The non-statutory renewals basis, which was a concession, ceased to have effect in April 2013.
Wear and tear allowance is abolished for 2016/17 onwards for income tax purposes (accounting periods beginning on or after 1 April 2016 for corporation tax). Where a company has an accounting period beginning before 1 April 2016 and ending on or after that then so much of the straddling period as falls before 1 April 2016, and so much of that period as falls on or after that date, are treated as separate accounting periods. Any amounts brought into account in calculating the profits of a property business for the straddling period are apportioned on a time basis or, if that method produces a result that is unjust or unreasonable, on a just and reasonable basis.
In addition, the statutory renewals basis, which provided relief for expenditure incurred by a business on replacement and alteration of trade tools, does not apply to expenditure incurred from 6 April 2016 for income tax purposes (1 April 2016 for corporation tax).
Some had argued that the statutory renewals basis could be used to provide relief for the replacement of domestic items in partly furnished properties. The Government's response has been to remove this possibility. However, this change also affects trades.
Statutory renewals basis - replacement of domestic items
In calculating the profits of a property business, a deduction for the expenditure is allowed if Conditions A to D are met.
Condition A is that a person (P) carries on a property business in relation to land which consists of or includes a dwelling-house.
Condition B is that:
- a domestic item has been provided for use in the dwelling-house ('the old item');
- P incurs expenditure on a domestic item for use in the dwelling-house ('the new item');
- the new item is provided solely for the use of the lessee;
- the new item replaces the old item; and
- following that replacement, the old item is no longer available for use in the dwelling house.
Condition C is that a deduction for the expenditure is not prohibited by the normal wholly and exclusively test but would be prohibited as capital expenditure.
Condition D is that no allowance under CAA 2001 may be claimed in respect of the expenditure.
A 'domestic item' means an item for domestic use (such as furniture, furnishings, household appliances and kitchenware) and does not include anything that is a fixture.
'Fixture' means any plant or machinery that is so installed or otherwise fixed in or to a dwelling-house as to become, in law, part of that dwelling-house and includes any boiler or water-filled radiator installed in a dwelling-house as part of a space or water heating system.
The basic amount of the deduction is:
- where the new item is substantially the same as the old item, the deduction is equal to the expenditure incurred by P on the new item; or
- where the new item is not substantially the same as the old item, the deduction is equal to so much of the expenditure incurred by P on the new item as does not exceed the expenditure which P would have incurred on an item which is substantially the same as the old item.
No deduction is allowed for expenditure in a tax year if the business consists of or includes the commercial letting of furnished holiday accommodation and the dwelling-house constitutes some or all of that accommodation for the tax year.
No deduction is allowed if the person derives rent-a-room receipts from the dwelling-house and ss793 or 797 ITTOIA 2005 applies in relation to those receipts (rent-a-room relief).
If P incurs incidental expenditure of a capital nature in connection with the disposal of the old item or the purchase of the new item, the deduction is increased by the amount of the incidental expenditure.
If the old item is disposed of, the deduction is reduced by the amount of any consideration in money or money's worth which P or a person connected with P receives, or is entitled to receive, in respect of the disposal.
Similar changes are made for corporation tax purposes. The changes have effect for expenditure incurred on or after 6 April 2016 for income tax purposes (1 April 2016 for corporation tax).
Clearly, there will be winners and losers from the above changes. When combined with the rules on repairs, many clients will be unsure as to what tax relief is available. Make sure you talk to them before they incur significant costs.