Tribunal: Capital expenditure can be ‘repairs’

The Tribunal has allowed a taxpayer’s appeal that capital expenditure on an ‘outbuilding’, adjacent to let premises, be treated as repairs rather than as improvements for tax purposes.

The taxpayer had income from property lettings and claimed £119,000 repairs as a deduction in his 2005/06 tax return. HMRC refused to accept that relief was due and said the amount claimed for repairs of an outbuilding was capital expenditure and therefore not allowable.

The taxpayer requested a review of the decision. The review upheld HMRC’s decision. It concluded:

  • The outbuilding had been converted from storage to provide additional living, which required substantial capital expenditure.
  • If the outbuilding had been put back into good repair and still used for storage, the expenditure might have been allowed as repairs.
  • Plans and ‘before and after’ photographs showed different use after the work.
  • The outbuilding was a separate building.

The taxpayer appealed and the Tribunal examined photographs of the outbuilding and judged that it had been in a dangerous state before the work. The judges looked at the architect’s plans and report, and concluded that the work undertaken was essential repairs. There was no evidence to support HMRC’s contention that after the building work there had been a change of use from games room and storage to additional accommodation.

Allowing the taxpayer’s appeal, the Tribunal decided that their decision was supported by the HMRC Manual at PIM 2020 and by the case of Conn v Robins Bros Ltd.

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The Tax Man

The Tax Man

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At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

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Business Valuation in Distress

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After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

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FD in The Cupboard

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Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

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