which the central heating is but a part.

It's not even the whole of the central heating system, Dug.

The boiler won't work without the radiators and the taps and the pipes which connect them.

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Replying to the_drookit_dug:
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By Batty Girl
18th Dec 2020 18:46

Thanks for the replies. This was what I was mainly concerned about - with a residential property is the property always considered to be the asset? In which case I assume the items that would fall under the integral features rules within a commercial property are always just a part of the asset within a residential property?
Thanks

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Replying to the_drookit_dug:
Psycho
By Wilson Philips
18th Dec 2020 20:01

I agree

Integral features rules are not in point.

The central heating system is part of the building. Unless the replacement of the system involved demolition of the entire property, we're not looking at the entirety.

Revenue.

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Replying to lionofludesch:
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By Paul Crowley
18th Dec 2020 17:08

Repair based on the reply, not the question

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By frankfx
18th Dec 2020 16:41

I would go back to the expert line.

If only for their top expert to review the quality of the service received.

The fact that you sensed that they were winging it on Google is telling.

On the limited information provided, as alluded by Lion.
Since updated by OP

I'd go for repair.

Essential repairs covered in Conn v Robins bros ltd .

https://www.taxinsider.co.uk/capital-verses-revenue-how-to-offset-expenses

The above may assist.

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Replying to frankfx:
paddle steamer
By DJKL
18th Dec 2020 18:27

Maybe the expert line could outsource to Accounting Web, it would make for better questions.

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By bettybobbymeggie
18th Dec 2020 16:53

The heating system includes pumps, switches, thermostats, pipes and radiators in addition to the boiler so I'd only start to think capital if the whole lot was replaced. Switch out a boiler = repair.

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Replying to bettybobbymeggie:
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By Paul Crowley
18th Dec 2020 17:14

Good analysis

HMRC USED to challenge improvements, despite like for like not being available
Having lost pretty much every time at appeals (now tribunals ) they finally accepted reality.
Do not trust HMRC opinion of the law, it is just propaganda

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Replying to bettybobbymeggie:
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By Batty Girl
18th Dec 2020 19:07

Thank you - my understanding is that it is the whole system, because the old system could no longer be repaired. The invoice says it's the installation of a new central heating system. So I think it is the whole lot, or certainly the majority of it.
Do you think this would make it capital? I wasn't sure if it would be treated differently in a residential property and the asset would be the property, rather than the heating system.

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By Batty Girl
18th Dec 2020 19:03

Thank you to everyone for taking to time to respond.

It's definately not just a boiler replacement. The invoice says that it is an installation of a new central heating system, and it was for about £5k. It was warm air heating and has been replaced with central heating. The heating engineer has put in writing that the old system was obsolete and could not be repaired, and the client is happy to argue that it is just a modern replacement for an outdated system. Both systems just heated the house - the new one does it better because it is newer technology.

I don't know enough about heating systems to know what would be an improvement, and what could reasonably be considered to be just an update of a similar quality, but based on what the client has told me I'm happy to go along with his argument that it's not an improvement.

I was mainly worried about whether the replacement of the entire system (assuming that's what it is) could be considered a repair (with the entire asset being the property), or whether the central heating system would be considered the asset, and therefore the replacment of it would always have to be capital.

Thanks
BG

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Replying to Batty Girl:
RLI
By lionofludesch
19th Dec 2020 13:07

Batty Girl wrote:

Thank you to everyone for taking to time to respond.

It's definately not just a boiler replacement. The invoice says that it is an installation of a new central heating system, and it was for about £5k. It was warm air heating and has been replaced with central heating. The heating engineer has put in writing that the old system was obsolete and could not be repaired, and the client is happy to argue that it is just a modern replacement for an outdated system. Both systems just heated the house - the new one does it better because it is newer technology.

I don't know enough about heating systems to know what would be an improvement, and what could reasonably be considered to be just an update of a similar quality, but based on what the client has told me I'm happy to go along with his argument that it's not an improvement.

I was mainly worried about whether the replacement of the entire system (assuming that's what it is) could be considered a repair (with the entire asset being the property), or whether the central heating system would be considered the asset, and therefore the replacment of it would always have to be capital.

Thanks
BG

Thanks for your thanks.

I like how OPs come up with a huge wedge of previously undisclosed information, just as they give their thanks and, presumably, consider the matter closed.

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Alex
By scurlage
18th Dec 2020 23:08

If you replace badly insulated wood windows with modern UPVC that is a repair. So can't see why this heating system would not be.

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Replying to scurlage:
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By Tax Dragon
21st Dec 2020 06:59

The clue is the word "replace". The UPVC (or modern equivalent) replaces the wood. New windows replace old. (It's so obviously a replacement that I'd venture it gets called that on the invoice.) The point is that the house had old windows where it now has new windows.

In the OP's situation, the invoice referred to an "installation". The house did not have central heating (which, as someone has already noted, includes many components including pipes) prior to installation. It did afterwards.

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Replying to Tax Dragon:
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By the_drookit_dug
21st Dec 2020 10:43

It did I guess have a fixed heating system - unfortunately though I don't think a central heating system counts as the 'nearest modern equivalent' to a warm air system.

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Replying to the_drookit_dug:
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By Tax Dragon
21st Dec 2020 12:16

I agree, and that makes it (probably) capital, though were I the OP I would not take the consensus view (if there is one) from here and would head off and do some more reading.

To that end, I think the phrase "nearest modern equivalent" is HMRC's and HMRC's alone (cf Paul C's comment). I believe it's based [or largely based - something else for the OP to check] on Conn v Robins Bros Ltd, which is therefore worth a look to form your own view of the tests. What (probably) kills the argument for me is that IIRC one of the tests is that you need to be taking something out and putting something "in its place" (or "replacing" for short). IIRC RSJs for wooden beams was fine, for example.

