Revenue vs Capital Expense Taxation Vexation

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    Revenue vs Capital Expense Taxation Vexation

    Hi all,

    Like many on here I'm having trouble with splitting revenue and capital expenses for tax purposes.

    I acquired a large property last year with a commercial and residential element. The commercial element has been tenanted almost continuously but the residential part was empty for refurbishment throughout last tax year. I was already a landlord with an active letting business.

    When I bought the property there was a known problem with the party wall - probably affecting the purchase price - therefore the spending to repair this would likely be Capital under PIM2020 (http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm)

    I also had the building painted at the same time - this was expensive due to the size - this would seem to me to be a revenue expense under the PIM2020, being within what I would regard as the normal maintenance/painting cycle.

    Also, I paid to get planning permission to convert part of the commercial element into residential - assuming this is a capital expense.

    When I completed the residential part was habitable (according to the Council Tax folk!), but in poor decorative condition and requiring some updating to meet the expectations of my clients. Some of this is improvement, but most is replacing or refurbishing what was already there. The improvement obviously is capital, but there will be approx 5k of refurb work that I would like to be revenue. This where I am in two minds, it could be within the definition of repair as it I don't think it affected the value of the property significantly, but according to the underlying principle (PIM2020): 'The underlying principle is that the cost of buying a property in good condition is clearly capital expenditure. Hence the cost of buying a dilapidated property and putting it in good order is also capital expenditure.' Tricky.

    I would welcome any thoughts on the above or experience on how PIM2020 is interpreted by HMRC.

    What I really want to know is - what are the costs of getting this wrong? Would HMRC just ask me to resubmit my SA if they don't agree or would I be in danger of penalties or losing the opportunity to claim these expenses?
    caveat emptor
    If it sounds like I know what I am talking about........I don't.

    #2
    You could be accused of making false claims and fined.

    Anything complicated would be better for you to consult a professional advisor or get a tax accountant to do your tax return.

    Comment


      #3
      An incorrect Tax Return can land you with a Penalty (and interest thereon).

      There is a range of errors from "Reasonable Care" (no penalty) through to "Deliberate & Concealed,unprompted (100% of the tax due).

      Depending on the amount involved and the confidence in your own levels of expertise, it might be prudent to engage a professional Surveyor to certify the relevant expenditure as Capital or Income?

      Comment


        #4
        Thanks for the advice. I've actually had conflicting professional advice on this, albeit unpaid advice. Of course if I paid for I would be indemnified. It actually won't make that much difference in thus particular tax year whether cap or rev. My instinct is to err on the side of capital to be whiter than white.
        caveat emptor
        If it sounds like I know what I am talking about........I don't.

        Comment


          #5
          It depends when you received the advice, as the penalty regime was recently changed. The current one can be downloaded from HMRC :

          http://www.hmrc.gov.uk/about/new-pen...-penalties.pdf

          Comment


            #6
            I am in a (sort of) similar position. I bought a house with two flats. One flat is let out, the other is undergoing redecoration, with new kitchen and re-plastering in some rooms. Can I claim this is
            repair and maintenance? The flat may be worth more after it is finished, but not significantly more.

            Comment

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