A leading tax organisation has issued a warning that landlords hit by flooding could be badly affected by changes to tax relief on expenditure when replacing furniture and other domestic goods.
The Association of Taxation Technicians (ATT) is calling on HM Revenue & Customs (HMRC) to release detailed guidance on the new rules.
The warning is included in the ATT’s response to draft legislation published by HMRC, which was designed to provide relief for the cost of replacing furnishings to a wider range of property businesses, as well as creating a more consistent and fairer method of calculating taxable profits.
As of April 2016, the Wear and Tear Allowance will be replaced with tax relief. At present, landlords can claim an annual allowance of 10%, even if they do not replace any furnishings. Under the new rules, landlords will only be able to claim on actual expenditure.
However, the ATT believes that many of the new rules will cause confusion. HMRC has vowed to issue guidance on certain aspects, but the ATT has highlighted other areas where clarity is needed.
The President of the ATT, Michael Steed, comments: “In general, we welcome the new rules, which are more logical than those they replace, but if they are to work efficiently, they need to be much clearer.”
In its response, the ATT has underlined a series of detailed questions that landlords will need answers to before they can comply with the new rules.
Some of the questions are as follows:
- Will kitchen equipment qualify if it is provided for the general use of, say, three tenants who will live in a property despite the legislation stating “solely for the use of the lessee”?
- Do the rules apply at all where the tenants do not have a formal lease?
- Will replacement garden furniture qualify given that it is not provided for use “in the dwelling-house”?
- Can a futon be a replacement for a bed, or a tumble dryer for a freezer, or a bookcase for an old piano?
- If a new item is a real improvement on the old item (because it has much greater functionality), but is purchased second-hand, is the allowable expenditure limited to what would have been the brand new cost of a like-for-like replacement, or is it restricted to the hypothetical second-hand cost of a straight replacement? And if the latter, what evidence does the landlord need to keep?
Steed adds: “Questions like those we have identified are likely to arise for many landlords at one time or another. For someone who has to refurnish a whole house – for example because of the recent flooding – all these questions could come at once.”
He insists: “It is vital that HMRC publish guidance before April so that there are some answers to the questions. The ATT would be pleased to assist HMRC in the preparation of clear guidance.”1
If you have a rental property that has suffered flooding, remember that our Landlord Property Insurance covers this.