‘Wear’ Has the Claim Gone?

The Note contained the announcement that as from 6 April 2013, the Extra Statutory Concession (ESC) B47 ‘Furnished lettings of dwelling houses - wear and tear of furniture (income tax and corporation tax)’ would be no more. This article investigates the reasons for the ESC withdrawal and considers whether its cancellation has proved as catastrophic as James thought. 

ESCs have been around for decades - since 1897 to be precise - they came into being because it is not easy writing law that deals with many of the scenarios met in real life. Most ESCs are in place to cover minor inconsistencies, not least in instances where the strict letter of the law would prove difficult to operate. 

There are currently over 100 in force (a full list can be seen at www.hmrc.gov.uk/specialist/esc.pdf) and no doubt more would have currently existed had a Mr Wilkinson not applied for a widower’s allowance. HMRC refused his claim and the case ended up in court (R v HM Commissioners of Inland Revenue ex p Wilkinson 2005). The case had nothing to do with lettings but the court’s decision brought into question HMRC’s ability to grant concessions that were not actually laid down in statute. As a consequence, HMRC has been reviewing each ESC, supposedly with the intention of retaining as many as possible; those being kept being gradually incorporated within legislation. However, the review process has identified some concessions that are out of the scope of HMRC’s discretion and must be withdrawn - ESC B47 being one of them.

The reason that ESC B47 was implemented in the first place can be found in the tax legislation (CAA 2001, s 35(2)), which states that capital allowances are not available if expenditure is ‘...incurred in providing plant or machinery for use in a dwelling-house’. It was felt that not being able to claim any tax relief on the purchase of items where a taxpayer is in the business of renting residential property was unfair. Thus HMRC created ESC B47, such that although the original purchase cost of the item could not be claimed, some form of tax relief was still possible. The relief was either via use of a ‘renewals’ claim for the replacement cost or a ‘wear and tear’ allowance calculated as 10% of the net rent received. The ESC therefore allowed an amount of tax relief on items supplied. 

Pre-April 2013, landlords of unfurnished lettings could therefore claim tax relief on the cost of replacing (‘renewing’) items, but not on the original purchase cost whilst landlords of furnished lettings had the choice of either claiming the same ‘renewals’ allowance or the ‘wear and tear’ allowance. 

Post-April 2013, the non-statutory ESC B47 ‘renewals’ basis can no longer be claimed as, in their view, HMRC deem it to be unnecessary.  Their contention is that any claim that would previously have been covered by the concession is still possible but under other sections of the law. 

As James commented in his article, the ‘wear and tear’ allowance might look attractive but the term ‘fully furnished’ is somewhat vague. The legislation deems furnished lettings as being where the property has ‘sufficient furniture, furnishings and equipment for normal residential use’ (ITTOIA 2005, s 308(1)(b)). In effect this means that a tenant must be able to move in without being required to provide anything other than their clothing and food. For example, beds, chairs, tables and a cooker must be placed within the property. 

So if the ‘renewal’ basis is no more and HMRC say that a similar claim can be made under another section of tax law, where do we look? In his article, James suggested looking to claim as ‘repairs’ (the details on such claims are set out in HMRC’s Property Income manual, at PIM2020; see www.hmrc.gov.uk/manuals/pimmanual/PIM2020.htm). Replacement of such items as sinks, baths, radiators should be allowed as ‘repairs’ as they are attached to the fabric of the building but only providing that the item is ‘like for like’.

What sections could you try if the item cannot be repaired and needs to be completely replaced? One section to consider is ITTOIA 2005, s 68 ‘Replacement and alteration of trade tools’. This section applies to expenditure ‘incurred on replacing or altering any tool used for the purposes of a trade’. The legislation is normally considered to refer only to small items such as hammers and chisels, etc. but tax cases have extended the relief to include other items of plant and machinery.

However, as property letting is not a manufacturing business, trying to persuade HMRC to allow a claim for the cost of an item replaced under this section will not necessarily be straightforward. 

An example of such a problem is in claiming for replacement carpets in non-furnished lettings. The leading tax case of Odeon Cinemas v Jones (1971) established, inter alia, that carpets are ‘implements, utensils or articles used for the purposes of the business’. Therefore by virtue of ITTOIA 2005, s 68 the cost of replacing carpets in an unfurnished property should be technically allowable. 

However, HMRC invariably disallow a claim believing carpets to be items of a capital nature and, as a letting business cannot generally claim capital allowances, no claim is granted. Until a court case is brought under this particular heading the rules will remain unclear. As ever, whether a claim succeeds depends upon the particular facts of the case, plus whether it is worth the cost in pressing for a claim should HMRC resist.

Landlords of furnished lettings are more likely to take the easy way out and claim the ‘wear and tear’ allowance, rather than trying the s 68 route. Should a claim be possible a couple of points to note are: 

ESC B47 is gone, but all is not lost. Claims under other sections of the legislation are possible, but need careful consideration before submission.