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London Luton Hotel BPRA Property Fund LLP v HMRC

London Luton Hotel BPRA Property Fund LLP v HMRC

A recent case expands range of expenditure qualifying for BPRA, creating an opportunity for uplifts on prior claims.

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Harinder Soor

Partner – Claims and Incentives

KPMG in the UK

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A recent First-tier Tribunal (FTT) case has significantly expanded the boundaries of a claim for Business Premises Renovation Allowances (BPRA). Given the result, we expect HMRC to challenge but in the meantime any businesses who have made a BPRA claim in the past, or who might be able to make a retrospective claim, should consider whether they have claimed the full extent of the allowable expenditure. BPRA was introduced to help regenerate empty commercial properties in disadvantaged areas, providing a 100 percent Initial Allowance or 25 percent straight-line Writing Down Allowance for renovation expenditure connected with bringing disused commercial properties back into commercial use, within certain designated areas of the country. BPRA dropped off the statute book for new expenditure on 1 April 2017. Due to the generous nature of the relief, HMRC have targeted arrangements where the intention was to undertake projects which would fall within the BPRA rules.

The subject of this case was a project carried out by London Luton Hotel BPRA Property Fund LLP (London Luton), redeveloping a disused flight training centre near Luton Airport into a hotel in 2011-2012. The total paid to the developer was £12,478,201 and London Luton claimed BPRA on the full cost. HMRC disallowed £5,255,761, comprising the following:

  • The interest amount - £350,000;
  • The capital amount - £2,000,000;
  • Independent Financial Adviser (IFA) fees - £372,423.40;
  • Promotor fees - £310,000;
  • Legal fees - £153,409;
  • Franchise costs - £272,862;
  • Furniture, fixtures & equipment (FF&E) and other non-qualifying amounts - £587,556; and
  • Residual amount/profit - £1,209,510.

The main discussion considered the wording of CAA2001 s.360B, which defines qualifying expenditure as “expenditure incurred … on, or in connection with the conversion, renovation or repair of a qualifying building”. The phrase “expenditure incurred on the provision of plant and machinery” has long been familiar within the capital allowances rules and the boundaries of this were determined in Ben-Odeco Limited v Powlson [52TC459]. However, the tribunal ruled that the words “in connection with” do additional work, broadening the category of expenditure eligible for BPRA.

Accordingly, the tribunal allowed the interest amount, IFA fees, promotor fees, legal fees relating to the property conversion and some of the franchise costs. Under principles established in Ben-Odeco, none of these costs would be eligible for capital allowances.

The capital amount was a sum which was deposited as security against bank funding. This was therefore deemed not to be real expenditure incurred at all.

The FF&E was inspected by the tribunal, and found to be permanently fixed. Although a full property law fixtures analysis was not undertaken, the tribunal allowed the BPRA claim with respect to these costs. It is worth noting that plant and machinery allowances would have been due on the FF&E had BPRA not been available.

The other costs included roof plant and external works. HMRC argued these fell under the exclusion for expenditure “on or in connection with land adjoining or adjacent to the property”. However, on cross-examination, HMRC accepted that the assets were within the curtilage of the property and therefore the tribunal determined that they formed part of it.

The residual amount/profit had been claimed in full, but the tribunal agreed with HMRC that the correct treatment was to apportion this over the total expenditure, in the same way as preliminaries and certain professional fees under J D Wetherspoon plc v HMRC [UKUT 42].

While the result may still be appealed, and changes introduced in the Finance Act 2014 remove the “in connection with” wording, this case opens up a significant opportunity to review existing claims to ensure all relevant expenditure has been claimed existing BPRA claims, as well as where qualifying expenditure was incurred but no claim was made, particularly where expenditure was incurred prior to 2014.

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