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  • HMO & Multi-Lets

    Calling all accountants

    There are sections dealing with claims outside a return and error or mistake claims, namely SS 42(9) and 33 Taxes Management act 1970 respectively,They are discussed in HMRC's online manuals at .
    S42(9) applies "Where a claim has already been made either on a return or stand alone, a taxpayer may make a supplementary claim under S42(9) TMA 1970 where an error or mistake has been made on the original claim." and will only be accepted if "the time limit for making the 'original claim' has not expired."
    S33 however,"only applies to errors or mistakes made on an SA return, for example where something was originally omitted from the return. It does not apply to errors or mistakes in a claim that is included within an SA return.".
    "Where a taxpayer discovers that they have made an error or mistake on their self assessment return and as a result, the assessment is excessive, they have the right to amend the return within 12 months of the filing date. Where this time limit has lapsed, they are still entitled to make a claim to ‘error or mistake’ relief under S33 TMA 1970 within 5 years of the filing date for the year concerned."
    Put crudely, it appears that if our landlord had failed to make claim to Capital Allowances (CAs) at all, he may use S33 to file claims for the previous five years, (For 2010 this will be reduced to four years - make your claims now if relevant!)
    However, if no CA claim has previously been made, the much shorter time limits of S42(9) appear to apply.
    Mark Lee said:
    Great reply from Stephen Fay. Key points to reinforce, if I may:
    Stephen Fay ACA said:
    Crucially, CAs are also available on ‘fixtures in a let property’ if they are NOT provided for tenants' use. In other words, if they are not part of the dwelling itself. This can leave a potential CA claim for P&M that is within HMO communal areas. Bear in mind that the UK operates a self-assessment tax return approach, so just because an investor has adopted a particular tax treatment, does NOT mean that someone is 'successfully and legally avoiding tax'. It just means that you have adopted a treatment, and as you haven't been investigated, have heard no more about it. There is a difference!
    The CAs figure for most property investors is small (<£1kpa). Putting a large value in a single year could spark a HMRC Enquiry, which could lead to a full-blown investigation. If the figure is high, and there is good evidence, then it may still be worth it.
    I would add, going back to the original question that:
    1) There are a number of firms offering a similar service and that the main focus over the years has been with care homes. In the early days hardly any care homes had claimed.
    2) If you have an accountant chase them up first. Most accountants are able to identify the P&M but may lack the expertise to quantify the claim sufficiently to withstand Revenue scrutiny. The value of using a specialist however is that they (should) have the input of quantity surveyors who can allocate expenditure, including on-costs to qualifying P&M. As already highlighted above, the absence of a query from HMRC does not mean they have checked the claim and agree it. It simply means they have not seen fit to query it - most commonly because they have not really noted it.
    3) I'm not sure you can claim for 5 back years. Error or mistake will not apply because the claim to capital allowances is made in a return (s33(2A)) and the time limit for a capital allowance claim is 31/1 next following the year of assessment.
    <b style="color: rgb(0, 0, 0);">Mark Lee FCA CTA (Fellow) Chairman - TaxAdviceNetwork.co.uk"More than 2,000  accountants now enjoy our support and services"
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    Where a taxpayer finds out that he has made a mistake in a return or failed to claim all he might be entitled to, he may make what HMRC call an "error or mistake claim". They are discussed in their manual at
    The relevant legislation is contained in SS 42(9) and 33 Taxes Management Act 1970 (TMA).
    The manual states "S42(9) TMA 1970 only applies to errors or mistakes made in a 'claim'. Where a claim has already been made either on a return or stand alone, a taxpayer may make a supplementary claim under S42(9) TMA 1970 where an error or mistake has been made on the original claim.
    A supplementary claim relating to 'error or mistake relief' should only be accepted providing that the time limit for making the 'original claim' has not expired. A supplementary claim of this sort should be dealt with as if it were an original claim and relief given by set-off or repayment."
    With regard to S33 it states "S33 only applies to errors or mistakes made on an SA return, for example where something was originally omitted from the return. It does not apply to errors or mistakes in a claim that is included within an SA return. For errors or mistakes within a claim, S42(9) TMA 1970 applies.
    Where a taxpayer discovers that they have made an error or mistake on their self assessment return and as a result, the assessment is excessive, they have the right to amend the return within 12 months of the filing date. Where this time limit has lapsed, they are still entitled to make a claim to ‘error or mistake’ relief under S33 TMA 1970 within 5 years of the filing date for the year concerned."
    This seems to suggest that if our landlord had originally claimed Capital Allowances (CAs) but of an inadequate amount, his claim will be restricted by the stricter time limits of S42(9).
    On the other hand, if he had made no CA claim at all, he could do so for up to the 5 preceding years although in 2010 this will be reduced to four years. (Get your claims in now!)

