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Court of Appeal rules painting taxable as plant

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10th Apr 2014
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A dispute over how a famous painting in a stately home should be taxed recently reached the Court of Appeal.

The court ruled in favour of the taxpayer (The Executors of Lord Howard of Henderskelfe), who had won a case in the upper tribunal. 

The dispute is about whether a painting by Sir Joshua Reynolds is a “wasting asset” and exempt from capital gains tax.

The custodians of a stately home which featured in the BBC television series Brideshead Revisited, have been spared a tax bill on the £9.4m sale of a famous eighteenth century painting after winning the latest case.

HMRC won a case in the the first-tier tribunal, but this decision was later overturned by the upper tribunal.

In 2013, it ruled (UKUT 129 (TCC) that the famous painting of Omai, a young South Sea Islander, by Sir Joshua Reynolds, which was exhibited in Castle Howard, Yorkshire, was a piece of “plant or machinery” used to boost visit numbers to the house. Plant and machinery is categorised as a wasting asset.

As the painting had been loaned to an associated trading company whose business was inviting the general public to view the house, the Court of Appeal ruled that the asset was kept for permanent employment in a business. 

But there this may not be the end of the matter, says PD Tax Consultants.

“With a lot of tax at stake it is likely that HMRC will appeal the decision to the Supreme Court, but we must wait to see.  HMRC had been provided with initial encouragement after a win in the first-tier tribunal.”

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By plummy1
11th Apr 2014 13:51

Capital Allowances

Does this have any impact on the capital allowances rules regarding the claiming of artwork?

Up until now it has only been applicable for hotels, public houses and restaurants etc. However I am unsure whether defining the item as plant for the purposes of the 1992 TCGA would influence the meaning of the term  for capital allowances purposes. 

Any thoughts?

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By GuestXXX
17th Mar 2015 16:32

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By User deleted
11th Apr 2014 18:16

@secondhand

You've identified the issue.

The point is that neither party was entitled to capital allowances - the owner because it was used for the purposes of someone else's trade, the trading company because they did not have sufficient interest in the asset. Very briefly, the case revolved around the question of whether an asset that was plant in someone else's trade could also be treated as plant (and therefore a wasting asset) in the hands of the transferor. (HMRC tried to argue that it could only be plant in the hands of the person carrying on the trade.)

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By GuestXXX
17th Mar 2015 16:32

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By AndrewTall
14th Apr 2014 10:55

Old assets

Part of the issue in this case is the age of the painting - it pre-dates capital allowances (and for that matter CGT) and is manifestly not a wasting chattel as it is much older than 50 years - but most paintings are deemed not to last >50 yrs so it is deemed a chattel and the rest then follows.

On CAs and artwork, HMRC takes the hard line that only people providing ambience can claim for assets that create the ambience and ignores the various studies on workplace efficiency, white collar crime, etc that under-pin the provision of artwork in other business premises.  I've always felt it bizarre that you can claim for the costs of renting art as a W&E cost of the trade, but not get CAs on the cost of buying art.

That said there is a clear policy point in trying to stop CA creep extending the boundaries of what can be claimed so I don't expect any changes to occur voluntarily.

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By plummy1
14th Apr 2014 11:13

Has it ever been challenged?

On CAs and artwork, HMRC takes the hard line that only people providing ambience can claim for assets that create the ambience and ignores the various studies on workplace efficiency, white collar crime, etc that under-pin the provision of artwork in other business premises.  I've always felt it bizarre that you can claim for the costs of renting art as a W&E cost of the trade, but not get CAs on the cost of buying art.

Andrew,

I am aware of the legal cases which resulted in artwork being allowed in those premises where it adds to the ambience but I wondered whether it has ever been legally challenged in other types of premises? I suspect HMRC will always take a hard line where they know there is no legal precedent to support the taxpayer.

John

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Replying to S4gara:
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By AndrewTall
15th Apr 2014 09:31

Not seen a case on it - yet

plummy1 wrote:
Andrew,

I am aware of the legal cases which resulted in artwork being allowed in those premises where it adds to the ambience but I wondered whether it has ever been legally challenged in other types of premises? I suspect HMRC will always take a hard line where they know there is no legal precedent to support the taxpayer.

John

I'm aware of arguments between inspectors and taxpayers (with mixed outcomes) over such plant outside of the ambience cases but not of any court cases on the point.  That said if HMRC do move towards accepting art designed to motivate staff / discourage fraud / inspire creativity / etc as business assets then the interesting issue of whether art is excessive for that purpose and so has as its purpose the provision of a staff benefit may arise.

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By User deleted
14th Apr 2014 11:36

The distinction in the CH case ...

... is that the artwork was doing much more than creating or enhancing the ambience of the surroundings - it was of such historical value that it was (claimed to be) actively drawing visitors to the House. Plus the fact that the display of works of art and other items is an intrinsic part of the trade being carried on.

What will be interesting to see is whether entities running their own stately home etc businesses now claim CAs.

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By geoffwolf
14th Apr 2014 13:45

not forward looking

surely the reason for not claiming capital allowances on that particular painting is that on cessation the picture is unlikely to be valued at less than the value when it came into business use. It seems to me that HMRC have used the wrong argument here.

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