Replacing Wear and Tear Allowance with Tax Relief for Replacing Furnishings in Let
Residential Dwelling – Houses consultation
CIOT comments
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Introduction
1.1
The CIOT comments on the consultation proposals for replacing the Wear and Tear
Allowance with tax relief for replacing furnishings in let residential dwelling-houses
from April 2016, referred to as the new ‘replacement furniture relief’.
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Do you have any comments on the proposed scope of the new relief?
2.1
The availability of the new relief to all landlords of residential dwelling houses
irrespective of the level of furnishing is a welcome proposal. We have previously
written, in conjunction with the ICAEW, raising our concerns about the uncertainty
engendered by the withdrawal of the concessionary renewals basis and the impact of
that withdrawal on part furnished and unfurnished lettings. We are therefore pleased
that this distortion has been remedied. The challenge is to make sure the new relief is
simple to use and set out clearly in statute.
2.2
The first issue is what qualifies for the new relief. The statement in paragraph 2.6 of
the consultation document has the potential to be a simple rule. However, a clear
delineation of what expenditure does not qualify will be important.
2.3
The initial cost of furnishing (paragraph 2.4 of the consultation) is to be excluded.
Again, clarity is important. It is easy to imagine putting basic furniture in, the tenant
moving in and then adding some more furniture or equipment. Does that qualify? We
assume not but we need clear rules.
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Do you have any comments on the proposals for dealing with any disposal
proceeds from the old asset that is being replaced or any improvement element
of the replacement asset?
3.1
We have concerns that without clear rules (in statute) for arriving at the disposal
Replacing Wear and Tear Allowance with Tax Relief for
Replacing Furnishing in Let Residential Dwellings: CIOT Comments
6 October 2015
proceeds (paragraph 2.12) and determining the disallowable improvement element
(paragraph 2.13), there will be scope for uncertainty.
3.2
In terms of disposal proceeds, will only actual proceeds be taken into account? For
example, furniture might be moved to another property or taken into personal use by
the landlord, would such a removal from the let property constitute a disposal
requiring a valuation? We think that any requirement to value to arrive at disposal
proceeds would undermine simplicity and certainty; the guiding principle should be a
cash basis.
3.3
Similarly the question of what constitutes an improvement is to some extent subjective
and potentially hard to both self-assess and to police. The example in paragraph 2.13
of replacing a washing machine with a washer dryer is straightforward but the scope
for uncertainty around technological change is much more difficult to apply (eg
replacing a TV with a TV with built in Freeview & DVD which might now be cheaper
than the old TV). If improvements are to be excluded, consideration might be given to
allowing certain categories of improvement, for example, where there is a natural
improvement in technology, or an improvement in energy efficiency. The principle
referred to in the Property Investment Manual in the Example at PIM3230 could be
built upon and extended (ie in relation to the non-statutory renewals basis that
‘Common sense had to be used to find the cost of a reasonable modern
replacement’.)
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Other comments
4.1
As the Assessment of Impacts acknowledges, there will be an additional
administrative burden on landlords in terms of record keeping under the proposed
replacement system. The Assessment largely dismisses the impact ‘given that they
currently keep records of other expenses such as repair costs’. We are not convinced
that the impact will be negligible. The administrative burden on landlords will increase,
especially if valuations are required.
4.2
The consultation indicates that the new relief will apply to all landlords of ‘residential
dwelling houses’. How will these terms be defined? For the purposes of the current
wear and tear allowance, PIM 3205 indicates that the term ‘dwelling house’ takes its
everyday meaning. HMRC’s interpretation is set out in the Capital Allowances Manual
at CA11520.
4.3
We would prefer the definition to be included in statute, building on existing statutory
definitions (rather than introducing yet another new definition). It is important that the
policy rationale for including or excluding particular types of dwelling is clear.
Currently, there are multiple definitions of residential property in tax legislation and
guidance, often with small but significant variations, the policy reasons for which may
have become obscure over time. Similarly, changes in wider government policy may
lead to a re-categorisation. One example of the latter, provided by a member, involves
care homes that have de-registered as such in order to provide a service called
‘supported living’. Under the supported living model, the user rents the unit from the
landlord (which is financed through housing benefit) and the local authority only funds
the care component. The consequence of de-registration is that the homes may now
constitute dwellings rather than an institution leaving open the question of whether
this result accords with the underlying policy intent.
P/tech/subsfinal/PT/2015
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Replacing Wear and Tear Allowance with Tax Relief for
Replacing Furnishing in Let Residential Dwellings: CIOT Comments
6 October 2015
4.4
A principles-based approach to drafting the statutory definition would allow for both
the policy underpinning the scope of the measure to be set out in statute and for the
definition to have the flexibility to retain its validity.
4.5
Consideration should be given to the need for a transitional provision or mechanism,
as landlords eligible to claim the wear and tear allowance and incurring actual
expenditure in the current tax year will receive no relief (until replacement) whereas if
the expenditure were incurred a few months later under the new rules, they would get
a deduction.
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The Chartered Institute of Taxation
5.1
The Chartered Institute of Taxation (CIOT) is the leading professional body in the
United Kingdom concerned solely with taxation. The CIOT is an educational charity,
promoting education and study of the administration and practice of taxation. One of
our key aims is to work for a better, more efficient, tax system for all affected by it –
taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of
taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax
Reform Group (LITRG), the CIOT has a particular focus on improving the tax system,
including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and
industry, government and academia to improve tax administration and propose and
explain how tax policy objectives can most effectively be achieved. We also link to,
and draw on, similar leading professional tax bodies in other countries. The CIOT’s
comments and recommendations on tax issues are made in line with our charitable
objectives: we are politically neutral in our work.
The CIOT’s 17,000 members have the practising title of ‘Chartered Tax Adviser’ and
the designatory letters ‘CTA’, to represent the leading tax qualification.
The Chartered Institute of Taxation
6 October 2015
P/tech/subsfinal/PT/2015
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