    Mark Lee said:
    Great reply from Stephen Fay.
    Key points to reinforce, if I may:
    Stephen Fay ACA said:
    Crucially, CAs are also available on ‘fixtures in a let property’ if they are NOT provided for tenants' use. In other words, if they are not part of the dwelling itself. This can leave a potential CA claim for P&M that is within HMO communal areas.
    Bear in mind that the UK operates a self-assessment tax return approach, so just because an investor has adopted a particular tax treatment, does NOT mean that someone is 'successfully and legally avoiding tax'. It just means that you have adopted a treatment, and as you haven't been investigated, have heard no more about it. There is a difference!
    The CAs figure for most property investors is small (<£1kpa). Putting a large value in a single year could spark a HMRC Enquiry, which could lead to a full-blown investigation. If the figure is high, and there is good evidence, then it may still be worth it.
    I would add, going back to the original question that:
    1) There are a number of firms offering a similar service and that the main focus over the years has been with care homes. In the early days hardly any care homes had claimed.
    2) If you have an accountant chase them up first. Most accountants are able to identify the P&M but may lack the expertise to quantify the claim sufficiently to withstand Revenue scrutiny. The value of using a specialist however is that they (should) have the input of quantity surveyors who can allocate expenditure, including on-costs to qualifying P&M. As already highlighted above, the absence of a query from HMRC does not mean they have checked the claim and agree it. It simply means they have not seen fit to query it - most commonly because they have not really noted it.
    3) I'm not sure you can claim for 5 back years. Error or mistake will not apply because the claim to capital allowances is made in a return (s33(2A)) and the time limit for a capital allowance claim is 31/1 next following the year of assessment.
    <b style="color: rgb(0, 0, 0);">Mark Lee FCA CTA (Fellow) Chairman - TaxAdviceNetwork.co.uk"More than 2,000  accountants now enjoy our support and services"
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    Good evening to everyone who has showed an interest in this subject!
    There are many questions here which need to be answered, but if you would allow me to highlight a few of the main points:-
    Historically, ‘dwellings’ as defined by HMRC were outside of the scope of Capital Allowances. HMRC issued guidance recently, which stated amongst other points, that “We consider that ‘communal’ areas are not dwelling houses”
    As an accountant, and trained Quantity Surveyor, I have valued and been involved with Capital Allowances in the commercial sector for the last 5 years. I am, therefore, in an ideal position to both highlight the various Plant & Machinery assets within a property, and to be able to value both the purchase, installation and commissioning of these assets.
    If you consider these ‘on costs’ as Mark Lee has highlighted, for all of the assets which qualify, within the 50% of the property (this being the rough proportion of communal areas within a typical HMO) for such items as heating installations, Hot & cold water supplies, sanitary wear to name a few, then you will start to appreciate that I am typically seeing PMA’s in the order of 20% of the properties purchase price.

    One must concede, that the actual items, size, purchase price and date all play factors in the final valuation of the assets.
    I work closely with HMRC, and one important factor, is that all of our claim reports are issued using the guidance contained within their recently issued “Pre-return toolkit for Plant & Machinery Capital Allowances”
    I have also updated some recently received testimonials upon my website, should people wish to observe.
    I do of course understand the reservations of the individuals here, but my services are aimed to compliment not compete with the excellent service your accountant provides.
    After answering many of my clients accountants queries in regards to claiming CA’s for HMO properties not one has objected to inputting the figures I provide, safe in the knowledge that each figure can be justified to the Nth degree, using published data which HMRC has pre approved.
    Thanks for all the points raised, I am happy to answer as many queries that arise on this thread and will update my website in the Q&A section.

    Many Thanks
    Arthur Kemp
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    Many thanks for responses it has certainly helped me understand the issue. I would be very interested in anyone who has been investigated as a result of a tax claim of this nature and whether they were able to defend it or what proportion of the claim was eventually accepted as valid.

    From my understanding on CA's any items claimed now cannot be offset when selling the property - so can be offset against capital gains , ( so there is tax gain by offset now against income tax) - also there is tax gain if you replace items claimed such as fire alarms , electrics .

