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House Garage Demolition Capital v Revenue Expense?

Demolition of Garage to Semi-Detached Residence - Garage Not Connected to House and Not Rebuilt etc.

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Between lettings, a private landlord decided to have the house garage demolished at a cost of £4,000. The garage had become dangerous and was an eyesore. The demolition team left the area where the garage was situated flat and tidy. The garage was not physically connected to the house, but was several yards away in the garden area.

Having examined PIM2030 and the two "Chimney" cases, Bullcroft Main Collieries V O'Grady TC 93 and Samuel Jones & Co (Devonvale) Ltd v CIR 32 TC 513 I am a little confused as to the tax treatment.

It seems to me that the semi-detached house is one "entirety", and the garage is another "entirety". Had the garage abutted the house, I can see an argument that the demolition of this dangerous garage was a "repair" to the house.

However, the garage was in fact a freestanding building several yards away from the house. It seems that the demolition and rebuilding of a freestanding garage is a capital cost. However, I am not so sure if it is still capital if the garage was not rebuilt. The cost was primarily incurred to remove a dangerous and ugly feature in close proximity to the semi-detached dwelling, which could have put off the prospective new tenant.

I wonder if perhaps Southern V Borax Consolidated Ltd (1940) 23 TC 597 has any bearing on this (a payment designed to preserve intact the existing business, its goodwill or the assets comprising it, rather than to improve the structure or organisation or to bring to it some positive and lasting benefit, qualifies as an allowable revenue item).

My opinion on this swings wildly depending on what commentaries I read on this subject. Can anyone suggest which tax reatment is correct.

Please also note PIM2030 (Is It Capital) and BIM46910 (What Is A Repair: The "Entirety") as per the following links:

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2030

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46910

 

 

 

 

 

Replies (18)

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By Cylhia66
19th Oct 2021 07:09

If the garage was not rebuilt, was it not an improvement?

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By David Ex
19th Oct 2021 10:57

I’m struggling to see a revenue deduction.

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Replying to David Ex:
By Duggimon
19th Oct 2021 11:13

It's in the post above yours.

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Replying to Duggimon:
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By David Ex
19th Oct 2021 11:31

Duggimon wrote:

It's in the post above yours.

Where are you looking? The link concerns “demolition costs of plant and machinery” and says they are capital.

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Replying to David Ex:
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By The Dullard
19th Oct 2021 12:05

It doesn't say that they are capital. It says that CAA 2001, s 26 requires the demolition expenditure to be added to the P&M pool, which is a slightly different proposition.

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By The Dullard
19th Oct 2021 12:12

Well, the entirety certainly isn't the garage, is it? In Bullcroft, the chimney was replaced.

The entirety would seem to be the land on which two buildings once stood, and now there is only one; the dwelling house that is enjoyed with the land.

I can't see that the land has been improved. As described, I see only remediation of the land, by the removal of something dangerous.

Unless you think there's a Law Shipping argument, I struggle to see capital expenditure.

The test is whether what you've got now is something better than what you had before or whether what you had before was simply broken and is now mended. https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim35480

I also fail to see the relevance of Winnie Wiggleroom's link since it deals with a statutory imposition in relation to the demolition of plant and machinery. Just because a statutory provision deems certain expenditure to be treated as if capital, doesn't mean that similar expenditure outwith that statutory provision carries the same treatment.

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Replying to The Dullard:
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By More unearned luck
19th Oct 2021 17:49

The expenditure is capital because it is an alteration. We had house and garage and now have house and no garage.

The test isn't just is there something better than before; it is also is there something different from before.

The expenditure isn't a repair as nothing has been repaired.

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Replying to More unearned luck:
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By The Dullard
19th Oct 2021 18:01

Er, no. Broken, now mended, but different is a repair as per Conn v Robins Bros to which I refer.

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Replying to The Dullard:
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By More unearned luck
21st Oct 2021 18:59

Nothing has been mended. Throwing away something broken is not the same as mending it, whether 'it' is an asset or part of an asset. Every case depends on its facts: Conn v Robbins was not a case of simple demolition. What distinguishes Robbins from the OP's case is the finding in Robbins that there was nothing new:

"...I think it is implicit in the Commissioners’ finding that the result of this work was not to produce something new but to repair something which had previously existed. Upon that basis it seems to me that there is no ground for regarding this expenditure as a capital expenditure."

Whereas we have something new, which is an area of hard standing that had not previously existed.

It is not revenue as we have something different from before: the expenditure does not restore the asset to its former state.

