Following the budget should I change FHL claim?

Can an FHL claim for capital allowances be changed to a claim for AIA?

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I only have one client who has a FHL in France. He renovated an old building at a cost of something like £100,000 including £35,000 spent on electrics, plumbing, fittings, furniture etc. Letting started in Summer 2021 and in the 2022 Tax Return claimed 18% capital allowances on the £35,000 (less 4.4% private use adjustment). On the 2023 Tax Return he claimed 18% on the brought forward pool (less 7.7% private use adjustment). This tax year will probably have a similar level of private use adjustment to last year.

What is the Hive's collective thoughts on amending the 2022 Tax Return to claim 100% AIA on the £35,000 (less 4.4% private use adjustment)? Such an amendment would not result in any tax refund as the FHL hasn't yet made any profits but it would crystallise the losses carried forward. I assume there isn't any kind of averaging of the private use adjustment over the next ten years like the capital goods scheme for partially-exempt VAT bodies?

I'm sure I will be thoroughly whipped by the FHL experts but I like a good lashing.

Replies (13)

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Caroline
By accountantccole
08th Mar 2024 14:42

Where will you stand on disposal?
Capital gains on assets vs income tax on proceeds of sale of pooled asset?

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By williams lester accountants
09th Mar 2024 10:06

Are you not out of time to amend the 2021-22 tax return?

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By richard thomas
09th Mar 2024 17:54

Williams Lester is/are quite right about the ability to amend the return - unless the notice to file was given after December 31st 2022.

My instinctive reaction to the question though was that, even though out of time for a s 9ZA amendment, you could make a claim under Sch 1A TMA (claim not in a return).

So what is to stop Dougscott’s client making a claim outside a return under Schedule 1A?

Section 3(2) CAA 2001 is the obvious answer:

“(2) The claim must be included in a tax return.”

End of, you might think. But is it?

Note the following. Section 140 CAA 1990 (the predecessor in part of s 3 CAA 2001) said until repeal:

“(3) Any claim made by a person for an allowance falling to be made to him in taxing his trade [including his FHL] shall be made in his return of income for income tax purposes, and section 42 of the Taxes Management Act 1970 shall not apply to any such claim.”

That is clear and unequivocal – return or nothing. Why then did the Rewrite Project draft s 3 so as to exclude the reference to section 42? And why did it, in subsections (4) and (5), the exclusions from the “claim must be in return” rule, say, in each case, that the claim:

“… is *instead* subject to section 42 of TMA 1970 (procedure for making claims and claims not included in returns).

because that reads as if the drafter thought that by saying the claim must be in a return it automatically followed that section 42 (including Schedule 1A) was automatically entirely ousted. The drafter of CAA 1990 did not think so, so one would expect an explanation in the Explanatory Notes for section 3 CAA 2001, but there is none.

So if s 42 is not ousted, then the question arises whether s 3(2) was intending to do any more than section 42(2) TMA does:

“(2) … where notice has been given under section 8 … of this Act, a claim shall not at any time be made otherwise than by being included in a return under that section if it could, at that or any subsequent time, be made by being so included.

(11) Schedule 1A to this Act shall apply as respects any claim or election which—

(a) is made otherwise than by being included in a return under section 8 …”

Given “shall” and “must” both imply obligation, not discretion, the difference is that the “shall” is qualified – it is possible to make a claim either before a return is filed or after the amendment final date.

Nothing in section 3 explicitly cuts down the 4 year limit in s 43 TMA either, so why did the normally meticulous Rewrite not explicitly change the time limit (as CAA 1990 did) or disapply it, leaving s 9ZA to give the effective time limit.

The HMRC manual is also a tad odd. For IT claims it says, at CA 11130:

“In Income Tax cases capital allowance claims are made in the return (apart from the few exceptional cases). The time limit for making a claim or amending a claim is the normal time limit for making or amending a tax return.”

For CT it says at CA11140:

“Capital allowance claims (including amended claims and withdrawal of claims) must be made in a company’s return, or in an amended return, for the accounting period for which the claim is made (apart from the few exceptional cases).

HMRC may extend the time limits for making, amending or withdrawing a capital allowance claim.”

For IT claims it is “are made”: that is hardly a clear statement that a claim in a return is mandatory.

For CT claims it is “must be made”, but HMRC have a discretion to extend the time limits (which is in paragraph 82(2) Schedule 18 FA 1998).

Why the difference and why is there no discretion for IT claims?

I’m not suggesting in the slightest that Dougscott’s client will stand much chance of getting AIA in this case, merely pointing out the usual lack of clarity which in this case is not just in the usual place, HMRC manuals but also in the legislation.

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Replying to richard thomas:
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By Tax Dragon
10th Mar 2024 06:43

When someone like me (who patently does not have your training or depth of knowledge) reads s3(2), I confirm that said someone does think "end of", as you surmised. I have worked with people who would not stop there and who could replicate your train of thought; sadly I no longer do and I have not acquired the ability to think like that myself. But I still yearn to, so I'm always grateful for your posts.

