Houses of Multiple Occupation (HMOs) in the main aren’t eligible for capital allowances. But about 10 years ago some capital allowances “specialists” including Portal Tax Claims contended that they were.
The case of Hora Tevfik vs. HMRC has proven that the rules are exactly what most established advisers thought: no capital allowances are available beyond the front door of a residential dwelling.
So, what happened to Mr Tevfik, and why is it important to you?
Tevfik vs. HMRC – the background
Mr Tevfik is a landlord. He held three properties purchased between 2001 and 2006 – two of which were only 50% owned by him. Portal Tax Claims was engaged to prepare capital allowances reports for these three properties. And a purported claim of £53,437 was identified; relating mostly to the three purchases and a small balance relating to subsequent works.
For the 2011/12 tax return period, the taxpayer received rental income and took a deduction of £50,000 for capital allowances under an Annual Investment Allowance (AIA).
Although Mr Tevfik only owned 50% of two of the properties, no reduction in the capital allowances claim was made. This claim created a tax loss for the taxpayer. No additional comments were made in the white space of the return. And HMRC initially accepted the return as submitted without enquiry.
For most taxpayers, that would be the end of it; Mr Tevfik would have successfully made a capital allowances claim on the shared areas of three HMOs.
But then came the discovery assessment
Unfortunately for Tevfik, that wasn’t the end of it. A 2015 HMRC enquiry into his 2012/13 tax period found that £50,000 of AIA claimed in the 2011/12 period related to residential properties which were HMOs.
HMRC contested that AIA couldn’t be claimed in the 2011/12 period on the expenditure from earlier periods – especially expenditure prior to 6 April 2008 when AIA first became available.
HMRC then argued that because the expenditure arose in relation to the communal areas of residential properties or dwelling houses, such as hallways, kitchens and bathrooms, no plant and machinery capital allowances could be claimed either. This line of argument followed HMRC’s Revenue Brief 45/10 in 2010.
What was the outcome?
The First Tier Tribunal agreed with HMRC’s arguments and Mr Tevfik now has a tax liability of £11,850 that he wasn’t expecting. Here’s why:
- Tevfik was claiming for 100% of the three properties, but only owned 50% of two of them.
- There was insufficient disclosure on the tax return to give HMRC enough detail to previously identify what assets the capital allowances claims related to.
- The properties had shared kitchens and bathrooms, and the corridors were needed to move between the bedrooms and these other areas of the property. No ‘flat’ provided the facilities necessary for day to day private existence. As such the external front door to the property is where the ‘dwelling house’ commences and not the front door to each ‘flat’.
What should you take from this?
The Tevfik case not only confirmed what could and couldn’t be claimed. It also demonstrated that discovery assessments are alive and kicking in the world of capital allowances.
Here’s our advice:
- Don’t claim AIA in the current period on expenditure incurred in previous periods, and certainly not in periods that pre-date AIA.
- You can’t claim allowances for the proportion of the property that you don’t own.
- Make sure that the disclosures on your tax returns are detailed enough to prevent discovery assessments. We always recommend you submit your detailed capital allowances report as part of your tax return to mitigate this risk.
- Communal areas of buildings with self-contained flats (lift lobbies, car parks, gyms, laundries etc.) can still be claimed for. But where the ‘flat’ relies on shared kitchens, bathrooms etc. elsewhere in the building, those communal areas aren’t eligible.
- You can still claim capital allowances for qualifying furnished holiday lets, residential and care homes, some student accommodation and some shared residential buildings.
- Making capital allowances claims can be a minefield, best navigated safely by appointing an experienced capital allowances specialist that knows what they’re doing. Look for a credible firm that has significant experience and will still be around to support you if HMRC make enquiries.
To make sure you’re making the most of capital allowances, speak to your tax adviser today.