    I understand that on my HMO's the items which qualify will be larger for licenced HMO's than unlicenced and will likely include ( on the premise that nothing can be claimed beyond the initial residential starting point - is this correct)
    1)Central Heating - for communal areas and part of the boiler cost pro rata 'd against communal floor space/non communal space ( but only if the boiler was fitted post purchase - but I normally claim anything fitted post purchase against tax. So in my case only items fitted during refurb would be claimable as I had been advised that items cannot nomally be claimed if fitted pre occupation and their value is added to capital value ? ). The majority of my properties need refurb so I can now claim this now instead of on sale ( current saving 40% income tax- 18%capital gains tax plus cash flow gain )
    2)Wired Internet systems - I have installed specifically for tenants on refurb so can claim now
    3)Electrics - if installed specifically for the HMO and not there on purchase of the property ( so refurbed properties I can claim a % of the new electrics but properties which retain the the wiring etc from purchase I cannot claim ) . If property is rewired during ownership I would claim normally as maintenace.
    4)Furniture , white goods , soft furnishings in communal areas - ? would this be in the wear and tear allowance ? If submitted woudl the IR then challenge and say prove that non communal rooms furniture equates to 10% of rent for w & t ? I think I could not justify?
    5)Communal bathrooms - in my case all renewed on purchase and extra bathrooms added so suitable as an HMO so can bring forward tax claim
    6)Fire alarms , cabling , fire doors , door closers and other equipment - on this basis can claim now ( current saving 40% income tax- 18%capital gains tax plus cash flow gain )
    I am not an expert and so my calculations may be way out but are based on my costs incurred on one of my properties as an example 6 rooms based on 40% floor area communal
    central heating £2000( 40%)
    wired network (done on refurb with electric rewire so less than if post occupation) -- 500£(100%)
    electrics £1600(40%)
    furniture 0
    bathrooms 6000(2 bathrooms all fittings , tiling etc )100%
    fire alarms etc 5000( fire alarm , fire doors and all fittings)100%
    Total £15100
    on the basis of having to pay capital gains in the future ?
    saving doing now £15100*22%(40%-18%)= £3322 less fees + opportunity cost of money now
    I welcome feedback as I am only trying to understand whether it is worth my while proceeding with a claim
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    Oops - its been pointed out to me that in my post above , I made an error in the assumption that Capital Allowances have an impact on capital gains so my calculations should not deduct 18% but be the full 40% which makes quite a difference
    Paul Fenton said:
    Many thanks for responses it has certainly helped me understand the issue. I would be very interested in anyone who has been investigated as a result of a tax claim of this nature and whether they were able to defend it or what proportion of the claim was eventually accepted as valid.From my understanding on CA's any items claimed now cannot be offset when selling the property - so can be offset against capital gains , ( so there is tax gain by offset now against income tax) - also there is tax gain if you replace items claimed such as fire alarms , electrics .I understand that on my HMO's the items which qualify will be larger for licenced HMO's than unlicenced and will likely include ( on the premise that nothing can be claimed beyond the initial residential starting point - is this correct)1)Central Heating - for communal areas and part of the boiler cost pro rata 'd against communal floor space/non communal space ( but only if the boiler was fitted post purchase - but I normally claim anything fitted post purchase against tax. So in my case only items fitted during refurb would be claimable as I had been advised that items cannot nomally be claimed if fitted pre occupation and their value is added to capital value ? ). The majority of my properties need refurb so I can now claim this now instead of on sale ( current saving 40% income tax- 18%capital gains tax plus cash flow gain )2)Wired Internet systems - I have installed specifically for tenants on refurb so can claim now3)Electrics - if installed specifically for the HMO and not there on purchase of the property ( so refurbed properties I can claim a % of the new electrics but properties which retain the the wiring etc from purchase I cannot claim ) . If property is rewired during ownership I would claim normally as maintenace.4)Furniture , white goods , soft furnishings in communal areas - ? would this be in the wear and tear allowance ? If submitted woudl the IR then challenge and say prove that non communal rooms furniture equates to 10% of rent for w & t ? I think I could not justify?5)Communal bathrooms - in my case all renewed on purchase and extra bathrooms added so suitable as an HMO so can bring forward tax claim6)Fire alarms , cabling , fire doors , door closers and other equipment - on this basis can claim now ( current saving 40% income tax- 18%capital gains tax plus cash flow gain )I am not an expert and so my calculations may be way out but are based on my costs incurred on one of my properties as an example 6 rooms based on 40% floor area communalcentral heating £2000( 40%)wired network (done on refurb with electric rewire so less than if post occupation) -- 500£(100%)electrics £1600(40%)furniture 0bathrooms 6000(2 bathrooms all fittings , tiling etc )100%fire alarms etc 5000( fire alarm , fire doors and all fittings)100%Total £15100on the basis of having to pay capital gains in the future ?saving doing now £15100*22%(40%-18%)= £3322 less fees + opportunity cost of money nowI welcome feedback as I am only trying to understand whether it is worth my while proceeding with a claim
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    Nick, in response to your point here, you should be aware that there is no interaction between Capital Allowances and capital gains tax unless the property is sold at a loss, or the items of plant and machinery on which Capital Allowances have been claimed represent wasting assets.
    Plant and Machinery fixtures are never wasting assets. In accordance with the Taxation of Chargeable Gains Act 1992, (TCGA 1992) Section 44(1), the amount of capital gains tax is, therefore, not affected by Capital Allowances claimed on plant and machinery fixtures when a property is sold at a profit.
    The ramifications of the above paragraph are very important for the property owner to understand. Basically, the property owner can claim plant and machinery allowances, sell the property, retain the allowances via a Section 198 election and still get the full benefit of the base cost of the plant and machinery fixtures within the capital gains tax computation. The property owner, therefore, gets double tax relief on the cost of the plant and machinery fixtures. This very important fact is still not widely appreciated by property owners.
    Further more, the accounting transactions for depreciation (Cr BS, Dr P&L btw), are not a tax deductible item, hence the introduction of Capital Allowances in 1878.
    You will be aware of course, that tax computations originate from the accounting transactions, adding back any non tax deductible items (such as dpn) and adjusting for approved tax deductible items (such as CA's).

