Un furnished rental property. Landlord (my client) has just (sept 2013) changed tenants, and replaced stairs carpet. Am I correct that this is now not an allowable expense against rental income ? Thanks
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I'd allow it on the basis...
... that it falls within S. 68 ITTOIA 2005, by virtue of the decions in:
Bidwell v Gardiner 39 TC 31 (carpet expenditure in an hotel would have been allowable but for being pre-dilapidation); andOdeon Associated Theatres Ltd v Jones 48 TC 257 (carpet and furnishing expenditure in cinemas never disputed as being allowable generally, but unsuccessfully challenged on the basis of pre-dilapidation).
Obviously that's just my view and HMRC won't agree.
It gives you a tenable position to file with a claim for the expenditure though, and if HMRC challenge it you can make a decision at that stage whether the tax relief available merits taking it to tribunal.
Interesting
The advice I had always been given was that movable items such as carpets and curtains are not allowable at least in a standard BTL although commercial such as hotel or cinema may be different. The implication being that you could remove them from the property and use elsewhere.
Curtains...
... would certainly fall within S. 68, which allows relief for expenditure on the replacement (but not the initial provision) of implements, articles and utensils used for the purposes of the business. That is, of course, unless a wear and tear election is made.
I don't think the fact that they can be taken away and used elsewhere has any bearing on it.
Whilst they're a fitting, rather than a fixture (meaning that it's legally permissible), few people will actually remove carpets from a property these days.
The only difference between a property business and an hotel or cinema, is the degree of wear a carpet received, but again, I don't think the case law considered them from that position. Simply whether they were implements, articles or utensils used for the purposes of the business.
That being said, HMRC are likely to challenge both the curtains and the carpets. They're not necessarily right though, but it's often simply not worth arguing with them.
None of that's reason not to make the claim in the first place, in my view.
I am not convinced a carpet is a "implement article or utensil". Small tools is the usual definition?
Wrong way round
The legislation refers to tools used for the purposes of a trade. It then defines a "tool" as "any implement, article or utensil".
It may be HMRC's view that this only covers small tools, although I don't actually think it is.
The following extracts from Lord Justice Salmon's speech in the Odeon case might help allude to the view of the courts, which is the opinion that ultimately matters.
"It is also perhaps worth noting that the work comprised in these items includes, for example, renewing carpets, decorating, rewiring, etc." p. 688
"...I am equally satisfied that all the sums expended for repairs of the cinema occupied by the taxpayer company or for the supply, repairs or alterations of any implements, utensils or articles for the purposes of the taxpayer company's trade were actually expended for those purposes..." p. 690
Still not convinced that carpets qualify as utensils etc. In fact, the more I think I about it, the less I think they qualify (in a residential setting).
I agree
I don't think that carpets are utensils either. Neither do I think that they're implements.
I do think they're an article used for the purposes of earning rental profits. Otherwise, why would John's landlord client bother providing his tenants with carpet.
I don't know many people that go to the cinema to admire the carpet, but nonetheless the Court of Appeal considered carpets to be implements, utensils or articles used for the purposes of Odeon's trade.
My point all along though is should we just take a negative approach and tell the client that they can't claim the expense? Or should we see if there is a tenable basis on which to claim it? Which do you think they prefer?
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Putting aside Steve's assertion re s68, which I agree is possible but not entirely free from doubt.
I think its an awful state of affairs that the owner of unfurnished property can no longer get clarity whether or not a new carpet is either allowable capital or revenue expenditure.
Its such a basic point.
The language used in s68 (utensils articles etc) is so outdated as to cause doubt.
Does PIM3200 not give some assistance
Although it is headed -
PIM3200 - Furnished residential property: wear and tear allowance
It does expand towards the end to dealing with Renewals & Unfurnished let property. This sounds like a renewal between tenants, and not just after purchase, and would look to be OK as a revenue deduction
"The 10% deduction is given to cover the sort of plant and machinery assets that a tenant or owner-occupier would normally provide in unfurnished accommodation. These are things like:
...,carpets and floor-coverings,...,"
and
"Renewals: furnished & unfurnished property
The cost of replacing plant and machinery supplied with the property can be claimed as an expense where neither the 10% wear and tear allowance nor plant and machinery capital allowances are claimed. This is called the ‘renewals basis’... "
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re the above -
is the point not that the renewals concession ECS B47 has been removed and it leaves those with unfurnished property with no ability (save for s68) to claim a revenue deduction for P&M capital expenditure ?
it appears that the manual page hasnt been updated for this removal of the concession
I agree with blok
PIM3200 is out of date and refers to the concessional renewals basis and wear an tear allowance.
As it's been left, it supports HMRC's usual line of argument (for non-property businesses) that carpet expenditure should be dealt with by way of capital allowances, because CA21200 says so.
What they fail to appreciate is that CA21200 is permissive, not prescriptive.
Before capital allowances would be in point, in any situation (other than an ordinary residential property business), the expenditure first needs to be capital and secondly needs to fall outside of S.68.
For the piecemeal renewal of carpet, it fails one or both of those requirements. I have had that argument with HMRC, and won, in the context of nursing homes.
As King_Maker intimates, HMRC may be more reluctant to accept that position for a property business, now that ESC B47 has been withdrawn.
As I've suggested, I think the tribunals/courts would be likely to support the view, but it might not be worth going that far.
I do still think that it's a tenable claim though, which should be made. Clients just need to be aware that HMRC might resist now.
