The allocation of costs between repairs and improvements always involves an element of judgment, but if HMRC disagree with the taxpayer’s decision additional tax and penalties can be due, as we explain below. We also have a warning about pension annual allowances and the declaration required on the taxpayer’s SA tax return. Finally we celebrate an outbreak of common sense at HMRC concerning Business Record Checks.
This is an
extract from our topical tax tips newsletter dated 22 October 2015 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
Repairs or improvement
If a client spends a substantial sum on repairing or altering their let property you will probably learn about the project after the event, when you complete the tax return. What you do next could have a huge bearing on the level of any penalty payable should HMRC question the apportionment between repairs and capital.
Only the landlord can know whether the work undertaken has installed a fixture, fitting, or part of the structure which did not previously exist, or has improved such an item so its nature has been transformed. Any of those outcomes means the cost should be classified as an improvement (capital expenditure); everything else is a repair. A diligent taxpayer will record all the expenditure when the work is done and categorise the costs at that time.
However, without back-up to support the landlord’s records, his analysis is worthless. If HMRC open an enquiry the tax inspector will ask for sight of various documents to support the cost apportionment. Those will include: architects drawings, builders’ estimates, receipts and building inspector’s report. Ideally the documents should tell a clear story to link the before and after state of the property. In reality this is unlikely to be the case, but HMRC will demand evidence of why and how each section of work was done.
When the tax inspector’s view of the repair/capital cost split differs from the landlord’s, HMRC may seek to impose a penalty for a careless inaccuracy – up to 30% of the underpaid tax. You can counter this with the argument that the taxpayer took reasonable care establish the correct deduction claimed on the tax return.
The HMRC compliance manual (para CH81130) says if an inaccuracy in a document exists despite the person having taken reasonable care, no penalty will be due. The HMRC manual goes on to say the standard of care is: “that of a prudent and reasonable taxpayer in the position of the taxpayer in question.”
The alternative approach is to encourage clients to keep adequate back-up to support all repair/ capital apportionments, and advise them not to claim costs as repairs which could be shown to be improvements.
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story and the
other two topical, timely and commercial tax tips. We’ve been
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