    Many Thanks


    Nick Parkin said:
    Paul - you have confused me with all the numbers, but I think that the one thing that you are asking about is simple (unless I have lost the plot).
    Property is generally defined by HMCR as "Investment" not "Business". So in normal circumstances no CA are allowed, especially by accountants who want an easy life. However increasingly expenses are being allowed as if Property were a normal business. In particular on this subject we are allowed to depreciate the Plant in HMOs ...... however, if it has been depreciated, then the depreciation is Debited from the Capital Account and Credited to the Expenses Account (forgive me if I got my Cr & Dr the wrong way round!). Consequently anything that you claim against P&L must be deducted from your CGT allowance.
    If that isn't true then it's stupid. but then so much of tax law is stupid that it wouldn't surprise me if I am both sensible and wrong.
    Nick,
    Pimlico Flats Renting Flats in London
    https://twitter.com/pimlico_flats/
    Pimlico Flats
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    Hi there - I spent quite some time researching Capital Allowances as I understand people often under-claim what they're entitled too (especially small business owners, like me).   I ended up going down the route of using a Capital Allowance Specialist.  The firm I used, Portal Tax Claims, only charge if they make a succesful claim so it seemed worth my while using them.

     

    As this is a particularly complex, and specialist, area of tax I'm told it's not unusual for (some) accountants to be slightly hazy in this area - which is why many people end up not claiming the full amount they're entitled to.  Accounts vary, but it's been reported that between 50% - 96% of firms could be owed refunds.  So, it's certainly worth looking in to I think. 

     

    Anyhow - I hope that helps!

     

    Charlottex

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    Hi Charlotte 

     

    I understand that there are changes programmed that are widely know to reduce the allowances being introduced in the not too distant future  ( apart from the clarification in October last year )so if anyone wants to claim they should do so sooner rather than latter 

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    A true master of accounts!

    Stephen Fay ACA said:

    ‘Capital allowances’ (CAs) are a form of income tax relief available for capital expenditure. UK Residential property itself does not usually attract any CAs at all (unlike some other countries).
    HMOs are residential property, and NOT fundamentally different to single AST props for tax purposes. The CA rules apply to both HMOs and single AST props equally (furnished holiday lets are different).
    No CAs are available for furniture, fixtures and fittings, equipment etc. provided for tenants' use in residential furnished lettings.
    However, CAs are available for plant and machinery (P&M) used or provided for use within a property rental business. This includes tools used for maintenance, office equipment and vehicles used in running the rental business.
    Crucially, CAs are also available on ‘fixtures in a let property’ if they are NOT provided for tenants' use. In other words, if they are not part of the dwelling itself. This can leave a potential CA claim for P&M that is within HMO communal areas.
    However, I would be amazed if figures of 25% of the purchase price are realistic. Perhaps 3-5% maybe more typical, although it really depends on the prop itself, and the fittings. A survey would help to support the figure claimed.
    The CA amount is ‘claimed’ in the SA105 Land and Property supplement to the tax return. Bear in mind that the UK operates a self-assessment tax return approach, so just because an investor has adopted a particular tax treatment, does NOT mean that someone is 'successfully and legally avoiding tax'. It just means that you have adopted a treatment, and as you haven't been investigated, have heard no more about it. There is a difference!
    A couple of further points …
     The CAs figure for most property investors is small (<£1kpa). Putting a large value in a single year could spark a HMRC Enquiry, which could lead to a full-blown investigation. If the figure is high, and there is good evidence, then it may still be worth it.
    Property investment is a ‘property rental business’ for tax purposes i.e. it is a business, despite being reported in the SA105 supplement of the personal tax return.
    Investors should ensure that they work with an accountant with specialist property tax experience. I would be disappointed if a client of mine was posting a query such as this on a forum … instead of directing it to me! I get a lot of property tax queries from investors who already have an accountant … and while I am happy to provide some general pointers, I do have to gently question why their query wasn’t directed to their own accountant. The answer is usually the same …!
    Hope that helps.
    Stephen Fay ACA
    Fylde Tax Accountants
    Tel: 01253 350 123
    Email: stephenfay@fyldetaxaccountants.co.uk
    Web: fyldetaxaccountants.co.uk
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