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.
- 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:
- 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.
Links to our guides:
Dwelling house for capital allowances
Annual Investment Allowance (AIA)
Replacement of domestic items relief
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