UK: Tax Update: A Round-Up of Recent Tax Issues – Monday, 24 January 2011

Last Updated: 25 January 2011
Article by Richard Mannion


1.1. Revenue Deduction for Capital Expenditure on a Dwelling

UK and Overseas Property Businesses (Including Houses in Multiple Occupation)

For dwelling houses that are part of a UK or overseas property business, but are not furnished holiday lettings the possibilities for claiming a revenue deduction for capital expenditure on furnishings, fittings and fixtures are set out in the table below:


ESCB47 for furnished lettings of a dwelling house - Wear & tear

Renewals allowance (ESC B47)

CAA2001 P&M Allowances

Furniture & fittings

10% of net rental Income

Or Actual cost of renewing

Not permitted (s35)



Can claim cost of renewing fixtures in addition to 10% wear & tear for furnishings

Not permitted (s35), but Flat Conversion Allowances may be due

ESC B47 only applies in practice where capital allowances are not due (for example as set out in CAA2001 s35).

For university accommodation and houses in multiple occupation (HMOs) – where the student flat or room in a house could be regarded as a dwelling – there may be the opportunity to claim wear and tear and cost of renewing fixtures, as well as capital allowances in relation to the parts of the property meeting the conditions for qualifying as common parts (lifts, carpets in hallways, entrance areas and common stair cases etc). Common parts of such properties are not regarded as dwelling houses, and therefore capital allowances are available.

There has been some discussion as to the wording in R&C Brief 45/10, which sets out HMRC's interpretation of a dwelling house applying from 22 October 2010, as to whether common areas in HMOs are regarded as part of the dwelling house or not. The relevant text is:

Returning to the example of student accommodation at paragraph four above, HMRC have concluded that the better view is that each flat in multiple occupation comprises a dwelling-house, given that the individual study bedrooms alone would not afford the occupants 'the facilities required for day-to-day private domestic existence'. In other words, the communal kitchen and lounge are also part of the dwelling-house. The common parts of the building block (such as the common entrance lobby, stairs or lifts) would not, however, comprise a 'dwelling-house'.

This would seem to imply that from 22 October 2010 while communal kitchens and lounges of an HMO would be regarded as part of the dwelling (and thus not attracting capital allowances, but where the wear and tear and/or renewals allowance could be considered), it may still be possible to claim capital allowances on the common entrance lobby, stairs and any lift. Further clarification is expected shortly from HMRC. Please also see Informal of 1 November 2010 for further notes on HMRC's Brief 45/10.

Furnished Holiday Lettings

While the consequent amendments to HMRCs capital allowance manuals (CA11520 and CA23060) arising from HMRC's Brief 45/10 now specifically state that "A person's second or holiday home or accommodation used for holiday letting is a dwelling house" , it is relevant to note that the restriction not permitting capital allowances on dwelling houses (CAA2001 s35) applies to:

  • an ordinary property business,
  • an overseas property business, or
  • special leasing of plant or machinery.

Ordinary property business, overseas property business and furnished holiday lettings are further mentioned at CA2001 s248-250, indicating that furnished holiday lettings is treated as a trade and is not treated for capital allowance purposes as either an ordinary or overseas property business. It is understood HMRC do not regard a furnished holiday letting (FHL) as a UK property business, despite references in ITTOIA part 3 chapter 6 to a UK property business that consists of or includes FHL. Certainly CAA2001 s17 regards FHL as a qualifying activity for the purposes of claiming capital allowances.

From April 2011 under the provisions for changes to furnished holiday lettings, where the property does not meet the conditions for being classified as furnished holiday accommodation it will not be possible to claim capital allowances (subject to an election being made to treat the property as continuing to be an FHL property for up to the following two years). There will therefore be a disposal, and provisions have been drafted to reinstate the equipment at market value when the property does meet the FHL requirements.

Since April 2008 and the introduction of integral features, the type of plant or machinery qualifying for capital allowances in an FHL property may have increased in many cases. Typical plant & machniery that qualifies for capital allowances in an FHL can include:

  • All loose furniture and equipment,
  • Heating, ventilation and air conditioning installations,
  • Aspects of electrical systems (depending on when the expenditure was incurred),
  • Fitted kitchens and bathrooms,
  • Swimming pools.

Where a single price has been agreed for the purchase of a property it may be possible to agree an appropriate apportionment of that purchase price to plant & machinery qualifying for capital allowances. Some capital allowance specialists have indicated that for furnished holiday letting properties, typically, anything between 12% and 30% of the purchase price of a property could be treated as plant & machinery. This means that for an FHL property costing £1m there may be plant with a potential value of between £120k and £300k included in the purchase.

Any claim for capital allowances on fixtures and fittings arising from the purchase of a property may be restricted by:

  • any agreement between buyer and vendor to a CAA2001 s198 election to fix the price attributable to fixtures, and
  • the disposal value required to be brought into account by the vendor (a maximum value of the original cost to that vendor, assuming the plant was bought on or after 24 July 1996).

In arriving at any apportioned value to plant if the vendor bought the plant before 24 July 1996 and has not claimed allowances, then there is no restriction (to vendor's cost) on the value attributed on a just and reasonable basis to the plant.

1.2. Corporation Tax Deductibility of Payments to an EBT

The case of JT Dove Ltd considered the corporation tax deductibility of a payment to an EBT, where that payment was made in order to perpetuate the principles of the original owner's intention for the management of the company's share capital with a view to benefiting the employees and incentivising them to the benefit of the company's profit. In this particular instance the payment was more than a payment of cash for the acquisition of shares for the potential use of employees, though the Tribunal's decision was that the payment was not deductible for corporation tax when made (28 January 1997).

