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HMO fails to substantiate capital allowances claim

Updated: Jul 5, 2020

House in Multiple Occupation (HMO)

In the case of Tevfik v Revenue and Customs Commissioners [2019] UKFTT 600(TC), the taxpayer lost their capital allowances claim for a House in Multiple Occupation (HMO) when they couldn’t substantiate the claim basis under enquiry.

The case:

  1. provides an overview on what is a dwelling for the purposes of plant and machinery allowances (“PMAs”) and reinforces the point that claims for an HMO in a property rental business are likely to be challenged and/or heavily restricted;

  2. confirms that claims for annual investment allowances (“AIA”) are time restricted; and,

  3. reinforces the need to make proper disclosure for large or complex capital allowances claims to withstand a discovery assessment.

Case Summary

The taxpayer purportedly acquired three London properties for £712,000 between 2001 and 2006 and engaged a capital allowances advisor to value the qualifying PMAs before and after acquisition (£53,437). This was used to support a £50,000 claim for AIAs in the taxpayers 2011/12 tax return together with a claim for 10% wear and tear allowance.

The tax return was received by HM Revenue & Customs (“HMRC”) on 22 January 2013 and HMRC opened a discovery assessment on 8 March 2016. This was initially to challenge the validity of the AIA claim but widened to include the justification for all PMAs within the properties and the taxpayer’s inability to satisfy HMRC, and eventually First Tier Tribunal (“FTT”), that they had correctly applied the dwelling-house exclusion.

What is a dwelling for PMAs?

What constitutes a dwelling for the purposes of the Capital Allowances Act (“CAA”) 2001 is not defined in statute or case law. HMRC has historically relied on ratings law (a legacy from Assured Tenancy Allowances) and issued a clarification of interpretation on 29 December 2008 which was revised on 22 October 2010.

Defining a dwelling can be problematic because buildings (e.g. a block of flats, student halls of residencies) can have parts in use as dwelling (e.g. the individual bedrooms, kitchens, living rooms, bathrooms etc.) and parts that are not (e.g. basement car parks, gym facilities, hallways and lobbies etc.). Often the distinction is obvious from the physical construction but there can be overlaps of shared areas and assets installed. In these circumstances, the legislation requires the taxpayer to make a ‘just and reasonable’ apportionment.

HMRC were forced to clarify their position following a ratings decision which found that a hotel room could be a dwelling house. This revised interpretation of “facilities required for day-to-day private domestic existence” meant that areas such as “cluster flats” in student halls of residence would be fully restricted for claims filed on 22 October 2010 onwards.

The dwelling-house exclusion for PMAs is triggered when the taxpayer operates a property rental business, an ordinary trading business (e.g. that provides living accommodation for key workers through the course of its trade) is not normally affected.

Dwelling-House Restriction and a HMO

Because most landlords operate a HMO as a property rental business, PMA claims will normally be subject to a dwelling house restriction.

Since houses are rarely designed for the occupants to live independently in their bedrooms; most areas of any property are likely to fall within the above restriction. Therefore, any claim is likely to be nominal (if at all). Indeed, HMRC’s official stance has been for some time that PMA claims for a HMO should be referred for investigation by their specialists.

Although HMRC accept that hallways, lobbies etc. are not part of any dwelling in a block of flats they do not in a house. Similarly, they do not agree that attics or basements should be treated separately in a HMO.

Evidence of claim basis

The taxpayer chose not to attend the hearing and HMRC presented correspondence between the parties from the taxpayer’s agent which stated that the claim was based on common parts only following a site survey and capital allowances valuation.

Whether the taxpayer had been able to provide more details on the claim basis is perhaps a moot point given the nature of the property but a crucial factor in the decision was the fact that they didn’t. Nor did the PMA claim reflect the fact the taxpayer only owned 50% of two of the three properties.

The burden of proof is on the taxpayer to establish that the expenditure on his properties was qualifying expenditure and in view of both HMRC and FTT he had not discharged that burden.

Discovery Assessment and AIA

The original enquiry began with questioning an erroneous claim for AIAs. AIAs (like First Year Allowances) must be claimed in the chargeable period which the expenditure was incurred. AIAs were introduced for expenditure on or after 6 April 2008 and any qualifying expenditure was incurred well before this date; therefore, the AIA claim had no basis.

There was no dispute that the taxpayer could be entitled to an ordinary claim for PMAs (at the lower writing down rates of 10% and 20%) but this would still be subject to the dwelling house exclusion.

HMRC were provided with no copies of the surveys or any other supporting documentation that might alert them to the insufficiency of the claims made. No additional disclosure was provided in the tax returns for the let properties other than the actual claims for AIA and wear and tear allowances.

Consequently, FTT ruled that when the normal enquiry window ceased, HMRC could not have been reasonably expected, based on the information made available to them, to be aware of the insufficiency in the taxpayers claim.


Although FTT was not required to rule on the precise definition of a dwelling for the purposes of a HMO. It does provide more details on the basis for HMRC’s published view (i.e. that most of any such property will need reflected in the restriction calculation). It also highlights the importance of proper disclosure.

Whether a detailed capital allowances report was prepared is not clear. There is no evidence of it being provided to HMRC as part of any claim submission.

Not only should such information be made available to HMRC (particularly for large and/or complex claims) but it should also be in the right format (i.e. contain sufficient details on entitlement, claim valuation basis and restrictions) to afford HMRC the opportunity to take an informed view should it desire in the normal enquiry window.

Even although it may not have significantly altered the eventual outcome, it’s the absence of such detail in light of the facts that persuaded FTT that a valid discovery assessment was made by HMRC.

All capital allowances claims prepared by Furasta Consulting use a format that is familiar to HMRC and the Valuation Office Agency such that lengthy enquires (or concessions) are extremely rare.

We have significant experience on dealing with the tax authorities both directly (and supporting other tax advisors/teams) and if you would like more details, please do not hesitate to contact us.


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