It is rather obvious. The reason is Self Assessment.
The fault for having p**s poor systems etc lies squarely with the senior management of HMRC. Some small amount of responsibility rests with the staff but very often they only do what they are told to do, how and when they are told and with the miserable bit of training they have been given. I'm afraid that as with everything else, you only get what you pay for.
Sorry but I don't agree.
The current s201 does not differ, materially, to the original and simply provides that an employment related benefit is any benefit or facility provided by reason of the employment. S205 focuses primarily on the valuation of that benefit.
There is nothing I can see here to alter what I said previously. The question is whether a benefit is provided and in that connection, there is such if an asset is made available for the director's use. So, are the watches made available? On the face of it there is no reason why they should not be so considered but ( and as I pointed out in my previous post) that would ultimately be a question of fact for a tribunal and who knows what a judge will conclude?
Incidentally, I note that in one of your earlier posts you talk about there actually being a " benefit" . I recall that when in a past discussion (concerning offices etc built at a director's home) I suggested that a BIK would not arise if the director did not actually "benefit", you questioned the proposition that there needed to be an actual benefit. How times they do change!
Apologies. Late as ever!
I'm not sure the 2017 changes really altered the basics. They seem to simply codify the treatment previously applied by HMRC.
In particular, the charge now applies where an asset is "made available for.." whereas the original referred to an asset "placed at the disposal of..".
HMRC guidance (see EI Manual 21630 onwards) doesn't suggest any difference in the interpretation of those two terms. Indeed, EIM21880 states that "made available " means the ability to use and is not limited to actual use. A reading of the entirety of the sections (pre and post 2017 rules) shows that the changes made do not change the HMRC position and simply confirm and codify certain aspects that in the past proved contentious.
The answer to the OP 's question is, as often proves to be the case, "who knows".
A BIK will apply irrespective of whether or not there is actual use. The asset must however be made available for private use and therein lies the problem.
The director can put it where he likes (in all politeness) but what is there to stop him taking it out and using it? If he is the only director I would suggest nothing. So it is likely to be always available.
That said, I recall a case (but not the name) where expensive jewellery (to say nothing of a very expensive yacht) were actually used by director / wife / daughter (I think) but tribunal accepted that the only use was business and ruled out a charge based on availability, but again I cannot remember why! It was not that the legislation could not apply, the judge simply decided the assets were not available and so not greatly helpful.
It does show however, that the answer is "it depends" and possibly depends on the tribunal judge if it went that far.
I would agree many of the comments about why the particular investment is made. There is no likely income so far as we are aware and no strong likelihood of sale at a profit. So why choose this particular asset? The only obvious thing one would get is a sense of wellbeing at owning such a watch and that suggests a purely private motive. But again, this is pure speculation and we have insufficient facts.
I suppose point 3 was (strictly) correct in that the acquisition cost was "what she paid". However, for CGT purposes, TCGA 1992, S17, states that a persons acquisition or disposal is deemed to be for a consideration equal to MV in a transaction other than at arm's length. S18 deems transactions between connected persons to be treated as other than at arm's length ( and brother and sister are such connected persons). So, for CGT purposes the brothers disposal to the sister and her acquisition take place at MV.
Exactly what the MV is, is a matter for a professional valuer. The sisters information suggests that she paid less than MV and is aware of that fact. If therefore she makes a return on the incorrect (possibly) basis, without taking professional valuation advice, she would be making an incorrect return and that would be negligent or possibly deliberate. Penalties could therefore arise if the return is challenged by HMRC and found to be incorrect. Not therefore the best advice to the client to simply "wing it".
Whilst not disagreeing with many of the comments made, there is one other, important, aspect that affects companies / directors.
As many have indicated, the correct treatment is fact dependant but that includes consideration of what the company intended. If they intended to meet a personal cost of the director, it is then more likely that it is part of the remuneration package and should be taxed as such (including PAYE etc). Most advisers would, of course, view this as an undesirable treatment as it usually is the least tax efficient. But that does not change the facts!
Having said this, if the expense is not correctly recorded in the records (say a meal recorded as motor expenses) that is unlikely to support the view that the company intended to meet the costs of a private meal when the exact nature of the expense has been 'hidden' as motoring.
It is not common to have the argument that the company intended to reward/benefit the director but as a trainee you should learn all the possibilities and not just the ones that might be preferred!
Late to the party as ever. Just a couple of points re Ss21-23 (CAA).