The original owner had transferred 100% of his shareholding in the company to a pension fund for employees in 1954 specifying various principles which included: that the pension trustees should maintain financial control of the company; approve appointment of board members from within the company unless there were exceptional circumstances; that there should only be a take-over of the company if various resolutions and meetings of pension trustees and staff were approved; and that all employees were to receive a full rate of pay and there was to be fairness in relation to remuneration between managers and staff (this was established using a profit sharing scheme amounting to 20% of operating profit shared proportionately between all employees according to their fixed remuneration level).

However under the Pensions Act 1995 it became inadmissible for a company pension scheme to self invest in the company to a greater extent than 5%. The solution was to set up an EBT, contribute the market value of the shares to the EBT (£3m) and for the EBT to buy the shares from the pension fund. Included in the objects of the EBT was the ability to use up to 24% of the shares acquired for incentivising company employees, for example using share options subject to pre-emption rights that they be sold back to the EBT when the employee left the company or retired. The beneficiaries of the EBT could include both the company's current and former employees and connected persons such as spouses, widows and children under 18 years of age.

The questions examined were (i) whether the payment was wholly and exclusively for the purpose of the trade, (ii) whether it was capital or revenue in nature and (iii) whether the payment was a potential emolument.

Wholly and Exclusively

HMRC contended (on the basis of Morgan Tate & Lyle Ltd – 1955 AC21) that it was not wholly and exclusively for the purpose of the trade (a payment intended at least in part to prevent outsiders becoming shareholders was not generally made for the purposes of the trade in that case). The Tribunal considered, however, that the importance of the independence of the company and the preservation of the principles for the harmonious management and working practices of a contented and cohesive workforce meant that the character of the payment was to enable the company to continue to work efficiently and was therefore wholly and exclusively for the purposes of its trade. The presence of beneficiaries outside the employees of the company did not adversely influence this conclusion.

Capital or Revenue Treatment

In reaching this conclusion on the capital/revenue nature of the payment, there was a detailed analysis of the accounting issues applying at the time:

The accounting rules applying at the time were set out in UITF13 and as related to the instance of this case, were covered by example 7 in those rules (shares in a cooperative company held in trust for the employees). The expert evidence (provide by Peter Holgate, senior accounting technical partner in the London office of PricewaterhouseCoopers LLP) considered whether the payment could be:

  • an asset of the company (as the company did not have control of the shares in the EBT, the payment could not represent an asset of the company);
  • an equity item (it could not be regarded as a payment resulting in a decrease in ownership interest from transfers to owners in their own capacity, as it was made before the EBT became an owner of the company);
  • a reduction of a liability (there was no question that the payment could be in respect of a liability of the company);
  • an expense item.

By process of elimination the payment could only be described as an expense item for accounting purposes. Nevertheless, there was a need to consider the capital/revenue divide from a legal perspective.

The three cases were considered in detail:

  • British Insulated & Helsby Cables v Atherton (establishment of a pension fund held to be capital) 1926 AC205;
  • IRC v Carron Company 45 TC18 (expenditure on a charter of enduring benefit but of a revenue nature), and;
  • Heather v PE Consulting Group Ltd 48 TC293 (payments for a share incentive scheme held to be revenue).

In conclusion and without undue regard being given to the 'purpose' of the payment, it was considered that the payment was similar in nature to that in the case of Carron, and was held to be revenue in nature. The fact that no asset of the company was brought into existence was a significant factor in this part of the decision.

Potential Emoluments

As in MacDonald v Dextra Accessories Ltd (2004) STC339, it was found that the payment to the EBT was a potential emolument not paid within 9 months of the year end and that it was not therefore deductible for corporation tax in the year of deduction for accounting purposes.

1.3. Entrepreneurs' Relief and QCBs

This note is a reminder for those dealing with transactions which involve qualifying corporate bonds (QCBs) as part of the consideration for the disposal of assets qualifying for entrepreneur's relief, that an election is available for crystallising a gain on the portion of consideration for QCBs, and therefore the opportunity for entrepreneurs' relief.

TCGA92 s116 applies when QCBs if they are received as consideration (or part consideration) for a disposal of shares, the reorganisation provisions of TCGA92 s127-130 apply. The receipt of corporate bonds is not treated as a disposal, but the proportionate part of any gain on the shares attributable to the QCB consideration is rolled into the bonds and taxable when the bonds are subsequently sold.

However without any election it would not be possible to make a claim for entrepreneurs' relief in respect of the disposal attributable to QCBs unless either (i) the company issuing the QCBs is a trading company (or holding company of a trading group) and the vendor's personal company and he is an employee or officer of the company, or (ii) the conditions in (i) were met for the one year period ending with the date of cessation of trade and that end date was within three years of the date of disposal. Thus if a business owner is selling out to a new company which will not be his personal company, the receipt of QCBs is potentially a problem as far as entrepreneur's relief is concerned.

However TCGA92 s169R permits the vendor to elect that the QCB deferral provisions for gains rolled into the QCBs do not apply, and that there is a CGT event on receipt of the QCBs. Assuming the entrepreneurs' relief provisions are met at that point it will then be possible for the vendor to claim entrepreneurs' relief in respect of the portion of the gain attributable to the QCB consideration. However this will trigger the cashflow impact of the tax on the gain earlier than might otherwise have been the case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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