In Messrs Elliot Balnakeil v HMRC [2021] TC08143, the First Tier Tribunal (FTT) found that farmhouse and bothy renovation costs were capital in nature and not allowable deductions for Income Tax purposes.

  • Andrew and David Elliot Farmed sheep and cattle, in Partnership, on a hill farm in the Scottish Highlands.
  • Over a number of years, the farm had decreased in size from 35,000 to 13,000 acres.
    • Owing to the terrain, 15 acres were needed to keep a single sheep, as opposed to the normal two to three sheep per acre.
  • In the year to 28 May 2011, the farming partnership accounts and tax return claimed deductions for:
    • Bothy Repairs: £23,213.
    • Repairs to Balnakeil House (the house): £206,407.
    • Associated legal and professional fees: £36,401.
  • The bothy was a small outbuilding with one bedroom. Historically this was used as a shepherd’s cottage, but it became uninhabitable due to disrepair and had not been used as living accommodation since the 1970s.
  • The house was the largest farm property. Dated 1774, it was listed by Historic Scotland as of national importance and ‘Grade 1’ listed by The Highland Council (the Council).
    • Prior to 1992, it served as Employee accommodation for the general manager. Thereafter, it saw occasional use by casual workers and was used annually, by a shepherd, for a month at lambing time.
    • Although furnished and serviced by water and electricity, the interior and furnishings remained as they had been since the farm manager moved out. It had become increasingly uninhabitable.
  • In 2002, the Council served an Urgent Works Notice allowing them to undertake any works considered to be necessary for the preservation of the house and to recover the costs of those works from Messrs Elliot.
    • This notice triggered Messrs Elliot to commence renovation of the house and bothy, to an extent beyond that required by the notice.
  • After a lengthy process of seeking funding, consulting on the works and applying for planning consent, renovation started in early 2010 and was mostly complete by late 2012.
    • While the project was being considered, it became clear the farming partnership would dissolve. It did so on 8 October 2014.
    • A new partnership ‘Andrew & Elizabeth Elliot (Balnakeil)’ was formed on 1 January 2012. This partnership marketed the house and bothy as Furnished Holiday Lets and received the letting income.
  • The deduction for renovation costs was disallowed by HMRC as being capital in nature. Messrs Elliot Appealed to the FTT.

For expenditure to be an allowable deduction from trading profits, it must be incurred Wholly and exclusively for the purposes of the trade, and not capital in nature. The latter of these points was considered first. 

The FTT found that the renovation costs were capital, and so disallowable:

  • VAT treatment does not necessarily correlate with Income Tax treatment.
    • The house renovation costs had been categorised in the accounts as capital or revenue based on their VAT liability: 0% VAT for improvements, 5% for repairs and 17.5% for fixtures and fittings.
    • Bothy renovation costs had been allocated 50:50 between repairs and capital.
    • These arbitrary apportionments did not reflect the Income Tax nature of the works.
  • The costs allocated to repairs in the accounts were of the nature of ‘replacement of substantially the whole’. This was not indicative of repairs. 
  • The overall character of both the house and bothy changed. The expenditure was of a capital nature in bringing about this transformation.
    • The house changed from a farmhouse with minimal facilities, which was uninhabitable and unfit for modern living, to a luxury holiday home that obtained 4-star Visit Scotland rating with the grandeur of a classic big house.
    • The bothy became a luxury self-catering cottage from a previously uninhabitable empty shell.


This case demonstrates the importance of interrogating the true nature of ‘repair’ expenditure recorded in accounts to establish its effect on the underlying asset.

As the expenditure, in this case, was capital, it was not necessary to consider whether it was wholly and exclusively incurred for the purposes of the trade. This was nevertheless discussed for completeness. It was found that the purpose of the expenditure was the conversion of the redundant properties into those suitable for holiday letting. The expenditure was not wholly and exclusively incurred for the purpose of the farming trade, against which tax relief had been sought.

Useful guides on this topic

Repairs and renewals
What expenses can you claim for tax? In what situations are repairs disallowed and treated as capital expenditure? 

Wholly and exclusively…toolkit
What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there? 

Farming: What expenses can I claim?
What expenses can farmers claim for tax purposes? Are there special tax and accounting rules for farmers? What are the rules for VAT for farmers? 

Farming: Overview
What is farming? What are the tax consequences and tax considerations of farming?  

A to Z Index for different trades, professions & vocations
What expenses can you claim if you work in a certain type of business? These subscriber guides summarise the key tax treatments for different types of self-employed sole trader or partnership.

Furnished Holiday Letting
What is Furnished Holiday Letting? How do you qualify for Furnished Holiday Letting? What are the rules for Furnished Holiday Letting?

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Messrs Elliot Balnakeil v HMRC [2021] TC08143

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