We have been engaged by a client to undertake capital allowances claims on two furnished holiday lettings. The client has spoken to their accountant who has advised them to go ahead but I have a few concerns which I may want to raise with the client or accountant as I am not sure of the extent to which they are going to benefit from our work.
The facts of the case are the client has a profitable limited company but the furnished holiday lettings are only part of that company i.e. the company derives most of its income from a farm. We are being engaged to undertake claims on two properties built from barns in their financial year 2012/13 but they have other fhl's which have been in operation since the early 90s. The reason we are being asked to undertake claims on the two properties they developed in 2012/13 is becasue they met the new qualifying criteria while the others may not have done so.
My thoughts or questions are as follows:-
i) My understanding is that the FHL business income and expenditure needs to be ring fenced and any capital allowances claimed need to be used only against profits generated by the that business and not used for relief against the farms profits even though they are part of the same limited company. Is this correct?
ii) Where you run an fhl business can you elect to have properties where you only claim wear and tear allowances on some because they don't meet the qualifying criteria and capital allowances on others where they do meet the qualifying criteria? I know you are able to aggregate letting periods etc across all the properties to reach the average to see if all properties meet the qualifying criteria but do you have do do this ie.all properties either qualify or fail based on these averages.
Based on the engagement letter the client has signed we could just do the claim and not worry about the above but we are not that kind of company and only want good outcomes and happy clients.
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Replies (8)
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It's a tricky situation you're in
The averaging election is exactly that; an election, so it's not automatic.
The limitation on capital allowances is limited to plant and machinery used in a dwelling house, other than one used in a UK or EEA FHL. Capital allowances can still be claimed for P&M used in an FHL which are then treated as an expense and so can create a loss.
We've got a difference of opinion though. Whilst FHL losses (company or individual) can't be set sideways generally, I'm of the view that sideways relief can be achieved against other property income within the same (UK or overseas) property business within the process of aggregation.
Others disagree and it may well be HMRC's view that you can't do that. If that view is correct, the CAs are still of use assuming that the FHLs will turn to profit eventually.
I'd be inclined to confirm your concerns that relief might take time in writing to the (almost) instructing accountant to check that they're happy that relief can be obtained within a reasonable timescale. I've heard it referred to as [***]-cover.
My Iterpretation
Steve I'm grateful for your comments. From what I have read I think although the qualifying fhls need to be accounted for separately it does sound like any loss created can be used against profits from the wider property lettings business but not the farm. I think this is what you are saying but also it might be the case that HMRC may take a different view. As you say we need to ensure the accountant understands the situation as I think they may believe that the loss relief may be applied through out the business.
Further thoughts
Since making my previous comment I have had further thoughts. HMRC guidance says that capital allowances can be claimed on a furnished holiday let once it meets the qualifying criteria but then if it fails to meet the criteria only wear & tear allowances may be claimed. Therefore it is difficult to contemplate that capital allowances generated from a qualifyinf fhl could be used to protect profits from a non qualifying fhl even if they are properties within the same limited company.
Any other comments would be greatly welcomed as I notice the HMRCs own PIM has not been updated to give guidance for 2011/12 onwards.
RE:
With reference to the utilisation of capital allowances, corporation tax and potential losses, s.269 (s.269A for overseas properties) of CTA 2009 states that the separate calculations must be made if the company wishes to utilise the capital allowances, wear & tear or loss relief provisions for a FHL business.
If you take a look at s.65 & s.67A, CTA 2010, these two sections apply to FHL businesses and state that the relevant loss relief provisions must be ignored. Therefore, it would seem to me that, in line with the intention of HMRC, FHL businesses are completely ring-fenced. Therefore, relief is only possible against other FHL properties.
If the FHL rules were deemed not to apply, the normal loss provisions for a property business would be relevant and the company may be in a better position as a result.
Agreed
Thanks holywood. That helps complete a puzzle for me. I'd not really considered the FHL loss position from a company perspective before.
I don't believe that FHL businesses are completely ring-fenced though.
I remain of the view that an FHL loss can be set against profits of the ordinary property part of the same (UK or overseas) rental business, but not if a CAs or W&T claim is made and treated as an expense of the property business, nor where any losses (of either part of the property business) are to be relieved outside of the property business.
However, if the FHL part has a loss, and no amount is claimed in it as CAs or W&T (although there may be unrelieved CAs expenditure), and the non-FHL part has a profit with there being an overall profit within the business, then CTA 2009, s 269 and ITTOIA 2005, s 327 would not apply, and the FHL loss can be set against the non-FHL profit (without the need for a sideways claim).
I think it would also be necessary that there were no brought forward losses for s 269/s 327 to not apply.
So yes, the usefulness of the CAs that John's considering is limited to only being available against future FHL profits.
The only way for the FHL rules to not apply is for the definition to be breached. However, in year 1 that would preclude the claiming of CAs, and in later years would preclude the set-off of any brought forward FHL loss (which the CAs would presumably create).
Hmmm...
I'm sceptical of the reasoning Mr Kesby as believe para 4A, s.65, CTA 2010 is quite clear, but appreciate that it is possible to 'get at' the losses of an FHL property if the FHL rules were not to apply.
If the company doesn't wish to claim capital allowances or W&T allowances, it would seem that the benefits of applying FHL treatment, particularly within a company, would be limited and one may as well just apply the 'normal' property business rules to give access to W&T allowances and the desired loss relief.
I have not really ever considered whether it would be possible just to ignore the FHL rules and dis-apply them but would suspect that it would be relatively straight-forward to breach the conditions should a company wish for the rules not to apply.
Anyway, I think the O.P is correct to question to merit of a CA claim and it is useful that he has considered the client's interests even if the accountant has not.
My point...
... is that, in the circumstances I refer to, no loss relief claim is being made under any part of CTA 2010, so the application of s 65, including the exclusions in s 65(4A), is irrelevant.
The treatment is a simple mathematical consquence of CTA 2009, s 205 or s 206, which will be undisturbed by s 269 if no claim is made that would cause it to apply.