I may be misreading some of the comments but, for the avoidance of doubt, S23 does not say that anything qualifies for CA's. It merely sets out certain items that are not specifically excluded by Ss 21 and 22. To decide whether allowances are due on such items, regard must be had to the general legislation and case-law.
It is also helpful to understand the background to the introduction of Ss 21-23.
At the time, there was a proliferation of claims that pushed the boundaries of what is P and M. The new legislation was intended to "draw a line in the sand". It reflected, more closely, what HMRC (and by definition the government) believed should qualify ( or perhaps more accurately, what they believed should not qualify).
Accordingly, S21 says, for example, you cannot have allowances for buildings.
But, it had been agreed by courts or in some cases agreements, that some buildings would be treated as qualifying. So, S23 was included to take such items out of the general definition. A dry dock therefore might be a building but was not treated as such by virtue of S23.
All the items in list C were things covered by court decisions or, in the case of caravans, agreements with trade associations etc. HMRC have always adhered to the view that the list does not apply by analogy and only covers specific items that were the subject of such court decisions or agreements.
There is probably an error in item 19 of the list in that it does not contain the reference to caravan sites that is in subs 5. What that means is that all caravans are taken out of Ss21 and 22 not just those that would have been covered by the ESC.
That does not alter the fact that, whether a particular caravan does or does not qualify as plant will be decided by the general rules, without regard to Ss21 and 22. Given that an ESC was required in the first place, it would seem likely that there is considerable doubt.
I would also comment that, in light of the way Ss21 -23 apply, any claim that does not properly reflect legislation and (particularly) case-law will probably be incorrect and possibly result in an incorrect return.
I think the answer to the question raised is "No" the HMRC Officer is wrong.
The Board of HMRC has always had the right to prescribe exactly how a claim or election should be made and what information must be included.
Generally speaking they rarely did so other than specifying that such should be "in writing". There are notable exceptions (e.g. Group Relief claims) and whenever such exceptions are made, it is incumbent on HMRC to clearly set out what they require. I cannot immediately remember the exact process but simply putting it in their guidance is not sufficient. Will see if I can discover what is required.
I am not aware that they have specified any particular form etc in regard to the payment issue, in which case anything which meets the plain reading of the words should suffice. So, something in writing which says what the taxpayer wants, is fine.
I don't like to criticise the staff at HMRC (who are often poorly trained in such matters, or may have had no training on the specific issue) but would suggest the officer in question is of a more recent vintage (which could be anytime in the last 15 years!).
As others have said however, it is a pointless argument to have. Simply reply disagreeing and put the "claim" in writing before the deadline. Of course you should make the officer squirm by requiring chapter and verse to support the initial refusal. This will benefit all by making said officer carry out some much needed CPD.
I usually arrive late to these discussions but the OP here is from 2019 and beats, by far, my previous "best".
Just to throw in a couple of comments.
Firstly, I am not sure I could wholly agree WP's comments about conversion being the start of trading. It is not that I disagree (really) just that in the Freeman Hardy Willis case, Green commented that manufacture alone is not trading. There has to be a sale to produce any profit / receipt.
Also, the BIM instruction referred to does not say exactly what Dull's says.
It refers to trade beginning when they start to produce the sausages (not, "is ready to make" or indeed, "has made").
I suppose the real point, as with all other things, is that the facts are all important.
If a person buys a property with a view to conversion and re-sale, the activity is likely to be a trade. However, there can be no profit until a sale is made. Pending sale, costs are (mostly) part of stock valuation and therefore, date of commencement is not relevant in many cases. There could be some where stock value falls or there are other costs resulting in losses and in those cases the date of commencement will be relevant (possibly).
The BIM guidance mentioned talks firstly about things that are pre-trading and includes getting contracts for purchases and sales. Again, simply making sausages is not the (whole) trade. There has to be a sale. But trading commences when all those steps are in place and production begins. Again, one could make a load of sausages and then freeze them whilst looking for a buyer. When does trading commence?
I am not offering an answer. Merely trying to highlight that the facts are what matters and that decided cases need to be considered against the specific facts of those cases and not taken out of context.
As to the OP, I would agree that property letting is not the same as conversion and sale. HMRC could however argue that both are "seeking to make a profit from property" (as in the Gloucester wagons case) and so are "similar".
I tried to reply yesterday but it seems to have got lost with the reviewers, so I will try again.
