This latest decision by Upper Tribunal concerns an appeal by both HM Revenue & Customs (HMRC) and the taxpayer (a Limited Liability Partnership) on the qualifying costs paid through a Development Agreement for a 124 bed hotel and their eligibility for Business Premises Renovation Allowances (BPRA).
HMRC is known to take a narrow interpretation of what expenditure is on for capital allowances purposes; and specifically BPRA. Although BPRA has now been phased out, the points raised will have wider implication and are a common feature in related capital allowances compliance checks.
The original case was held by First Tier Tribunal (FTT) in 2019 and this most recent decision over turns large parts of it in the taxpayers favour on a number of important points and a summary with more detailed commentary is set out below.
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 in this appeal is that both HMRC and FTT took the wrong approach by disallowing the full Business Premises Renovation Allowance (BPRA) claim of £12,478,201.
The LLP contended that Development Sum paid via the commercially valid and arms-length Development Agreement for the delivery of a fully converted and operational hotel was all expenditure, on or in connection with, the conversion of a qualifying building into qualifying business premises.
Whilst, Upper Tribunal (UT) disagreed with HMRC’s and FTTs approach it reached the same conclusion by virtue of the actual terms contained in the legal agreements and asking the question – what did the LLP get for its money? In this case, more than simply the obligation to carry out construction works. This meant FTT was right to consider the different obligations therein and that is what the rest of the decision focused on.
The Capital Account
UT rejected both HMRCs and FTT’s approach and arguments that the money paid over by the LLP to the developer (OVL) was not actually received by it through its deposit in a Capital Account which the Co-op bank had a charge over.
“Having accepted that the Capital Amount was expenditure incurred by the LLP as part of the Development Sum, the only question is on what it was expended. Our analysis shows it was in substance a guarantee by OVL of the LLP’s obligations to the Co-op, sourced from OVL’s potential profit from the project which it had agreed to put at risk. That was clearly expenditure “on or in connection with” the Conversion of Blush House and the fact that the guarantee may not have been called on does not detract from that.”
A lot of discussion took place on this point which was not helped by the conflation of other cases (e.g. Tower McCashback) which had a clear anti-avoidance purpose and very limited commercial reality. This was a real project and the understanding of what this expenditure was for had been misconstrued – crucial in this decision was the construction of the legal agreements and determination of the real purpose of the payment.
The Interest Amount/License Fee
Whilst the arrangements overall and the Development Sum were held to be commercial and broadly market price, UT could not accept that the separate right/obligation acquired by the LLP for £350,000 was allowable.
Its amount was calculated by reference to bank interest payments which would make it revenue not capital and if it was ‘in connection with’ it would doubtless be caught by the specific exclusion for ‘land or rights in or over land’. Either way, UT concluded that the payment was a circular self-cancelling arrangement outside the context of the Development Sum, had no commercial justification and was not ‘in connection with’.
The IFA and Promoter Fees
UT upheld the original FTT decision and allowed this BPRA expenditure.
“While the phrase “in connection with” should be interpreted in the same way for both qualification and exclusion, we consider that the FTT was entitled to find, as it did, that on the facts the Fees were incurred for the general purpose of raising equity for the project, and not partly in connection with the acquisition of the land, no part of which was included in the BPRA claim. ”
Whilst there was some disagreement as to FTTs interpretation and approach in the end it did not matter. UT concluded that all the legal fees were caught by the general exclusion for expenditure incurred on the ‘acquisition of land or rights in or over land.
In what was another wide interpretation of ‘in connection with’, the UT rejected previous arguments by FTT and HMRC to allow all the franchise costs under this umbrella – ‘albeit at the outer limits of that phrase’.
The fact that one of the recipients was replaced (and compensated as such) did not alter the work they had done or the work that needed to be done in getting a converted building into ‘qualifying business premises’.
Fittings, Fittings and Equipment
This was a category of expenditure that incorporated lots of other elements including external works, drainage and main services connections. Crucial to HMRC’s appeal was its reliance on the exclusion of ‘developing land adjoining or adjacent to a qualifying building’.
UT upheld FTTs original decision (albeit via a different path) and rejected HMRC’s appeal.
UT agreed with the LLP and concluded that there was no basis to apportion the residual profit element. OVL’s profits were derived from constructing the hotel and what the LLP got for its money (what it incurred the expenditure on or in connection with) was the series of discrete rights/obligations under the Development Agreement.
“If a taxpayer incurs expenditure of £100 to acquire a series of specific obligations which the supplier can discharge for £80, the question for BPRA purposes is not whether the taxpayer has made a good bargain, or how the £20 should be allocated, but whether the specific obligations are on or in connection with Conversion ”.
The LLP’s appeal to allow the expenditure in full was allowed.