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BPRA case explores “on or in connection with”

Updated: Jul 5, 2020

If you have ever had to negotiate a claim for Business Premises Renovation Allowances (“BPRA”) with HM Revenue & Customs the recent case of London Luton Hotel BPRA Property Fund LLP (“the LLP”) v The Commissioners for Her Majesty’s Revenue & Customs (“HMRC”) [2019] UKFTT 0212 (TC) provides a useful commentary on the boundaries of qualifying expenditure; and specifically what the legislation means by “on or in connection with the conversion, renovation or repair”.

The LLP paid a developer £12,478,201 (“the Development Sum”) to convert a flight training centre into a 124-bedroom hotel and sought to claim BPRAs on the full Development Sum. HMRC disallowed £5,255,761 (42%) on the basis that it was not qualifying expenditure “on or in connection with the conversion, renovation or repair” of a qualifying building. Tax Tribunal allowed the LLP’s appeal in part.

This was a syndicated BPRA claim with a structure reliant on support from wealthy individual investors and payment in advance of works. The BPRA claim was made in the LLP’s 2010-11 tax return. Construction works commenced in May 2011 and were completed by June 2012. The arrangement pre-dated HMRC’s technical review of the BPRA legislation and DOTAS (Disclosure of Tax Avoidance Schemes) and restrictions to qualifying expenditure enacted in Finance Act 2014.

The Starting Position

There was no disagreement on the basic entitlement to claim, this was a matter of quantum. Was it correct to base the claim on the full Development Sum which the LLP argued was negotiated at arms-length and paid entirely for works “on or in connection with the conversion, renovation or repair” of a qualifying building into qualifying business premises?

Tax Tribunal considered the make-up of the Development Sum and the case provides useful commentary on several important elements that will have wider application not just for BPRA claims.

The Development Sum

The total project cost (including land etc.) was £15,500,000 and the actual construction contract amount was for £5,721,914; therefore, the Development Sum incorporated payments for several other elements and HMRC disputed the eligibility of the following:

  1. The Interest Amount (£350,000)

  2. The Capital Account (£2,000,000);

  3. IFA fees (£372,423.40);

  4. Promoter fees (£310,000);

  5. Legal fees (£153,409.89);

  6. Franchise costs (£272,862);

  7. Fixtures, Fittings and Equipment (“FF&E”) and other non-qualifying amounts (£587,556.35);

  8. Residual amount/profit (£1,209,510).

Interest Amount/License Fee

Tax Tribunal found in favour of the LLP on the basis that the payment was necessary to enable the contractors to enter the property for the purposes of carrying out the works, it was a commercial arrangement; and was clearly incurred “in connection with” the conversion of the property.

The Capital Account

This was an amount paid to the Developer and immediately deposited in the capital account. It was not ‘real expenditure’ on the works and Tax Tribunal agreed with HMRC that it was circular and self-cancelling cash-flow designed to inflate the BPRA claim.

IFA Fees

Tax Tribunal agreed with the LLP and rejected HMRC’s claims that such costs were not capable of being “in connection with” the conversion, renovation etc. of the property.

Promoter Fees

For the same reasons as the IFA Fees, Tax Tribunal found in favour of the LLP.

Legal Fees

Tax Tribunal felt that most of the Legal Fees would not qualify for BPRAs because they related to the purchase of the property; however, they felt minor elements would given the wider interpretation of “in connection with” taken and left it to the parties to resolve.

Franchise Costs

A large part of this payment (£248,000) was to remove one of the original hospitality consultants and Tax Tribunal agreed with HMRC that this was not qualifying expenditure. However, it did agree with the LLP that the other payments to comply with the LLPs obligations under the Franchise Agreement for a compliant branded Ramada Encore Hotel were “in connection with” therefore these costs were allowed in part.

FF&E and other non-qualifying amounts

Much of this expenditure related to the external areas of the building and included tarmacking, landscaping, drainage and mains services connections. However, it also included a new roof top plant room. Tax Tribunal rejected HMRC’s arguments that these were excluded works (i.e. an extension or development of land adjoining or adjacent to a qualifying building). They were mostly within the curtilage of the qualifying building and regardless were entirely to serve the property and therefore allowable in full.

The FF&E comprised bedroom FF&E, other FF&E; and FF&E sundries. These included cupboards, headboards, mirrors, reception desk, bar counters etc. On inspection all the items appeared permanently fixed, in that they could not be removed without causing damage. As a result, Tax Tribunal agreed that the FF&E was qualifying BPRA expenditure.

Residual amount/profit

HMRC argued that the profit element should be apportioned over the project cost as whole (i.e. including land acquisition) on the basis the Developer offered a “cradle to grave” approach. Tax Tribunal agreed with HMRC and recommended that the apportionment calculation be revised to reflect the above.

A specialist team was set up by HMRC to investigate all large BPRA claims and some of the above is likely to effect any open enquiries or outstanding claims. BPRA was abolished in April 2017.

If you have any questions whatsoever, please do not hesitate to get in touch.


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