8 years of pre-commencement expenses

[Incredulum]

An individual with no other trading activity acquires a site in 2000 with the intention of developing the site and selling it. He obtains planning permission in due course and erects a block of flats. He completes them and puts them up for sale and sells them in 2008.

Building a block of flats and selling them individually is clearly a trade.

Per Birmingham & District Cattle Byproducts, a trade only commences when the doors are opened to customers - i.e. in 2008 when he starts selling his completed flats. And only expenditure in the 7 years prior to commencement is deductible s57 ITTOIA/s61 CTA.

Is the expenditure on acquiring the plot of land disallowed through the pre-commencement legislation?

Or, provided it is capitalised into stock is it possible to obtain relief for this expenditure when the P&L is debited - is this the point at which an "expense" is incurred?

All thoughts gratefully received.

[pawncob]

It was a capital acquisition at the time and wouldn't be brought in to the accounts until it was necessary to introduce it as trading stock. The "transfer" could be made at M.V. and CGT paid (if appropriate) or it could be brought in at cost and included in the eventual profit calculation. It might be better to take the gain at CGT rates rather than potential 50%, but it may be too late without incurring penalties.
Has a loss relief claim been made on the development?

[Incredulum]

Thank you for your thoughts.

I don't think I agree that it was a capital acquisition.

If the person (sorry, I meant person, not individual) had an ongoing trade then the acquisition would have been of a trading asset.

If the trade had commenced within seven years there would have been no doubt that there had been an acquisition of stock on the date the site was acquired.

There is no doubt that preparatory works commenced when the site was acquired - architects were appointed.


There are no loss relief claims as the development is highly profitable, hence the desire to obtain relief for the considerable costs of acquisition of the site.


Reading s61 "If in calculating the profits of the trade... (b) a deduction would be allowed for them if they were incurred on the start date the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them)."


I think that no deduction would have been allowed for the costs if they were incurred on the start date - as the acquisition of stock does not give rise to a deductible expense on the day on which it is incurred; but instead on the day on which the stock is sold.

Therefore, provided the expenses are capitalised into stock, the 7-year restriction does not apply?

[pawncob]

He has presumably submitted accounts for each of the last seven years, thereby accumulating very large losses, which will be offset against the future profits (unless utilised elsewhere). These accounts would have included the purchase cost, so it's already built in to the costs to date.
If he hasn't submitted accounts, why not?

[Incredulum]

No. It is not possible for there to be losses (prior to 2008), as the trade had not commenced.

1. The trade has not commenced until there is stock to sell.

2. There are no losses; all costs are (correctly) capitalised into stock as they are incurred - from an accounting and therefore tax perspective.

[pawncob]

Well I've claimed losses for the last three years on a business doing just what you described, and HMRC have made tax refunds based on the accounts submitted, which of course showed NO TURNOVER WHATSOEVER.

[Incredulum]

That's interesting. Are you saying that this is in the first years of the business?

How have you justified for the purposes of self-assessing the loss that the business has commenced? Did you consider Birmingham & District?

[pawncob]

Yes this was in the first four years of the business. Accounts prepared, submitted, agreed and loss offset against other income.

The ability to claim expenses incurred over previous seven years of trading is designed to enable small businesses to claim expenses where the hobby has become a business, or it has a long start up time. It does not preclude claiming losses where these arise from trading activity.
If a new "trader" bought on spec a collection of items which turned out to be valueless and unsaleable, surely he's entitled to loss relief notwithstanding "NO SALES"?

[Incredulum]

The ability to claim expenses incurred over previous seven years of trading is designed to enable small businesses to claim expenses where... it has a long start up time.

Indeed. Many businesses do have a long start-up time. Particularly in the property world.

It does not preclude claiming losses where these arise from trading activity.

Agreed. But there has to be trading activity. And in order for there to be trading activity, a trade has to have commenced.

[/quote]If a new "trader" bought on spec a collection of items which turned out to be valueless and unsaleable, surely he's entitled to loss relief notwithstanding "NO SALES"?[/quote]

Absolutely not. I have seen companies lose millions-worth of relief in pre-trading expenditure which is never brought into account as the trade never commences. Commonly seen when a trading group incorporates a new company to undertake a new venture and this venture never commences trading. Of course, in the circumstances you describe it is possible that he opens a shop and never manages a sale - under such circumstances he has commenced trading, albeit "NO SALES" and loss relief is available.

Have a read of http://www.hmrc.gov.uk/manuals/bimmanual/bim70510.htm

[pawncob]

Having got everything ready, the trade only commenced when the company began to take in raw materials and turn out its product. This principle is applicable to manufacturing in general.


And what's the difference between building and manufacturing?