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Mark McLaughlin looks at a recent tax case on the cost of repairs to an old and dilapidated property.

Introduction

Distinguishing between repairs expenditure and capital costs is often difficult. The distinction can become even more difficult in the case of an old, dilapidated building.

Where there’s a Will(s)…

In Christopher Wills v Revenue & Customs [2010] UKFTT 174 (TC), the taxpayer appealed when HMRC disallowed a claim for £43,665 in respect of repairs to an outbuilding attached to a rental property. The total cost of the work was £106,707, with the balance being treated as capital expenditure. The outbuilding was a listed building, which had become extremely run down and was in a dangerous state of disrepair. Because the building was listed, there was no option other than to undertake a substantial repair scheme. Prior to the repair work, the outbuilding was used for storage, as a games room and additional living space, and for a few years sometimes as a garage. The claim for repair costs was based on an agreed split between repairs and renewals for VAT purposes.

HMRC argued that the repair work was part of a wider capital scheme to convert the outbuilding into additional living space, and that all the expense should be treated as capital expenditure. However, having examined the architect's plans and report, the tribunal found that the disputed work undertaken was one of essential repair. The taxpayer's appeal was therefore allowed.

HM Revenue & Customs' Property Income Manual PIM2020

Interestingly, the tribunal found that their decision was 'supported' by HMRC's property income manual at PIM2020, which features relatively extensive guidance on the deductibility of repairs from property income. With regard to work done on an old property, the guidance states:

'A repair or replacement of a part of a building using modern materials may give an apparent element of improvement because of the greater durability, superior qualities and so forth of the new material. But the cost normally remains revenue expenditure where any improvement arises only because the taxpayer uses new materials that are broadly equivalent to the old materials.'

Having said that, the guidance goes on to warn: 'Where a significant improvement arises from the change of materials, the whole of the cost is capital expenditure.' This includes items such as redecoration after the main work has been done. However, HMRC accepts that replacing part of the 'entirety' with the nearest modern equivalent is allowable as a repair for tax purposes as a 'like for like' replacement.

Finally, although HMRC guidance does not carry the force of law, the reference to PIM2020 in the Christopher Wills case suggests that reading PIM2020 and the case itself may be helpful in practice, in addition to reviewing established case law such as Conn v Robins Bros Ltd [1966] 43 TC 266, Lurcott v Wakely & Others [1911] AER 41 and William P Lawrie v CIR [1952] 34 TC 20, all of which are mentioned in PIM2020.