capital allowances claims Archives

HMRC Updates the tax position for FHLs

The following has been reproduced from the website for the “Institute for Chartered Accountants in England and Wales” (ICAEW)

HMRC has published clarifications on the draft legislation introduced to cover not only Capital Allowances and Furnished Holiday Lets but many other tax considerations as well.

Abolition of FHL tax rules

On 29 July 2024, the government published draft legislation for consultation, which provides for the abolition of FHL tax rules from April 2025. In its response to the consultation in September, ICAEW’s Tax Faculty raised a number of issues where clarification was needed.

HMRC has now published further guidance which addresses many of those points. In particular, HMRC has made it clear that the intention is to remove the specific tax reliefs currently available for FHLs and not to change other rules. The guidance confirms, for example, that holiday accommodation, whether previously qualifying as an FHL or not, remains standard-rated for VAT.

Capital allowances and s198 elections

The general rule is that capital allowances cannot be claimed for expenditure incurred on items for use in a dwelling (s35, Capital Allowances Act (CAA) 2001), but this does not apply to FHLs. Transitional rules will apply on the abolition of the FHL regime so that capital allowances can still be claimed on expenditure included in a capital allowances pool by 1 April 2025 for corporation tax and 5 April 2025 for income tax.

The faculty had asked HMRC to explain how the transitional rules will apply where an election is made under s198, CAA 2001 to fix the amount allocated to fixtures on the sale of a property. HMRC has confirmed that the expenditure allocated to fixtures will not qualify for capital allowances in the hands of the purchaser if s35, CAA 2001 applies (ie, the fixtures are for use in a dwelling).

FHLs commencing in 2024/25

On commencement, FHL status is determined by reference to the 12 months from when the property is first let as furnished holiday accommodation, rather than the 12 months from the start of the tax year/accounting period. How this will work once the FHL rules are repealed (ie, would a new business take account of the part of the 12-month period falling after 1/6 April 2025)?

HMRC has confirmed that this will be the case. Where a business commences in 2024/25, the relevant period for the purposes of the occupancy conditions begins on the first day in the tax year (or accounting period) in which letting commences and may extend past April 2025.

Business cessations

The faculty had expressed concern that a lack of clarity around business cessations and the rules for capital gains tax (CGT) relief may lead to disputes. In particular, the faculty asked HMRC to clarify if:

business asset disposal relief will continue to be available for three years where an FHL business ceases in 2024/25 on taking in a long-term tenant; and
the abolition of the FHL rules will itself be treated as a business cessation.

HMRC has confirmed that “where legislation refers to the cessation of business, it means an actual cessation of business activity”. HMRC says that the date of cessation is “the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future”, and that to benefit from CGT reliefs beyond April 2025, the business had to cease before then.

The guidance also confirms that HMRC does not consider that the repeal of the FHL tax rules means that an FHL business has ceased.

Jointly owned property

The FHL rules tax married couples and couples in a civil partnership who own property jointly on their share of the income from the property. However, once the FHL rules have been abolished, couples will be taxed 50:50 unless they have a Form 17 in place. Form 17 can be used where the property is held in unequal shares.

The faculty welcomes that HMRC’s guidance draws attention to this. The faculty had suggested that HMRC promote awareness of the issue so that couples have time to consider completing Form 17 before the changes take effect. The faculty had also urged HMRC to consider extending the 60-day period for couples to submit the form, but this has not been done.

CGT and anti-forestalling

Clause 14 of the draft legislation includes an anti-forestalling rule, which is intended to prevent a CGT advantage through the use of unconditional contracts. HMRC’s guidance explains that where a contract is made on or after 6 March 2024, and the disposal takes place on or after 6 April 2025, CGT relief will not apply unless the claim includes a statement confirming that the conditions in the draft legislation are met.

In simple terms, the draft legislation requires that either:

the purpose of entering into the contract was other than to avoid the changes made in connection with the abolition of the FHL regime; or
the contract was entered into by unconnected parties wholly for commercial reasons.