Carpets
A renewal of a worn out carpet must surely be either (or both) an expense incurred in connection with the provision of furniture, or an "other article" used for the purposes of the trade (see http://www.legislation.gov.uk/ukpga/2005/5/notes/division/5/2/6/14 for what the draftsman means for s68). This topic of renewals must be breaking some records for the number of queries it generates!
an expense incurred in connection with the provision of furnitur
@Nichola: if we rely on s68 then it is irrelevant, but failing that there is a question about what this clause S308(1)(b) means.
The notes to the act say ‘The purpose of subsection (1)(b) is to make it clear that related revenue expenses such as the expenses of repair and insurance of the furniture are deductible in calculating the profits of the property business.’ (my underlining) I am not sure what standing these notes have in law, if any, but they cast doubt in my mind on whether this clause could be used to justify a claim for replacing carpet (or other furniture).
However I suggest it is arguable that this clause justifies claiming for the cost of delivery or cost of fitting of carpet (which is often a significant part of the total cost), because such costs seem to fall within the plain meaning of the clause even if not of the notes.
@Nichola
Obviously we're in agreement.
I'd ruled out carpets as being furniture, but in any event, I think renewals of furniture must also fall under S. 68, given the explanatory notes for S. 308 (dealing with expenses in connection with the provision of furniture).
But have you seen Mike Truman's article in this week's Taxation yet? And the case of the Caledonian Railway Company, where the deductions were allowed on a renewals basis under the ancient predecessor to S. 68 for railway rolling stock, but they weren't permitted to also claim a wear and tear allowance then available.
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I read said article by MT this week.
My conclusion on what was written was that the concession previously introduced by HMRC went against long since drafted legislation (s68 as it now is) and it (the concession) had crept under folks radar because historically nobody was really bothered about the renewals basis.
The concession
The article caused me to take a look at the text of the concession, and there never was a concessional renewals basis, it was statutory all along!
We've all been hoodwinked! This is what ESC B1 actually said:
B1. Machinery or plant: changes from “renewals” basis to capital allowances basis
Expenditure on machinery or plant which has been the subject of a “renewals” deduction does not technically qualify as capital expenditure for the purpose of capital allowances (section 4(2),CAA2001). Taxpayers who change from the “renewals” to the capital allowances basis are, however, permitted to claim such allowances as if the expenditure did so qualify provided that where they use more than one item of a class of machinery or plant they change from the “renewals” basis to the capital allowances basis for all the items in that class.
So it refers to something called the renewals basis that already existed at the time that this concession was made, and it permitted taxpayers to switch from the renewals basis to the capital allowances basis and claim capital allowances on the renewals exenditure.
ESC B47 then refers to relief being available for renewals if the wear and tear allowance isn't claimed, but nowhere other than in the legislation is there any authority for the renewals basis that people have been allowed to apply all these years.
There was no non-statutory renewals basis to withdraw. It was S. 68 and its predecessors all along, and there's a legal authority for it to apply to rather large items.
Carpets as furniture
Carpets are definitely something provided in connection with the provision of a furnished letting. Whilst a property may be furnished and not have carpets, if they are already there and the property is let furnished there will be tax relief on replacing them. We also have a load of case law on general repairs so there is always that side to fall back on.
I noted the article just refered but with due respect that case law does not add anything further as we have that already in the explanatory notes to s68 ITTOIA expenditure (as in my link above http://www.legislation.gov.uk/ukpga/2005/5/notes/division/5/2/6/14) which relates to deductions in respect of the replacement (“supply”) or alteration of implements, utensils and other articles employed for the purposes of the trade." So provided the implement, utensil or other article is employed for the purposes of the trade a deduction applies.
Interesting that there is no rule for duality of purpose, so don't try half using your carpet!
What about "unfurnished" properties?
So where does this leave landlords of unfurnished properties? S308 refers only to furnished lettings. However, most of my landlord clients let their properties "unfurnished", although in practice they are really semi-furnished, as they provide carpets, curtains and kitchen appliances (cooker, fridge, freezer, washing machine etc).
I have always claimed relief for renewals of the above items, but not for their initial cost. Does this basis still apply? Can these items really be treated as "tools" of the trade under S68,? We were told on a recent CPD course that the renewals basis had been withdrawn for landlords. I am totally confused!
I just found this very interesting discussion. To answer jastirling's question, I think S308 does indeed apply to a part-furnished letting. S308A-C (added to the act in 2011) are about the 'wear and tear allowance' which is only available for fully-furnished lettings, a subset of furnished lettings, but if you provide *any* furniture with the letting, and the tenant is entitled to the use of it, then it is a furnished letting for the purpose of the original (and still standing) S308.
I suppose if you provide only carpets then there is a technical argument that these are fittings and not furniture (because not moveable) and so S308 might not apply. However as I have learned (here) the claim for carpets (if it stands up) is based on S68 anyway, which can be applied to furnished or unfurnished lettings alike (but is limited by S308C if you are entitled to, and claim, wear and tear allowance for that property).
BTW, HMRC used to say that you had to choose 'renewals basis' or 'wear and tear allowance' and couldn't chop'n'change from year to year. I don't see that they can maintain this any more, the wear and tear allowance is a statutory option and the landlord is under no obligation to choose it in any given year or for any given property. So chopping'n'changing would seem entirely legitimate (if laborious). If properties are let sometimes fully-furnished and sometimes less-than-fully-furnished, and if you wish to maximise your wear-and-tear allowance, you will have to chop'n'change anyway.
Going back to Steve's mention of CA21200, it is interesting that at CA21230 HMRC make a distinction for the purposes of capital allowances between 'floor coverings that are not part of the building or structure; for example, carpets (but not tiles which are stuck down)' (my underlining). I think this supports the view that vinyl/lino, which is also stuck down, is part of the entirety of the property and thus its replacement, unless it constitutes an improvement, is allowable without reference to s68. Whereas for carpet deductibility depends on s68.