I don't recall whether windows is an HMRC example or based on the case(s). But maybe you could take out windows and put forcefields in their place, à la Star Trek, and that would be OK*. But I don't think you could take out a fence and put in a wall* and it not be capital.

*I suspect there's a cost test too (forgive me, I haven't read the case in full for a long time). Hence not wall for fence** and possibly you need to wait to install your forcefields until they are as cheap as chips. Well, of a similar cost to how much windows currently are, anyway.

**I note this fits HMRC's "nearest modern equivalent" interpretation too [a wall hardly being the modern equivalent of a fence], though I don't see that as validating the interpretation. I think I'll have to do some more reading to replace some knowledge that seems to have fallen out of my head on all this. Later, though.

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By whitevanman
19th Dec 2020 00:38

Can I sound a note of dissent.
I would not necessarily agree that replacing a warm-air heating system with a "wet" central heating system would be like-for-like replacement. I wouldn't say it is just new technology. As far as I am aware both technogies have been around for many years and both are still used.
That aside, I am also not sure I would agree that the integral fixtures rules are not in play.
CAA 2001 S33A is in Part 2 of the act and applies to anyone who carries on a qualifying activity. This is defined in s15 and includes a UK property business. So, it applies to residential property lettings just as any other letting. The fact that there are then restrictions on what can be claimed in certain types of business does not change this. So, even if it was a "repair" it would fall foul of s33A (and s33B).

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Replying to whitevanman:
Psycho
By Wilson Philips
19th Dec 2020 10:01

I read s33A(4) together with s35. That seems to me to take the expenditure out of the integral features rules, including s33B. Happy to listen to contrary arguments, though.

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Replying to Wilson Philips:
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By whitevanman
19th Dec 2020 11:29

Apologies, you are of course correct. I never got as far as s35 after midnight on Friday ( had escaped to a socially distanced concert which was great) is my only excuse for numptiism (?).
That leaves the question of repair and at least there I would stand by what I said in the previous post based on the few facts provided. Unless of course, you know better?

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Replying to whitevanman:
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By the_drookit_dug
19th Dec 2020 11:52

It used to be far more common to see warm air heating systems in residential properties than it is now. I once had a wee one bedroom bungalow with an old 'bullet proof' system that was undoubtedly cutting edge 40 years ago, but had long since become obsolete. We replaced it with central heating - not any thought was given to replacing it with another warm air system. I don't imagine that many would.

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Replying to whitevanman:
Psycho
By Wilson Philips
19th Dec 2020 13:51

No, I don’t know better. I would tend to agree with you, without having seen exactly what was replaced with what, that replacement of one form of heating system with another is not a ‘repair’ - and is more than just replacing old materials/technology etc with the modern equivalent.

Switching from a gas-fired boiler to an oil version, or vice versa, I might accept. But (probably) not a completely different type of heating system.

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By unearned luck
19th Dec 2020 13:24

It's interesting that the OP only provided what is probably a key fact quite late in the day.

"Alterations" are capital even it they don't amount to an improvement. So I agree with WVM.

Since the government is committed to the phasing out of gas and oil central heating. This question is likely to become more and more relevant over the next decade or two. A change in the law would be helpful that treats changing from one heating system to another counts as revenue expenditure.

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Replying to unearned luck:
RLI
By lionofludesch
19th Dec 2020 13:40

unearned luck wrote:

It's interesting that the OP only provided what is probably a key fact quite late in the day.

"Alterations" are capital even it they don't amount to an improvement. So I agree with WVM.

You see it as an "alteration" ?

A disappointingly vague term which could mean anything ........

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Replying to lionofludesch:
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By unearned luck
22nd Dec 2020 00:52

'You see it as an "alteration" ?' Don't you? Or do you see an improvement which is tantamount to the same thing.

'A disappointingly vague term which could mean anything ........' Indeed, but that does not stop it being relevant to the question revenue or capital.

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By In a Daze
19th Dec 2020 17:36

The whole central heating system will include:
Hot and cold water pipes
Gas pipe from the meter to boiler
Radiators
Thermostat
Boiler

I would find out what work has actually been done this will make your decison fairly straight forward.

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Replying to In a Daze:
RLI
By lionofludesch
19th Dec 2020 17:35

In a Daze wrote:

The whole central heating system will include:
Hot and cold water pipes
Gas pipe from the meter to boiler
Radiators
Thermostat
Boiler

If it is only the boiler that has been replaced, it is only part of the heating system so i would say it is a repair.

It isn't only the boiler, though.

Rather late in the day, the OP thought it worth mentioning that the house needed an entire system.

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By Batty Girl
19th Dec 2020 20:28

Thanks again to everyone.

My apologies for not making the situation clear in my original post. I thought I had by saying it was the central heating system that had been replaced and that it was replaced in it's entirety, but I now realise that although I knew what I meant, it wasn't obvious to anyone else.

I do understand that whether or not it is an improvment/repair is somewhat contentious, and I will be discussing that with my client in detail. My main concern had been that if it was excluded from being a repair because it was an integral feature, then there was no point addressing the issue of whether it was an improvement anyway. Thankfully, Dug and Wilson Philips have confirmed that this is not the case in a residential property.

I really do appreciate the time you have all taken to respond, especially at a weekend/evening and apologies again for making it more difficult by not giving all the info in my original post.

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By paulwakefield1
21st Dec 2020 07:42

What a very dignified reply to unjustified criticism.

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