Then, in 2013, it was all changed and the wear and tear allowance was made the statutory basis. Which meant that for furnished properties, and furnished properties only, you could take 10% of your rent as a proxy for the repairs of the renewals that you were going to do in that property.From April 2016 the wear and tear allowance has been replaced by, effectively, a newer form of renewals called the replacement of domestic items.

That allows all residential landlords to deduct the actual cost of replacing furnishings. The level of furniture in the property is immaterial. It won’t matter if you’re renting an empty property or furnished property.

It might be worth stressing that capital allowances will still continue to apply for the landlords of furnished holiday lets. Remember, furnished holiday lets, generally speaking, get a much better treatment in the tax cannon.

The very important part of the sequence in understanding whether something is revenue or capital is to look at assets that are purchased in a dilapidated condition. There are two famous cases. As you’d expect in tax, they point in different directions.

Law Shipping was all about a ship that was bought with a Lloyd’s survey that was overdue and the repairs were carried out, but the purchase price, which was reduced, reflected the poor condition of the ship. It really couldn’t be used to earn profits without the repairs.

The repairs had to come first. Incidentally, there was no evidence of the accountancy treatment putting it into the revenue capacity. By contrast, the famous Odeon Associated Theatres case, this is about some cinemas that were bought at the back end of the Second World War, where there was a backlog of repairs which had not been undertaken because of the wartime conditions.

Here, distinctly and differently from Law Shipping, the price was not depressed. The assets could be used profitably from the day of purchase. Importantly, the accountancy evidence said, ‘Revenue expenditure.’ Remember, accountancy evidence is not conclusive. It is, however, persuasive.

So in consideration of capital versus repairs and what constitutes capital allowances, we have two significant cases that point in opposite directions. The first one is the Auckland Gas Company. The second one is Transco and Dial. Now, in both cases, they concern the insertion of polyethylene gas pipes into old iron pipes.

The distinction is that, in Auckland, they were changing the pressure of the gas, they were replacing a very significant part of the network, and that was held to be capital expenditure.

By contrast, in Transco and Dial, although they were still inserting modern polyethylene pipes into old iron ones, there was no change in gas pressure. They were doing approximately 1% of the network each year, and that was held to be revenue.

Other areas of difficulty and practice include the alteration or the improvement of an asset. Alteration and improvement where people, perhaps buy‑to‑let landlords, had single‑glazed windows replaced with double‑glazed plastic for example.

For a long time, HMRC asserted that that was an improvement, it was capital, and therefore tax relief would be due, but not until the property was sold.

The really strays to the area of technology moving more swiftly than the law because now it’s virtually impossible to buy a single‑glazed wooden window. Automatically you get plastic double‑glazed. Time’s moved on. HMRC are happy to accept, now, that it’s just a repair if you like.

In terms of dilapidations under a lease, that’s a composite payment to the lessor at the end of the life of the lease. Then it’ll be allowable to the extent that it represents deferred repairs, allowable that is for revenue treatment, but not allowable to the extent that it reflects capital costs.

All of this can seem highly complex and a little overwhelming, so contact us if you require industry leading tax consultants!