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Replying to More unearned luck:
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By The Dullard
21st Oct 2021 19:36

You're approaching this the wrong way around. The test is not whether the expenditure is revenue, but whether it is capital.

If it isn't capital then it's deductible. The asset wasn't safe and now it is, but since it isn't any better than before, the expenditure isn't capital.

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Replying to The Dullard:
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By More unearned luck
25th Oct 2021 19:51

I'm not approaching this the wrong way round; . 'capital' includes alterations, ie things that are not better than before, but merely different than before.

If I'm wrong about it being an alteration then that would be because it would be an improvement. The property must be better and more valuable than before otherwise the decision to demolish would be be a perverse one, and we should assume that the OP's client is a rational being in the absence of reasons to believe otherwise.

"The asset wasn't safe and now it is, but since it isn't any better than before, the expenditure isn't capital". If the asset is the garage (as was the chimney in Bullcroft Main Collieries) then how can its destruction be revenue? What we have is a fundamental change in the character of the asset from existence to non-existence. If the entity was the property then there has been either an alteration or an improvement. In this case too there has been a change in the character of the asset, but quite as profound.

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By ireallyshouldknowthisbut
19th Oct 2021 17:25

As Dullard mentions you don't have an issue with the definition of the garage forming part of the 'dwelling house', as this includes the curtilage. So the whole asset is not the garage, its the whole site.

If the garage was demolished and replaced with a new one, I would suggest this was very much a repair unless there was substantial improvement. Ie the size increased substantially. There is quite a lot in the manuals about repairs. After all there is not two garages, only one in this example of replacement. You wouldn't call a new kitchen a capital item, unless it was moved or greatly expanded, and even then probably only a portion of it, as there is still only one kitchen when you are done.

As for revenue, the expenditure would seem to be for the purpose of the lettings business.

An argument for repair would be you were mending the car parking area by removing an old fashioned item which is no longer in common use for storing vehicles. Probably too narrow for a modern car, and replacing with hard standing? I would be tempted to book as a repair and explain to the client the arguments against and let them sign off on it.

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Replying to ireallyshouldknowthisbut:
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By DJKL
26th Oct 2021 09:09

I think I too would be tempted down the repair route, akin to garden landscaping, capital treatment would possibly lead to not even getting a deduction for future CGT ( being a demolition would it be "there" at the time property eventually sold?)

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Replying to DJKL:
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By Tax Dragon
26th Oct 2021 09:37

Is landscaping always revenue? Seems to me that, even if the work is restorative, the cost way well be capital - else s416 CAA 2001 is somewhat irrelevant.

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By fawltybasil2575
26th Oct 2021 10:42

@ penelope pitstop (OP).

I consider that your own words, in your initial question, provide the key (in all cases, the capitals are mine):-

(1) "The garage HAD BECOME dangerous and was an eyesore”.

(2) “The cost was PRIMARILY INCURRED to remove a dangerous and ugly feature in close proximity to the semi-detached dwelling, which could have put off the prospective new tenant”.

(3) “I wonder if perhaps Southern V Borax Consolidated Ltd (1940) 23 TC 597 has any bearing on this (a payment DESIGNED TO PRESERVE INTACT THE EXISTING BUSINESS, its goodwill or the assets comprising it, rather than to improve the structure or organisation or to bring to it some positive and lasting benefit, qualifies as an allowable revenue item)”.

The garage was thus, at the start [see (1)] not unsafe, but BECAME unsafe during the lettings periods.

The expenditure was incurred (in specific terms) for the purpose of removing a dangerous eyesore which [see (2)] could put off prospective tenants.

The expenditure was incurred (in general terms) for the purpose of protecting the business [see (3)] to thereby restore the business to its state prior to its becoming dangerous.

As ever, the key is the PURPOSE of the expenditure – in my submission thus a revenue expense. The HMRC guidance at BIM 35000 (and links therefrom) provide useful reading.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
26th Oct 2021 11:36

I agree (1) and (2), but HMRC's interpretation of the Borax case (see BIM35540) is somewhat different. From that page:

"At page 602 Lawrence J explains that expenditure that does not alter a fixed capital asset is incurred on revenue account:

"'…in my opinion the principle which is to be deduced from the cases is that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company.'"

In the OP's case, as MUL points out, there is an alteration to a fixed capital asset - so I don't think HMRC would struggle to distinguish the scenario from Borax.

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By More unearned luck
27th Oct 2021 19:28

It seems (I put no more strongly than that) to be implicit in HMRC's comment at CG15200 that they consider demolition costs to be capital (but sometimes failing the reflected-in-the-value-of-the-asset-at-the-time-of-sale test, so no IT relief and no CGT relief.)

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