No capital allowances for communal areas of HMO

In Hora Tevfik v HMRC [2019] TC07383 the First Tier tribunal denied claims for capital allowances on the communal areas of HMO properties and found a discovery assessment valid despite oddities in the return.

Capital allowances cannot be claimed by an ordinary property letting business consisting of the letting of a dwelling house. They can be claimed on plant and machinery used in some other types of dwelling house, such as:

A Furnished holiday letting.
A dwelling house used as part of a qualifying trade.
Relating to shared areas of buildings that consist of multiple self-contained dwellings.
Where a property is in mixed use, a just and reasonable apportionment is required.

Mr Tevfik rented out three properties, though his 2011-12 return, in error, said he rented only one property.

He claimed both the 10% wear and tear allowance and capital allowances. Originally he claimed £50,000 in AIA’s but was out of time for this claim; general capital allowances were instead in point.
On enquiry HMRC found all three properties were houses of multiple occupation (HMO) and that he only owned 50% of two of them.
The capital allowance claims related to installations including heating, lighting, gas, electrics, fire alarms and smoke detectors but was restricted to communal areas only.
HMRC issued discovery assessments for £11,849.80 on the basis that capital allowances were not due as the expenditure was for a dwelling house. Mr Tevfik appealed.

The FTT dismissed the appeal on all counts.

On the question of discovery, the tribunal found:
- HMRC could not have been reasonably expected, on the basis of the information made available to them, to be aware of an insufficiency, despite inconsistencies in the return such as:
  - Only one property being declared as rented.
  - Claims to both AIA and wear and tear allowance; the court said this was odd but questioned whether it was inevitably wrong.
  - Total rental figures not matching up to the amount of wear and tear claimed.
- The return perhaps ought to have made HMRC suspicious of an insufficiency, but it was not enough to make them aware of the insufficiency.
In the matter of whether the expenditure qualified for capital allowances the court agreed that communal areas are, by HMRC Brief 45/10, seen as being part of a dwelling house, with only common parts not being classed as part of a dwelling.
The claims made were described as relating to communal, common parts, installations and shared areas but with no split between the different elements.
- Although invited to do so by HMRC, Mr Tevfik did not revise his claims so as to relate to common parts of the buildings only.
- Nor did he amend the claims to reflect that he owned 50% of two of the properties.
Therefore, the court said the discovery assessment was validly raised.