I think the problem is that you are looking at it as if the expenditure must be either "repairs" (allowable) or "capital" (not allowable). That is the wrong test.
The case law (so far as relevant) distinguishes only "capital" and "revenue" expenditure.
It is not for HMRC to tell business owners how to conduct their businesses. One owner might like to keep assets in tip-top condition. Another may wait until it is absolutely essential before doing any "maintenance" (to use a neutral term).
The timing etc is a business decision.
For tax it is simply a question of legislation and case law. In the current example, the question is whether it is capital or revenue.
In that connection, any "alteration" is (probably) capital. So two bits of glass instead of one is capital. However, that is not what the courts have held and (perhaps) more importantly, is not how HMRC interpret/apply it. As others have pointed out, their guidance and long-standing practice (back to the 1980's at least) is to treat DG as a direct replacement for SG. It is the modern (20th century!) equivalent.
I think 2 of the reasons for their approach were:
First the courts view on use of modern materials; and
Second, the governments desire to see housing stock particularly, brought to a "modern" standard.
The reasoning is largely irrelevant. It is how they apply the law.
It would perhaps be better if one did not seek to consider whether the expenditure is on "repairs" or "capital". The statutory test is whether it is capital or revenue.
It is not for HMRC to dictate how a business owner should conduct his/her affairs. Some will choose to keep assets in tip-top condition whereas some will use the asset "as is" until such time as there is no alternative but to spend money. The exercise of such personal choice is irrelevant. The fact is that the business owner has decided to follow a course of action because that suits his/her business model. It is perhaps, better to consider the expenditure as on the "maintenance"of the asset because that is a neutral term and avoids the "repairs" issue (it cannot be a repair if it wasn't broken).
The only question is whether what is spent is on capital or revenue account and, as has already been said, HMRC accept that replacing single glazing with double glazing should be treated as a revenue expense.
I don't say that HMRC are entirely correct on this (but why should one wish to argue?) but I suspect their position is influenced by at least 2 things.
Firstly the courts have held that replacing old technology with new is not capital.
Secondly, this has been HMRC's position since at least the late 1970's and was probably influenced by the governments desire to bring housing generally into the 20th century.
My answers
It is rather obvious. The reason is Self Assessment.
The fault for having p**s poor systems etc lies squarely with the senior management of HMRC. Some small amount of responsibility rests with the staff but very often they only do what they are told to do, how and when they are told and with the miserable bit of training they have been given. I'm afraid that as with everything else, you only get what you pay for.
Sorry but I don't agree.
The current s201 does not differ, materially, to the original and simply provides that an employment related benefit is any benefit or facility provided by reason of the employment. S205 focuses primarily on the valuation of that benefit.
There is nothing I can see here to alter what I said previously. The question is whether a benefit is provided and in that connection, there is such if an asset is made available for the director's use. So, are the watches made available? On the face of it there is no reason why they should not be so considered but ( and as I pointed out in my previous post) that would ultimately be a question of fact for a tribunal and who knows what a judge will conclude?
Incidentally, I note that in one of your earlier posts you talk about there actually being a " benefit" . I recall that when in a past discussion (concerning offices etc built at a director's home) I suggested that a BIK would not arise if the director did not actually "benefit", you questioned the proposition that there needed to be an actual benefit. How times they do change!
Apologies. Late as ever!
I'm not sure the 2017 changes really altered the basics. They seem to simply codify the treatment previously applied by HMRC.
In particular, the charge now applies where an asset is "made available for.." whereas the original referred to an asset "placed at the disposal of..".
HMRC guidance (see EI Manual 21630 onwards) doesn't suggest any difference in the interpretation of those two terms. Indeed, EIM21880 states that "made available " means the ability to use and is not limited to actual use. A reading of the entirety of the sections (pre and post 2017 rules) shows that the changes made do not change the HMRC position and simply confirm and codify certain aspects that in the past proved contentious.
The answer to the OP 's question is, as often proves to be the case, "who knows".
A BIK will apply irrespective of whether or not there is actual use. The asset must however be made available for private use and therein lies the problem.
The director can put it where he likes (in all politeness) but what is there to stop him taking it out and using it? If he is the only director I would suggest nothing. So it is likely to be always available.
