Hello
I attach a URL link
https://www.accountingweb.co.uk/tax/hmrc-policy/hmrc-altered-guidance-to...
Rebecca Cave of Tax Writer limited comments on the matter.
how are other practicioners addressing the conflict highlighted in the article. More so since the Manuals are not law.
We enter in additional information / white space that
''interest is claimed as a cost using BIM47500 guidance , Example 2 Mr A''
Here is the BIM link, updated 7th Janaury 2020:
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700
Example 2 , which is set out below
Example 2
Mr A owns a flat in central London, which he bought ten years ago for £125,000. He has a mortgage of £80,000 on the property. He has been offered a job in Holland and is moving there to live and work. He intends to come back to the UK at some time. He decides to keep his flat and rent it out while he is away. His London flat now has a market value of £375,000.
The opening balance sheet of his rental business shows:
Mortgage£80,000Property at market value£375,000
Capital account£295,000
He renegotiates his mortgage on the flat to convert it to a buy to let mortgage and borrows a further £125,000. He withdraws the £125,000, which he then uses to buy a flat in Rotterdam.
The balance sheet at the end of Year 1 shows:
Mortgage £205,000Property at market value£375,000
Capital accountB/F£295,000
Less Drawings£125,000
C/F £170,000
Although he has withdrawn capital from the business, the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn.
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How do other accountants address this issue.
If interest has been clamed and challenged by HMRC what was the outcome.
Do you use the White Space, or avoid doing so?
To what extent do you discuss the matter with your client?
Over two years have elapsed since the ' conflict' arose. Yet you will note that the BIM47500 updates fail to address the issue.
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Replies (5)
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I have struggled getting any definitive guidance since this matter was first highlighted. From my reading of relevant sections in the following book, the authors seem to have no issue with claiming 100% of the interest cost so long as the capital account + retained earnings are not overdrawn:
A–Z of Business Tax Deductions (Published April 2020) Authors:Annette Morley and Nicola Moore
The contents of this book can be accessed free of charge by ICAEW members by logging into their account and going to the Bloomsbury Professional resource.
Why do people consider there to be a conflict?
The Gov.uk guidance says allow if W&E.
Why do you think it was allowable per the BIM example? Because it is considered to be W&E. Allowing the business proprietor to withdraw his capital is a business purpose. The only distinction that I am aware of is that between original capital and the "notional" (if I may call it that) capital arising from a re-valuation.
Seems to me the problem here is that some HMRC officers don't understand the rules. It would be interesting to hear whether the case referred to in the previous thread actually went to tribunal or whether it was conceded when referred up the chain to the relevant technical specialist.
I white-space, but for me it's a non-issue and I don't recall it ever being challenged.
I'm not sure I'm quite four-square with wvm, but there's not much of a gap if there is one. The next line (after the one Rebecca quoted) in the gov.uk guidance reads: "Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn't tax deductible." Which seems neither controversial nor at odds with BIM.
I don't think we differ at all. I used "original capital" as meaning the capital actually introduced, that is to say, what is referred to in Gov.uk as "the capital value of the property (etc)".
Hello Frankfx,
We find ourselves with exactly the same issue as your client. I wonder how this was resolved and if HMRC ultimately backed down?
Thanks for your help