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Can you claim AIA on a new Furnished Holiday Let?

Can you claim AIA on pre-trading refurbishments on a new Furnished Holiday letting?

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My client bought a old Relais in France for £50k. Essentially only the walls and windows were useable so it has been fitted out with new electrics, plumbing, windows, shutters, doors, kitchen, fitted cupboards, furniture, utility equipment. This was done over several years (and expenditure amounted to about £50k on the aforementioned items and £50k on building and renovation work) and finally about 10 years after purchase the property is in a fit state to let. The property's first let was in Summer 2021 as a Furniture Holiday Let and it will meet the FHL criteria.  Am I correct in thinking that AIA can be claimed on the remaining £50k (plant & machinery, fixtures, furniture, etc.) under CAA 2001 S12 in the 2021-22 Tax Return?

 

Thanks again.

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By Tax Dragon
30th Jun 2022 15:50

If "about to carry on" in s12 can realistically be interpreted as "might possibly get around to beginning in about ten years" then I don't have a problem with your conclusion.

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By More unearned luck
30th Jun 2022 20:05

The wording of CA23020 is much more accommodating to the OP, so perhaps HMRC don't take your point that 'about' provides a temporal boundary. If so then I'm on HMRC's side:

Firstly if there was such a boundary you would expect parliament to make it a bright line and not fuzzy, eg the law might say expenditure incurred in (say) the two years before the trade commenced is deemed to have been incurred on the first day of trading.

Secondly the reading of a fuzzy boundary into the legislation is reminiscent of the now dead debate over if a discovery could become stale, which ended badly for the taxpayers maintaining that there was limit on how long ago before the assessment was made, the inspector could conclude that there was an insufficiency. But in that case there are statutory time limits, so my analogy isn't perfect.

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Replying to More unearned luck:
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By More unearned luck
30th Jun 2022 20:05

I forgot to repeat 'integral features'.

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Replying to More unearned luck:
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By Tax Dragon
30th Jun 2022 20:32

I had read that HMRC page before I posted. I don't see how it invalidates my post, if that's what you're suggesting.

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Replying to More unearned luck:
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By Tax Dragon
01st Jul 2022 09:43

You also haven't said what you think "about to carry on" does mean.

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By More unearned luck
01st Jul 2022 16:43

Those words refer to to the intending trader and have nothing to do how recently the expenditure was incurred. Section 12 is concerned with the timing of relief, not the denial of relief.

There is a third reason why your construction of the section is wrong. viz it would stymie and distort industrial investment: existing manufacturers and newbies would be treated differently and entrants in new industries would be denied relief simply because it took many years to built their factory or power station or whatever. It is hard to conceive that this is what parliament intended.

Henderson J's construction of s 12 in the High Court round of Tower Mcashback (2008 BTC 805) at para 89 concludes that the section provides a fiscal symmetry. Which is an anathema to the view that it permanently denies relief for expenditure incurred before a certain but unspecified date.

The time the project has taken won't be the cause of any loss of relief for the OP's client.

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Replying to More unearned luck:
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By Tax Dragon
02nd Jul 2022 05:55

I still don't see where you disagree with me - rather, you have explained precisely why there has to be 'fuzz' written in, because otherwise the rule would stymie and distort industrial investment. I would suggest to you that my first post is confirmed by your logic, not refuted by it. The question it asks (because it's the question the legislation asks) is: what happened in the ten year gap?

Remember that s13 also provides for relief to be available. Whether it's s12 or s13 that provides relief depends on the answer to my question.

Or so it seems to me.

(I'd add - though this sounds like it might border on the facetious, and I do so hesitantly [this is indeed an addition by way of edit], it is meant earnestly - there's a difference between building a nuclear power station and fitting half a dozen shutters. How industrial - how commercially minded - was the OP's client? Was their mindset one of being 'about to carry on' a business?)

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By More unearned luck
07th Jul 2022 21:00

'About' means almost at once; in a few minutes' time. Eg "I'm about the put the kettle on. Do you want a cuppa?" The meaning might stretch to a few days as in "I'm about to go on holiday, I haven't the time to do x before I go". On that basis you would exclude about 99% or more of pre-trading capital expenditure from relief. By contrast revenue expenditure incurred in the 7 years before the trade commences can be claimed (s 57 ITTOIA). Why would there be a bright line for revenue and a fuzzy one for capital?

It is also odd, on your reading, that there is relief for the shutters if there was not, at the time the expenditure was incurred the intention to (in this case) to let as a FHL, but not if that intention was present then in the mind of the taxpayer.

If the Act asked what happened in the ten year 'gap' then the answer was very slow progress towards completion of the project.

It is odd that the word 'about' is in s 12. I'm interpreting s12 as if it read:

" For the purposes of this Part, expenditure incurred for the purposes of a qualifying activity by a person before that activity commences is to be treated as if the expenditure had been incurred by him on the first day on which he carries on the activity."

Is there any text book, HMRC commentary, article or case that shares your view?

I still think that a taxpayer doesn't need to worry about the length of the gap between buying the shutters and the first let as there is no time constraint for CAs.

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Replying to More unearned luck:
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By Tax Dragon
08th Jul 2022 06:02

I think I have interpreted s12 the same way as you. 'About to carry on' tests purpose - probably a better word than mindset... or for that matter industrial ('purposeful' is more consistent).

If I bought a holiday home in France, I like to think I'd either be holidaying in it myself (s13) or letting it out for others to do so (if that was my purpose in buying it... s12) in a shorter period than 10 years. And a possible question to ask to identify a client's purpose might be "what happened in the gap?" I think such a question might come up at tribunal.

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Replying to Tax Dragon:
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By Tax Dragon
08th Jul 2022 09:23

Tax Dragon wrote:

'About to carry on' tests purpose...

Though MUL agrees with me that satisfying a purpose test perhaps gets you past the 'about to carry on' condition, I think the legislation is more flexible (/cleverer) than that. For example... you might not know, when you do a house up, whether at the end you will sell or let. Strictly, expenditure can't be for the purpose of letting if you don't know you will let. But if it transpired that you were 'about to carry on' a business in the sense that, as you neared the end of the work (or shortly after you finished) you decided to let, you meet the condition.

So I think the condition tests proximity of expense and qualifying activity - and is met if there is proximity of purpose (business intent) or proximity in time.

And I still think

Tax Dragon wrote:

If "about to carry on" in s12 can realistically be interpreted as "might possibly get around to beginning in about ten years" then I don't have a problem with your conclusion.

is dead on.
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By plummy1
06th Jul 2022 11:04

We undertook a capital allowances claim for a client who took three years to complete his fhl before bringing it into use. We concluded that although AIA could be claimed it could only be claimed at the level applicable at the time the expenditure was actually incurred.

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