1. Full Expensing is Effective from 1st April 2023

Incorporated businesses will now benefit from full expensing on capital allowances from 1st April 2023 but what does this actually mean:-

Full expensing – which offers 100% first-year relief to companies on qualifying new main rate plant and machinery investments from 1 April 2023 until 31 March 2026. In other words plant and machinery which falls within the “Main Rates Pool” which therefore excludes “Special Rates Pool” expenditure (see next bullet point).
The 50% first-year allowance (FYA) for expenditure by companies on new special rate (including long life) assets until 31 March 2026
The Annual Investment Allowance (AIA) providing 100% first-year relief for plant and machinery investments up to £1 million, which is available for all businesses including unincorporated businesses and most partnerships.

2. Why has the Government Introduced Full Expensing?

Investment is a key driver of productivity growth but business investment has been a long-standing weakness in the UK – UK business investment accounted for 10.0% of GDP compared to the OECD average of 12.5% in 2021
A competitive headline Corporation Tax rate – the UK has the lowest rate in the G7 – alongside generous investment incentives will reward businesses that invest and create the right conditions for sustained economic growth.
The government introduced the super-deduction in 2021 – the biggest two-year business tax cut in modern British history – to encourage companies to make additional investments, and to bring planned investment forward as the UK recovered from the Covid-19 pandemic.
Full expensing builds on the success of the super-deduction, allowing companies to write off 100% of the cost of investment in one go.
In the capital allowances survey last year, businesses showed a clear preference for full expensing over the other options under consideration, on the basis of its simplicity and generosity.
As a result of this measure, the UK’s capital allowances regime will be world-leading.
A tax information and impact note for the policy is published [here .]

3. Annual Investment Allowance (AIA)

While Full Expensing only applies to companies who are paying Corporation Tax, individuals and partnerships are still able to claim “Plant & Machinery Fixtures” capital allowances up to £1m per annum. This is by utilising the Annual Investment Allowance which has been set at this maximum level for some time.

In should be noted that it is important to claim capital allowances in the year in which the assets have been purchased or the ability to claim the Annual Investment Allowance for those allowances will be lost and Writing Down Allowances will need to be claimed instead.

Serviced Accommodation – Does it Qualify for Capital Allowances?

In recent years there has been a steep increase in the purchase of property labelled as “Service Accommodation”. This has also been accompanied by a number of, self proclaimed, experts offering training. Unfortunately the message given in some cases is that running “Serviced Accommodation” is a means of being able to avoid the usual capital allowances restrictions for residential property and other onerous requirements.

The truth is there is no reference specifically to “Serviced Accommodation” within the Capital Allowances Act 2001 and therefore it does not automatically qualify. As a reminder the Capital Allowances Act states that subject to other qualifying conditions, the following may be able to claim capital allowances:-

Ordinary Property Businesses
Trades
Furnished Holiday Lets (FHLs)

The most relevant of the above for the owners of “Serviced Accommodation” is normally Furnished Holiday Lets (FHLs). Therefore when we are asked whether “Serviced Accommodation” qualifies for capital allowances we first look to see whether it meets the requirements of an FHL.

What are the Qualifying Requirements for FHLs?

If you want to read these in detail then see our previous blog on this subject. However as long as the Serviced Accommodation operates in the same way as an FHL the main tests will be around the availability for letting and the pattern of letting. Therefore the following minimum requirements need to be met:-

the property needs to be available to let for 210 days per annum
the property must actually be let for 105 days per annum
there must not be a pattern of longer term letting within any financial year. Longer term letting is defined as any period of 31 days or more where the let is to the same person. If the total of these types of lets is 155 days or more in any financial year then the property cannot qualify as an FHL.

In our experience, it is the last bullet point above, which disqualifies many owners of Serviced Accommodation from claiming capital allowances. For many owners of Serviced Accommodation the certainty of long term lets, with a premium for rentals is their goal. However we believe it is not made clear to those who are entering the world of Serviced Accommodation that their property does not automatically qualify for a capital allowances claim.

What Could Go Wrong?

As we can see from the above there is a danger that an owner of “Serviced Accommodation” may mistakenly make a claim for capital allowances. Automatically making a claim for capital allowances without being aware of the facts is definitely a high-risk strategy. One where the legislation, past precedent and case law is not on your side.

If the owner gets it wrong they could be opening up themselves to penalties imposed by HMRC or a future discovery assessment. Therefore we would encourage anyone who is entering this area of property ownership and letting to contact us first for professional guidance.

