One of the most controversial and far reaching changes to tax practice introduced by HMRC in the past two years is the withdrawal of ESC B47 with effect from 6 April 2013, which permitted a deduction for the renewal of various household items in respect of a furnished or unfurnished property let. It also enabled landlords to claim a 10% deduction of the gross rental income (less any expenses incurred by the landlord on items usually borne by a tenant), to cover the replacement of carpets, furniture and the provision of smaller items such as cutlery.

Following HMRC’s comprehensive review of the Extra Statutory concessions, many have been removed or enshrined in legislation, including ESC B47- well part of it anyway. Whilst the part of the concession permitting a deduction for wear and tear is now legislated, the ability to claim a deduction for the renewal of capital items such as free-standing white goods and other items of household furniture is no longer possible. This is simply due to existing legislation denying capital allowances on the provision of plant and machinery for use in a normal residential property business, which ESC B47 countered. Despite many of the rules pertaining to a residential let being similar to those of a trade, letting income is for tax purposes still treated as investment income.

As a tax practitioner, I deal with a significant number of clients who have property lets, as do my colleagues so the topic of whether something is allowable or not allowable, revenue or capital, often generates a healthy debate in the office. If you drill down hard enough, read enough articles and study the legislation/HMRC guidance, it is usually possible to come up with some vaguely sensible decision as to how to proceed in so far as expenses are concerned. However, having spent many years explaining to clients that any expenditure incurred ‘wholly and exclusively’ for the purposes of a letting business (as is the case with a trade) should be allowable, to then have to explain that there is no possibility of claiming a deduction for a new carpet in an unfurnished property (or furnished if the wear and tear allowance is not claimed), seems to fly in the face of common sense.

According to HMRC, the impact of these changes ‘was not a significant consideration’ in terms of tax yield, which, in my humble opinion, makes it all the more bewildering as to why they chose to take this course of action in the first place. It has clearly confused and in some cases, antagonised landlords and tax advisers alike. The Revenue suggest that by incorporating the renewals basis previously found within ESC B47 within legislation, a deluge of cases involving tax avoidance could appear. Maybe I am missing a trick but I cannot envisage a scenario whereby an avoidance scheme centres around the replacement of fridges in a residential let!

So, we are now left in a situation whereby if the replacement is of an item such as a cooker in a fully integrated kitchen, a deduction may be claimed but if the replacement cooker is freestanding, a deduction is not allowable. If wear and tear is already claimed due to the property being furnished, the replacement of the freestanding cooker would be covered by the 10% deduction. The Revenue state that replacing items such as hobs in an integrated kitchen are simply repairs owing to the fact that you are not replacing an ‘entirety’, being the whole fitted kitchen and instead, are merely repairing it. However, if you replace a fridge that is free-standing, you are replacing an entirety and due to the withdrawal of ESC B47, no deduction from gross rents can be made.

To ensure that as much expenditure is covered by a deduction from gross rents, it may be that some landlords feel it beneficial to convert an unfurnished property to a furnished one by adding a bed and a sofa. The Revenue allow a deduction for wear and tear where the property is let with sufficient furniture and furnishings for normal residential use. A second hand bed and a sofa would near enough achieve that goal.

All in all, these much publicised changes have not exactly endeared HMRC to the tax profession and the many landlords out there. They have stated that they will ‘monitor’ the position but in the meantime, if you are a landlord, you may wish to carefully consider whether you afford your tenant the luxury of a Bosch for £1,000 or a Zanussi for £200!’