A pub company has succeeded in making a very late capital allowances claim. The First Tier Tax Tribunal has decided that there really is life after death and in the case of Dundas Heritable v HMRC (2018) where a late claim made for capital allowances has been allowed despite normal time limits not being followed.
The Conventional View of Capital Allowances Claim Filing
Many clients and advisors think capital allowances on qualifying expenditure are lost if they are not claimed in a tax return for the first accounting period when the expenditure is originally incurred. This is contrary to what legislation and practice allows. In accordance with Capital Allowances Act 2001 (CAA 2001) s58 (4) a claim can be made within any open tax return provided the qualifying asset is in existence and in use for a qualifying activity carried on. For example, you may have qualifying expenditure in year end 31 December 2012, and it would still be ok to claim this expenditure in year end 31 December 2017 or later provided the asset is still in existence in this period. For example building still owned or the lease is still in existence for leasehold improvement expenditure.
HMRC Capital Allowances Manual and Legislation Guidance – Capital Allowances Time Limits
HMRC manual CA11140 states a claim for capital allowances must be made within a company’s tax return by the statutory filing date (12 months from the end of the accounting period) or in an amended tax return (12 months from the first anniversary of the statutory filing date). For example for a company accounts for year end 31 December 2017, the company tax return needs to be filed by 31 December 2018 and the amendment deadline would be 31 December 2019. This effectively gives you two years from the end of the accounting period to file a capital allowances claim. The time limit is extended further if an enquiry is raised by HMRC into the relevant tax return.
The relevant legislation for time limits for filing a capital allowances claim for a company is Finance Act 1998 Schedule 18 (FA 1998 Sch 18) paragraph 82. This stipulates the time limits for making, amending or withdrawing a capital allowances claim in a company’s tax return. It provides in paragraph 82 (1) that a claim may be made, amended or withdrawn up to the last of the four dates listed (paragraph 82 (1) (a) to (d)).
The first two dates are relevant to the case of Dundas Heritable v HMRC [2018]. The first date is, the first anniversary of the statutory filing date for a company’s tax return (typically two years after the end of the relevant accounting period) and the second date is, if a notice of enquiry is made into the relevant return by HMRC, 30 days after the enquiry is completed.
Facts of Dundas Heritable v HMRC [2018]
Dundas Heritable Ltd (the “Appellant”) operated public houses and bars and filed their company tax returns late which included a late claim for capital allowances for year end 31 March 2012 on 3 February 2015 and year end 31 March 2013 on 26 November 2015. Both returns should have been filed by 31 March 2014 and 31 March 2015 respectively, therefore HMRC deemed the returns to be too late.
As a result, HMRC opened enquiries on 12 April 2016 into both returns in accordance with FA 1998 Sch 18 paragraph 24 (1) in order to remove the late claims and subsequently issued closure notices rejecting them by virtue of paragraph 82 (1) (a). They further argued the claims should be considered valid only by reference to the time limits applicable at the time; therefore a subsequent enquiry does not post-validate a claim which was initially deemed invalid.
Conversely, the Appellant, despite recognising the capital allowances claims were submitted late; argued the enquiries extended the time limit to 30 days after the enquiry is completed, therefore the claims are valid as they were filed before this date in accordance with paragraph 82 (1) (b).
Decision Held in Dundas
The First Tier Tax Tribunal concluded the claim for capital allowances was timeous on the basis it was made before the four dates prescribed by legislation, therefore paragraph 82 (1) (b) was engaged as the claims were made long before the 30 days after the enquiry was completed. The decision highlights that HMRC is obliged to enquire into a tax return where the capital allowances claim is filed late in order to remove it, therefore extending the time limit prescribed by legislation which would otherwise be deemed out of time.
Practical Implications
To illustrate the effects of the above decision, let say a retailer was tax paying in year end 31 December 2015 but became non tax paying due to trading losses in year end 31 December 2016 onwards.
A specialist capital allowances review in 2018 indicates that based on historical expenditure incurred up to year end 2015, they under claimed allowances of £5m. Prior to the decision in Dundas it would have been considered too late to now amend the tax return for 31 December 2015. This would be the case unless there was some other enquiry into the tax return and it was still an open year. If the earlier years were all closed the advice would be to make a claim in in year end 2016 or in 2017. However ideally you would like to make the increased claim in year end 2015 or even earlier as those are the periods which will trigger a refund of taxes and going forwards the retailer may just have losses.
The decision in Dundas implies that they could now make an amended claim for year end 2015 or even earlier, even after the two year deadline of 31 December 2017. If HMRC then raises an enquiry in order to remove the late claim, this will then automatically re-open and extend the time limit for filing the claim. In our view HMRC are likely to strongly resist the impact of this case and seek to appeal the decision or amend the legislation. Otherwise Christmas really has come early especially for struggling retailers and other tax payers.
