HORA TEVFIK V THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE & CUSTOMS
FIRST TIER TRIBUNAL TAX CHAMBER (FTT)
Claiming capital allowances on Homes of Multi Occupancy (HMO) has long been a hot potato, with confusion surrounding what is deemed to be within a residential dwelling and what is not. To clear up any misconceptions, in recent years HMRC have sought to provide clarification and guidance on the meaning of ‘dwelling-house’ and qualifying plant and machinery expenditure. However, some taxpayers have continued to claim allowances erroneously. The recent First Tier Tribunal case of Hora Tevfik v The Commissioners for Her Majesty’s Revenue & Customs found in favour of HMRC, and provides more clarity on claiming capital allowances within a residential building.
Mr Tevfik acquired 3 properties, and operated them as HMOs as part of his UK property business. He claimed capital allowances on the shared living spaces such as communal kitchens and living areas and common areas such as lobbies and stairs on the basis that they were not part of the dwelling house and so capital allowances were due. HMRC disputed this as they contended that the expenditure was incurred on a ‘dwelling house’ and therefore did not qualify for plant and machinery allowances (s35 Capital Allowances Act 2001).
In dispute was also the application of the Annual Investment Allowance (AIA) claimed by Mr Tevfik. This was challenged by HMRC on the basis that the AIA cannot be claimed for providing plant and machinery for use in a dwelling-house and in any case the AIA only applies to expenditure incurred before 6th April 2008 – the ‘relevant date’ in CAA2001 s38A (5).
Under S35 CAA2001, no allowances are available on plant and machinery fixtures for use in a dwelling-house. There is no definition of what constitutes a dwelling house in CA2001, but it is given the same meaning as in the Rent Act 1977. In addition, guidance is provided in HMRC’s manual CA11520 and HMRC Brief 66/08 (issued 29 December 2008) which was revised as 45/10 (issued 22 October 2010).
Brief 66/08 attempted to clarify HMRC’s view that only communal areas (shared kitchen, bathroom and lounge) and areas to which tenants do not have access are not ‘dwelling-houses’.
However, there was still confusion and so HMRC replaced 66/08 with 45/10 to try to remove the uncertainty around the definition of a dwelling house. This sought to clarify that dwelling-house should take its everyday meaning – the presence of facilities required for day to day private domestic existence. Each flat in multiple occupation would comprise a dwelling-house. Individual bedrooms alone don’t provide this – and so communal kitchens and lounges fall within the definition of a dwelling house. Common areas such as the entrance lobby, lifts and stairs would not comprise a dwelling house and capital allowances could be claimed in common lobbies on assets such as lifts, carpets, fire alarms and electrics.
The FTT upheld HMRC’s view that allowances were not due on communal areas, but were available on the ‘common’ parts of the building such as the common entrance lobby, corridors and stairs or lifts as such areas would not comprise a ‘dwelling-house’.
Whilst these would have qualified for plant and machinery allowances, Mr Tevfik had not identified the expenditure incurred on the common areas separately and as a result the plant and machinery claim failed. This demonstrates the importance of careful cost segregation and if the costs had been clearly separated, the capital allowances claim for common plant would have succeeded.
The FTT found in favour of HMRC, that the AIA was not allowed. S38A(5) sets out that expenditure is AIA qualifying expenditure if it has been incurred on or after 6th April 2008. As the expenditure had been incurred before this date, Mr Tevfik was not entitled to claim the AIA.
Lovell Consulting Commentary
Capital allowances and dwelling houses have long been a problematic area for taxpayers and HMRC. It is still possible to claim tax relief, but as this case demonstrates, it is important to seek the best advise so all eligible plant and machinery allowances and repairs expenditure is captured and claimed. Lovell Consulting can assist. It is important to note that there is no restriction on claiming any repairs expenditure inside a dwelling house that is being subject to renovation/redecoration works.