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Can enhancement expenditure ever be tax deductible

Is Enhancement expenditure on property undertaken to meet legal requirement Tax Deductible ?

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We have a client with a portfolio of 5 Residential Lettings. In the 2018/19 tax year our client incurred costs of circa £7,000 to replace the Septic Tank at one of the properties as required due to the new regulations being introduced as from 1st January 2020. The new system is ‘all singing all dancing’ compared to what it has replaced but only because this was the legal requirement. Will the costs be allowable as ‘expenses’ being a replacement or will it be deemed a capital enhancement? – any comments or guidance would be appreciated

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RLI
By lionofludesch
12th Nov 2019 11:11

Whilst being slightly concerned that a septic tank might sing and dance, I would feel that you have a good case there.

HMRC have accepted over the years that building regulations change and that what was acceptable 20 years ago no longer is.

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Hallerud at Easter
By DJKL
12th Nov 2019 11:21

You do not say when the particular property was purchased by your client but subject to that I would also likely use the double glazed window replacing the single glazed approach- modern equivalent.

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Lone Wolf
By Lone_Wolf
12th Nov 2019 11:31

I agree with lion and DJKL, you'd have a good argument for saying that this is a repair as the current septic tank is merely being replaced by a modern equivalent.

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By Tax Dragon
12th Nov 2019 11:48

Windows are a part of a building. Changing them with modern equivalent repairs the building.

I'm not sure that a replacement of a whole item counts as a repair to a building. You wouldn't need replacement domestic items relief if it did.

Are septic tanks domestic items?

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Replying to Tax Dragon:
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By Windy
12th Nov 2019 12:20

Thanks Tax Dragon
I see your point and I do not think a septic tank would be covered by domestic items relief. HMRC do give an example in BIM46925 - changing technology - where someone replaces a boiler to a condensing model to comply with legal requirements and this is deemed to be allowable. I was rather hoping the same argument could be used in respect of the septic tank ?

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Replying to Windy:
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By Tax Dragon
12th Nov 2019 12:29

I think that is the right question to be asking. The conversation seemed (to me) to have started off on the wrong foot, hence my comment.

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
12th Nov 2019 12:25

I guess you could view the septic tank as a separate asset, but I'd view it as part of the building.

I appreciate I'm jumping to different legislation here, but CAA 2001 s21 treats a sewerage system connected with a building as part of that building. A septic tank is part of the buildings sewerage system. Using the logic from s21, I'd argue that the house includes the sewerage system, and a replacement of part of that system, is just a repair to the building.

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Replying to Tax Dragon:
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By The Dullard
12th Nov 2019 12:26

No.

A domestic item means an item for domestic use (such as furniture, furnishings, household appliances and kitchenware), and does not include anything that is a fixture.

Fixture means any plant or machinery that is so installed or otherwise fixed in or to a dwelling-house as to become, in law, part of that dwelling-house, and includes any boiler or water-filled radiator installed in a dwelling-house as part of a space or water heating system.

Are you going to take the septic tank with you when you sell the dwelling-house? And do you think you are entitled to do so under the terms of the standard sale/purchase agreement?

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Replying to The Dullard:
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By Tax Dragon
12th Nov 2019 12:44

I've not studied septic tanks. Tends to make my brain hurt and my eyes water.

But it might be the case that, if I was particularly attached to the singing dancing tank, I would be able to take it with me and put back the one that just sat there not singing or dancing.

The point of my initial comment, as I said, was to get the conversation on track. Job well done, methinks. (And yes... I'd run with your answer.)

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Replying to Tax Dragon:
RLI
By lionofludesch
12th Nov 2019 13:36

Tax Dragon wrote:

Windows are a part of a building. Changing them with modern equivalent repairs the building.

I'm not sure that a replacement of a whole item counts as a repair to a building. You wouldn't need replacement domestic items relief if it did.

Are septic tanks domestic items?