That said, I recall a case (but not the name) where expensive jewellery (to say nothing of a very expensive yacht) were actually used by director / wife / daughter (I think) but tribunal accepted that the only use was business and ruled out a charge based on availability, but again I cannot remember why! It was not that the legislation could not apply, the judge simply decided the assets were not available and so not greatly helpful.
It does show however, that the answer is "it depends" and possibly depends on the tribunal judge if it went that far.
I would agree many of the comments about why the particular investment is made. There is no likely income so far as we are aware and no strong likelihood of sale at a profit. So why choose this particular asset? The only obvious thing one would get is a sense of wellbeing at owning such a watch and that suggests a purely private motive. But again, this is pure speculation and we have insufficient facts.
I suppose point 3 was (strictly) correct in that the acquisition cost was "what she paid". However, for CGT purposes, TCGA 1992, S17, states that a persons acquisition or disposal is deemed to be for a consideration equal to MV in a transaction other than at arm's length. S18 deems transactions between connected persons to be treated as other than at arm's length ( and brother and sister are such connected persons). So, for CGT purposes the brothers disposal to the sister and her acquisition take place at MV.
Exactly what the MV is, is a matter for a professional valuer. The sisters information suggests that she paid less than MV and is aware of that fact. If therefore she makes a return on the incorrect (possibly) basis, without taking professional valuation advice, she would be making an incorrect return and that would be negligent or possibly deliberate. Penalties could therefore arise if the return is challenged by HMRC and found to be incorrect. Not therefore the best advice to the client to simply "wing it".
Whilst not disagreeing with many of the comments made, there is one other, important, aspect that affects companies / directors.
As many have indicated, the correct treatment is fact dependant but that includes consideration of what the company intended. If they intended to meet a personal cost of the director, it is then more likely that it is part of the remuneration package and should be taxed as such (including PAYE etc). Most advisers would, of course, view this as an undesirable treatment as it usually is the least tax efficient. But that does not change the facts!
Having said this, if the expense is not correctly recorded in the records (say a meal recorded as motor expenses) that is unlikely to support the view that the company intended to meet the costs of a private meal when the exact nature of the expense has been 'hidden' as motoring.
It is not common to have the argument that the company intended to reward/benefit the director but as a trainee you should learn all the possibilities and not just the ones that might be preferred!
Late to the party as ever. Just a couple of points re Ss21-23 (CAA).
I may be misreading some of the comments but, for the avoidance of doubt, S23 does not say that anything qualifies for CA's. It merely sets out certain items that are not specifically excluded by Ss 21 and 22. To decide whether allowances are due on such items, regard must be had to the general legislation and case-law.
It is also helpful to understand the background to the introduction of Ss 21-23.
At the time, there was a proliferation of claims that pushed the boundaries of what is P and M. The new legislation was intended to "draw a line in the sand". It reflected, more closely, what HMRC (and by definition the government) believed should qualify ( or perhaps more accurately, what they believed should not qualify).
Accordingly, S21 says, for example, you cannot have allowances for buildings.
But, it had been agreed by courts or in some cases agreements, that some buildings would be treated as qualifying. So, S23 was included to take such items out of the general definition. A dry dock therefore might be a building but was not treated as such by virtue of S23.
All the items in list C were things covered by court decisions or, in the case of caravans, agreements with trade associations etc. HMRC have always adhered to the view that the list does not apply by analogy and only covers specific items that were the subject of such court decisions or agreements.
There is probably an error in item 19 of the list in that it does not contain the reference to caravan sites that is in subs 5. What that means is that all caravans are taken out of Ss21 and 22 not just those that would have been covered by the ESC.
That does not alter the fact that, whether a particular caravan does or does not qualify as plant will be decided by the general rules, without regard to Ss21 and 22. Given that an ESC was required in the first place, it would seem likely that there is considerable doubt.
I would also comment that, in light of the way Ss21 -23 apply, any claim that does not properly reflect legislation and (particularly) case-law will probably be incorrect and possibly result in an incorrect return.
I think the answer to the question raised is "No" the HMRC Officer is wrong.
The Board of HMRC has always had the right to prescribe exactly how a claim or election should be made and what information must be included.
Generally speaking they rarely did so other than specifying that such should be "in writing". There are notable exceptions (e.g. Group Relief claims) and whenever such exceptions are made, it is incumbent on HMRC to clearly set out what they require. I cannot immediately remember the exact process but simply putting it in their guidance is not sufficient. Will see if I can discover what is required.
