Clause 69 introduces the new replacement relief for landlords for capital expenditure incurred in replacing furnishings, appliances etc. It replaces the old wear and tear allowance that was available for furnished lets only (repealed by clause 70). The old wear and tear allowance allowed landlords to deduct (broadly) 10% of their rental income regardless of expenditure actually incurred.
CIOT said in our response to the consultation in summer 2015:
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.
Overall this seems to have been achieved although there is scope for common sense guidance around what is ‘the same or substantially the same’ when what is replaced is a more advanced modern version of the old item. (The summary of responses agrees that guidance is needed.)
Although the new relief is welcome and (rightly) broader than the current 10% wear and tear basis, the change does represent a move away from a simple, ‘rough justice’ approach that required minimal record-keeping, in favour of greater accuracy but at the price of higher compliance costs. In the context of HMRC’s strategy of ‘Making Tax Digital’, as part of which mandatory quarterly reporting requirements are going to be imposed on landlords as on many other taxpayers, one might be expecting to see more moves in the opposite direction, to help make digitalisation work more smoothly without imposing excessive compliance costs.’
The main wider point of concern is what constitutes a ‘dwelling house’ which is not defined in statute. CIOT’s response said :
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. 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.
(The summary of responses did not cover that point.)