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Our client runs a large caravan holiday park with considerable facilities such as shops, swimming pool, amusement area etc. All caravans are owned by the business and, on average, are occupied for two weeks at a time during normal holiday periods.
Our client runs a large caravan holiday park with considerable facilities such as shops, swimming pool, amusement area etc. All caravans are owned by the business and, on average, are occupied for two weeks at a time during normal holiday periods.
We have advised the proprietor that, in our view, first- year allowances are not claimable because the caravans are being either hired or let. The client disputes this and states that he fails to see the distinction between caravans and new furniture in an hotel room which would attract first-year allowances.
Do readers consider that we are wrong in our interpretation of section 46(2), Capital Allowances Act 2001, both as it applies to the caravans themselves and to replacement internal fitted kitchens and bathrooms within those caravans?
(Query T15,874) – GAM.
'GAM' is perfectly correct to assert that first-year allowances are not available in respect of assets provided for hire or leasing (section 46(2), Capital Allowances Act 2001 – general exclusion 6). Whilst this provision may be harsh in the circumstances (caravan hire is not anywhere near as provocative as some leasing activities), the capital allowances code is unambiguous. (Such resistance was recently seen in the committee stages of this year's Finance Act when the Opposition tried to extend the enhanced first-year allowance régime to energy-efficient assets that are leased. Although such a move would undoubtedly encourage the use of such equipment, the Government stood firm and maintained that first-year allowances and leasing do not mix.)
I would be tempted to say that moveable furniture in an hotel room should also be subject to the exclusion from first-year allowances. After all, such is effectively 'hired' as part of the letting of the room to guests. Equipment used in the hotel's office will, however, not be within the exclusion and will therefore qualify for first-year allowances.
Whether this distinction is made in practice is another matter, but that is unlikely to be of relevance to 'GAM's' client. If the client runs an hotel, I would advise him not to make the point as that would only jeopardise his entitlement to first-year allowances on the plant and machinery in the hotel rooms. If he has no interest in an hotel, then the fact that some hotels manage to make successful claims for first-year allowances when the strict interpretation of the statute precludes it is not something that he can validly challenge. This was the decision of the House of Lords in R v Commissioners of Inland Revenue, ex parte National Federation of Self-employed and Small Businesses [1982] AC 617. – Kalonymous.
The wording of section 46(2), Capital Allowances Act 2001 is unusually concise, and 'GAM' was absolutely right to bring this to the attention of his client. The legislation was principally designed to prevent taxpayers from being able to claim huge first-year capital allowances on 'leased' assets. Look to general exclusion 6 and you will see 'For this purpose, the letting of a ship on charter, or of any other asset on hire, is to be regarded as leasing (whether or not it would otherwise be so regarded).
Readers who were in practice in the mid-1970s will remember a scheme whereby a 98 per cent rate income tax payer purchased a boat (usually a restored canal barge) and claimed 100 per cent first-year capital allowances thereon, so as to produce a loss which was then relievable against general income. Normally the letting out was managed by a specialist charter firm. 98 per cent of the capital purchase cost was thus met from income tax savings!
Even more tax relief could be obtained if the boat were purchased with borrowings, since free capital was not a requirement. Thus, it is to prevent a recurrence of such a scenario that the present legislation has been conceived. Considering that expenditure on a number of caravans would equal that on a sizeable charter boat, I fully expect that any refusal by the Inspector to allow first-year capital allowances in this case would be supported on appeal by the High Court and beyond.
To answer the client's question, essentially 'Why should caravans not attract first-year capital allowances when furniture in an hotel room does?', is relatively simple. In the case of an hotel, a charge is made for the letting of the room, dependent on size, level of comfort and service, prestige of the hotel, and views from the windows, etc. Thus, internal furniture might be relevant to the charge made, but is hardly pivotal on its own and would thus be considered as ordinary plant in the same way as, say, central heating equipment. Time and trial alone will decide if my understanding is entirely correct in this connection, as the legislation is perhaps just loosely drawn enough to allow the Revenue to seek a narrower interpretation via the courts, if it should wish to test it. For the moment, I suggest that accurate and copious notes are made on the tax returns showing exactly on what assets first-year allowances are being claimed. Then, if the Revenue is successful in asserting a narrower definition, at least it will not be able to go on a witch-hunt and allege 'discovery'. In the case of the caravans, they are analogous in this instance with the structure of an hotel, in that they are the asset which is being leased, not specifically their contents. Therefore I would say that the internal furniture, etc. should qualify for first-year allowances under section 44, Capital Allowances Act 2001.
Might I suggest to 'GAM' and his client that they seek definitive advice from the Revenue at the highest level on this? In my experience, it is best for all interested parties (in this case caravan manufacturers, dealers and site owners) to band together and present a united, co-ordinated and firm case to the Revenue. They have nothing to lose in so doing, and could gain much, not least uniformity of treatment. – Holmewood.
Editorial note. Although first-year allowances cannot be claimed, Extra-statutory Concession B50 confirms that machinery and plant writing down allowances are admissible.