I am not aware that they have specified any particular form etc in regard to the payment issue, in which case anything which meets the plain reading of the words should suffice. So, something in writing which says what the taxpayer wants, is fine.
I don't like to criticise the staff at HMRC (who are often poorly trained in such matters, or may have had no training on the specific issue) but would suggest the officer in question is of a more recent vintage (which could be anytime in the last 15 years!).
As others have said however, it is a pointless argument to have. Simply reply disagreeing and put the "claim" in writing before the deadline. Of course you should make the officer squirm by requiring chapter and verse to support the initial refusal. This will benefit all by making said officer carry out some much needed CPD.
I usually arrive late to these discussions but the OP here is from 2019 and beats, by far, my previous "best".
Just to throw in a couple of comments.
Firstly, I am not sure I could wholly agree WP's comments about conversion being the start of trading. It is not that I disagree (really) just that in the Freeman Hardy Willis case, Green commented that manufacture alone is not trading. There has to be a sale to produce any profit / receipt.
Also, the BIM instruction referred to does not say exactly what Dull's says.
It refers to trade beginning when they start to produce the sausages (not, "is ready to make" or indeed, "has made").
I suppose the real point, as with all other things, is that the facts are all important.
If a person buys a property with a view to conversion and re-sale, the activity is likely to be a trade. However, there can be no profit until a sale is made. Pending sale, costs are (mostly) part of stock valuation and therefore, date of commencement is not relevant in many cases. There could be some where stock value falls or there are other costs resulting in losses and in those cases the date of commencement will be relevant (possibly).
The BIM guidance mentioned talks firstly about things that are pre-trading and includes getting contracts for purchases and sales. Again, simply making sausages is not the (whole) trade. There has to be a sale. But trading commences when all those steps are in place and production begins. Again, one could make a load of sausages and then freeze them whilst looking for a buyer. When does trading commence?
I am not offering an answer. Merely trying to highlight that the facts are what matters and that decided cases need to be considered against the specific facts of those cases and not taken out of context.
As to the OP, I would agree that property letting is not the same as conversion and sale. HMRC could however argue that both are "seeking to make a profit from property" (as in the Gloucester wagons case) and so are "similar".
I tried to reply yesterday but it seems to have got lost with the reviewers, so I will try again.
I think the problem is that you are looking at it as if the expenditure must be either "repairs" (allowable) or "capital" (not allowable). That is the wrong test.
The case law (so far as relevant) distinguishes only "capital" and "revenue" expenditure.
It is not for HMRC to tell business owners how to conduct their businesses. One owner might like to keep assets in tip-top condition. Another may wait until it is absolutely essential before doing any "maintenance" (to use a neutral term).
The timing etc is a business decision.
For tax it is simply a question of legislation and case law. In the current example, the question is whether it is capital or revenue.
In that connection, any "alteration" is (probably) capital. So two bits of glass instead of one is capital. However, that is not what the courts have held and (perhaps) more importantly, is not how HMRC interpret/apply it. As others have pointed out, their guidance and long-standing practice (back to the 1980's at least) is to treat DG as a direct replacement for SG. It is the modern (20th century!) equivalent.
I think 2 of the reasons for their approach were:
First the courts view on use of modern materials; and
Second, the governments desire to see housing stock particularly, brought to a "modern" standard.
The reasoning is largely irrelevant. It is how they apply the law.
It would perhaps be better if one did not seek to consider whether the expenditure is on "repairs" or "capital". The statutory test is whether it is capital or revenue.
It is not for HMRC to dictate how a business owner should conduct his/her affairs. Some will choose to keep assets in tip-top condition whereas some will use the asset "as is" until such time as there is no alternative but to spend money. The exercise of such personal choice is irrelevant. The fact is that the business owner has decided to follow a course of action because that suits his/her business model. It is perhaps, better to consider the expenditure as on the "maintenance"of the asset because that is a neutral term and avoids the "repairs" issue (it cannot be a repair if it wasn't broken).
The only question is whether what is spent is on capital or revenue account and, as has already been said, HMRC accept that replacing single glazing with double glazing should be treated as a revenue expense.
I don't say that HMRC are entirely correct on this (but why should one wish to argue?) but I suspect their position is influenced by at least 2 things.
Firstly the courts have held that replacing old technology with new is not capital.
Secondly, this has been HMRC's position since at least the late 1970's and was probably influenced by the governments desire to bring housing generally into the 20th century.