To my mind, although shorter, s3 of the 2001 Act seems to be doing more (or at least different) work than its predecessor. For example, the exceptions were not in s140 and s14o contained no equivalent of s3(6).

If that's right, I wonder... might ss2 not explicitly exclude s42 precisely because of those "insteads" you do mention, and ss6 which you don't? If ss2 excluded s42 but ss6 made s3 subject to s42 in some situations, would there be an undesirable tension between those sss? In practice I would read s3 (including ss2 with the s42 exclusion) as subject to ss6, but I'd probably always have a niggle in my mind that I wasn't understanding it correctly.

As for the manual, would there be absolute (or at least greater) clarity had the word "only" been included in "The claims legislation in TMA70/S42 (Income Tax) and FA98/SCH18/PARA54 - PARA60 (Corporation Tax) applies to..." in CA11120?

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Replying to Tax Dragon:
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By richard thomas
10th Mar 2024 16:52

Section 3 CAA 2001 is doing different work from some of s 140 CAA 1990 because that is how the Rewrite worked. As well as simplifying the language and layout of sections, it also redistributed material in a more logical order. You can see this from certain ancillary documents such as the Explanatory Notes, the notes on changes and the Table of Origins, that being the document which shows you exactly where each subsection of the 2001 Act came from.

The main exception, that for special leasing (ie leasing otherwise than by way of an otherwise qualifying activity), was in s 141 CAA 1990. Section 3(1) is based on a tax case and subsection (6) is a drafting addition, explained in the Explanatory Notes.

I don’t follow your use of “explicitly” in your third paragraph – there is nothing about s 42 in s 3(2), so if it does exclude s 42 that has to be implicit and arise from a purposive reading. The oddity to my mind is that the drafter thought, by using “instead” in ss (4) and (5) that was enough to show that section 42 did not apply to ss (2) claims.

Faced with the wording of ss (2) to (5) in a judicial context I would give it a purposive interpretation and hold that s 42 did not apply, but your mention of ss (6) which I rather overlooked has set me thinking again.

Section 42(6) and (7) are about the way claims to CAs are made where the asset is acquired by persons acting in partnership. Subsection (6) says a claim by a partnership under s 3 CAA 2001 has to be made in the partnership return, but only where “subsection (2) applies”, ie where a notice to file has been given under s 12AA. [The Explanatory Note oversimplifies this]

This could be read as assuming that section 42(2) does apply to s 3 claims generally, yet the “instead” wording in ss (4) and (5) assumes that it and the rest of s 42 doesn’t. And s 3(6) is not necessary to qualify s 3(2) about returns, as section 3(3)(a) is not specific about which return is meant: individual, trustee or partnership.

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Replying to richard thomas:
DougScott
By Dougscott
10th Mar 2024 23:02

Ah okay, I might have to read that through again!

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Replying to Dougscott:
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By Tax Dragon
11th Mar 2024 06:06

At the risk of oversimplifying, you can claim AIA for 2021/22 only in a tax return for that year. So read and understand the response from williams lester accountants.

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Replying to richard thomas:
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By Tax Dragon
11th Mar 2024 06:24

Thank you again.

Maybe I misuse "explicit" and its derivatives. You had pointed out that s140 included some words that went missing in the rewrite. I would use "explicit" in relation to s140.

Maybe ss2 should explicitly say that s42 is disapplied other than as set out in sss4,5 and 6. As I read you now, it does say this but not in so many words. You seem to have reached that conclusion from s3 itself - is that fair? Your first comment had you looking elsewhere in the acts.

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Replying to Tax Dragon:
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By richard thomas
11th Mar 2024 11:33

What I was doing in my first comment was drawing attention to the stage way s 3 was drafted, as it relied on assumptions that had to be inferred from subsections (4) and (5) - which used "instead" without saying what the proposition was that they were instead of.

I contrasted this odd need to make an inference in relation to such an important issue with the equivalent previous provisions which did not have any such gap in the logic.

I also in the first comment sought to explore what a wily counsel (eg Keith Gordon or Michael Firth) might make of this need to infer to show that s 3 had a different meaning from the one that the drafter obviously intended, and in my second comment I considered how ss (6) might affect the issue.

Despite the oddity I remain of the view that s 3(2) means what it says, and that no alternative way of making a claim is possible.

I don't think I can say any more that might be relevant to the point you make at the end of your post, if I have understood it correctly.

The real point for the OP is the Williams Lester comment - it's out of time.

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Replying to richard thomas:
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By Tax Dragon
11th Mar 2024 22:58

Thank you again, and for your patience. I believe I now understand.

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Replying to Tax Dragon:
DougScott
By Dougscott
12th Mar 2024 00:12

So basically the expert opinion is that I am out of time the change the claim?

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Replying to Dougscott:
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By richard thomas
12th Mar 2024 07:02

Yes, 'fraid so - unless you want to have an expensive argument at the FTT.

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Replying to richard thomas:
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By Tax Dragon
12th Mar 2024 09:13

Expensive, and likely futile.

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