I'm pretty sure that I'd be more comfortable drawing an analogy between a septic tank and a window than between a septic tank and a new washer.

Without some sort of sewage system, the building doesn't work.

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Replying to lionofludesch:
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By Tax Dragon
12th Nov 2019 14:10

lionofludesch wrote:

I'm pretty sure that I'd be more comfortable drawing an analogy between a septic tank and a window...

Is that a reference to Blackadder?

Mrs Pants: But what about the privies?
Blackadder: Um well what we are talking about in privy terms is the latest in front wall fresh air orifices combined with a wide capacity gutter installation below.
Mrs Pants: You mean you crap out the window?
Blackadder: Yes
Mrs Pants: Well in that case we'll definitely take it. I can't stand those dirty indoor things.

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Replying to Tax Dragon:
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By Windy
13th Nov 2019 11:22

Ha Ha ! Can't beat a bit of Black Adder ! Maybe his comment :
"We're in the stickiest situation since Sticky the Stick Insect got stuck on a sticky bun." could be applied to this conundrum :)

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
12th Nov 2019 15:01

Surely part of a system? Is say your header tank the whole plumbing or merely a connected component? What happens if your garden gate rots and you buy another, would that be a problem? What about a garage door of a detached garage in the grounds of a let property?

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Replying to DJKL:
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By Tax Dragon
12th Nov 2019 15:13

I refer you to whitevanman's comment, with which I agree.

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By whitevanman
12th Nov 2019 14:46

I think the correct approach (as has been alluded to already but then seems to be passed over) is to consider firstly whether the expenditure is repair or replacement and in that connection you need first to consider, what is the entirety. Is it the Sceptic tank or the house?
I think most people would agree that the tank is simply an integral part of the house. It may stand separate from the building but is connected to it by pipework. If you look for case law support, the HMRC Business Income manual at BIM35467 refers to 2 old cases involving chimneys. The Samuel Jones case confirmed that the chimney was simply part of the factory whilst the Bullcroft case went the other way. If you look at the facts however, you will see that in Bullcroft, both new and old chimneys were in place at one and the same time and the old one could have remained in place, permanently. It was a question of fact (in each case) but one can see why the decisions went as they did.
If you conclude that the tank is simply part of the house, it follows that the expenditure in question is simply a repair (again others have already commented that any element of improvement is comparable to the double glazing issue).
If however, you consider the tank to be the entirety, that would bring in consideration of the other issues raised and I would agree the replacement of domestic items relief is not in point. I suspect however that it would be regarded as an integral feature (which brings us back to the entirety point (again mentioned by someone else) and simply supports the view that what we are looking at is a repair.

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RLI
By lionofludesch
12th Nov 2019 15:14

I can't believe the level of debate here.

It's a repair !!

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Replying to lionofludesch:
Lone Wolf
By Lone_Wolf
12th Nov 2019 15:37

lionofludesch wrote:

It's a repair !!


You might be right, but could you expand that answer so that it takes 5/6 paragraphs to say the same thing please ;)
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Replying to lionofludesch:
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By Tax Dragon
12th Nov 2019 15:54

lionofludesch wrote:

I can't believe the level of debate here.

Makes a nice change, doesn't it, from all the carping and hand-gesturing that Aweb is famous for.

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Replying to lionofludesch:
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By whitevanman
12th Nov 2019 17:48

I agree but doesn't it worry you that the debate seems to be necessary?

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By paddy55
13th Nov 2019 12:02

It's been some years since I was au fait with the U.K. tax system. However, going by other tax systems with the same problem, I would suggest that the expenditure is one of the following a) a capital allowance item of expenditure. Many things have been officially recognised as plant and equipment. b) It is wholly or partially a building improvement. If the expenditure raises the value of the building by a recognisable amount, the amount of the increase would be a building improvement i.e. capital. Some tax jurisdictions allow capital improvements to be depreciated e.g. 2.5%. c) If the expenditure is neither plant nor building improvement, then it must be a repair.

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