Hotels are particularly suited to a Capital Allowances Claim

As a rule Hotels are one of the most suited types of commercial property when it comes to making a claim for capital allowances. In this post we briefly state why this is the case.

Hotels Contain Plant

Hotels are rich in “Plant” which qualifies for capital allowances under the general “Fixtures” rules within the Capital Allowances Act 2001. Some of these fixtures include:-

Lifts
Air-conditioning
Heating
Sanitary equipment including toilets, baths and showers
Signs
Fire detection equipment
Hot & cold water systems
Wi-fi and telecommunication systems

Additional Plant

In addition to many of the common items found in other commercial property hotels contain items which are not commonly found in other buildings. Some of these include:-

Swimming Pools
Gymnasium Equipment
Laundry Equipment
Reception Desks & Bars

Items Creating Ambience

In addition to all of the above and more besides capital allowances are allowable on many items which create ambience. That these are allowable is as a result of a legal case of IRC v Scottish & Newcastle Breweries Ltd (1982) 55 TC 252. This means that items such as works of art, ornaments and bric-a-brac may normally be allowable for capital allowances purposes.

These items may also be allowable in other buildings where ambience is created for the benefit of customers such as Restaurants & Public Houses. However they would not be allowable in other commercial buildings such as Offices.

Making a Capital Allowances Claim

As a general rule the level of capital allowances claimable for a hotel will fall between 20% to 30% of the original purchase price of the property. Although if an extensive development or refurbishment work has been undertaken this percentage can increase dramatically when the costs of purchase and refurbishment are added together. Also luxury hotels may attract a higher percentage because of both the quality & quantity of eligible fixtures.

If you own a hotel or hotels (or you have clients who do) then please contact us for a free capital allowances claims estimate

Understanding the full scope of Plant & Machinery is important for capital allowances claims purposes.

I was discussing capital allowances claims on commercial property yesterday and the person I was talking with clearly looked confused. I had been talking about the need to identify the plant and machinery values in a property. When I explained what items can attract capital allowances they said that when I had referred to plant and machinery they immediately thought of factories and industrial buildings not care homes, hotels and offices.

This made me think that it would be worth writing a short blog listing some of the most common items that attract capital allowances together with some less common ones. This will hopefully illustrate why nearly all property that is used for commercial purposes with a view to making a profit is worth investigating for a capital allowances claim.

Plant and Machinery – some examples

Here then are some examples ofitems of plant and machinery which in the right circumstances attract capital allowances:-

Advertising signs, Air-conditioning including ducts & vents, automatic doors & gates.

Beehives, blinds & curtains, burglar alarms & bullet resistant screens.

CCTV systems including cabling & ducting, chilling equipment and insulation, carpets, counters & fittings, catering equipment.

Distribution systems & dry docks.

Emergency lighting & electrical systems.

Fans & heaters, fire alarms, floodlighting floor covering (specialised), freezer rooms.

Generators. Hand dryers & hot water services. Intercoms and internal signs. Kitchen equipment. Lifts & hoists, light fittings & lamps, lighting protection equipment.

Mechanical gates & mezzanine storage platforms (movable).

Passenger lifts, paging systems, power installations. Racking cupboards & shelving, radio & television receivers. Safety equipment, security screens, smoke detectors, switchboards, switch gear.

Tea & coffee dispensers, transformers, turnstiles.

Ventilation equipment, vents. Wash basins, waste disposal units, wet & dry risers, works of art at a restaurant or hotel.

Plant & Machinery – Definition for the purposes of capital allowances claims

In reality machinery has the definition you would expect but for capital allowance purposes does throw up some interesting items which then qualify such as door handles, door closers and locks.

Plant is a slightly more difficult to define but for capital allowances purposes:-

“Plant is anything which is brought into existence (or improved) which has an enduring benefit for the trade.”

There are two key points here namely that the asset in question has to have an enduring benefit. HMRC has accepted that a period of two years or more can constitute an enduring benefit. The other point is that improvements to qualifying assets are to be treated as capital expenditure. Thus repairs and maintenance do not normally constitute capital expenditure whilst the cost of upgrading an asset may need to be capitalised rather than being treated as revenue expenditure.

If you want to investigate the possibility of a making a capital allowances claim on your property visit our website at www.curtisplumstone.com or telephone me, John Plumridge, directly on 02392 696815.