Broadly speaking, in calculating rental business profits a taxpayer can deduct business expenses so long as they are:
and
It is not possible to set out all the expenses that are
allowable for tax purposes in every circumstance. In this part of
the manual we aim to give some idea of the main types of expenses
that are likely to arise in a rental business and also some idea of
what can or cannot usually be claimed as a deduction in calculating
rental business profits.
The guidance assumes that the property is let at a market
rent and there are no unusual factors (see
PIM2220).
This guidance applies equally to CT Schedule A as from 1
April 1998.
This part of the manual gives only a broad outline of the
trading expenses rules. For detailed guidance refer to the Business
Income Manual.
Most of the trading expenses rules are applied to property
income (see
PIM1100 onwards). This includes the
‘wholly and exclusively’ rule which says that expenses
cannot be deducted unless they are incurred wholly and exclusively
for business purposes.
All the evidence has to be considered in determining whether
an expense was laid out wholly and exclusively for business
purposes. The evidence may include documents, agreements, notes of
meetings and any other records. What the taxpayer says was their
purpose in incurring the expense is part of the evidence but it
isn’t necessarily decisive: the facts may point to another
purpose. For example, suppose the taxpayer lives in London but has
a holiday cottage in Wales. The cost of going down there for a
three week family holiday is unlikely to meet the ‘wholly and
exclusively’ test even if the taxpayer says their purpose in
going was to inspect the property prior to third-party letting
later in the year.
For an expense to qualify the business purpose must be the
sole purpose. A non-business or private purpose prevents any
deduction from business profits where there is no objective
yardstick by which any business element can be distinguished from
the non-business element.
But where a definite part or proportion of an expense is
wholly and exclusively incurred for the purposes of the business,
that part or proportion can be deducted. An example is the revenue
running costs (including standing charges and hire-purchase
interest) of a car or van used partly for business and partly for
private purposes. For example, if 20% of the mileage in their car
is business mileage, a taxpayer can deduct 20% of the costs of the
car, including standing charges. For more about travelling see
PIM2210.
Another example is the cost of rates, lighting and heating of
premises used partly as business and partly as private
accommodation, see
PIM2050.
Payments made by a partnership towards the personal or
domestic expenses of a partner are disallowable because they fail
the wholly and exclusively test.
It is a general IT principle that capital expenses can’t
be deducted in computing taxable income. This applies to trades and
rental businesses as well as to other activities. Hence, for
example, neither the capital cost of the property that is let nor
the amount of any depreciation of the property can be deducted in
computing taxable profits. Nor can a loss on the sale of a property
or other capital assets be deducted.
But the cost of ordinary expenditure on repairs can normally
be deducted. In addition, separate tax allowances give relief for
the depreciation of some capital assets. See
PIM3000 onwards.
In accountancy and tax practice, expenses that are deductible
as an ordinary expense in computing profits are often called a
‘revenue expense’. This is in contrast to a
‘capital expense’, which isn’t deductible. But
some revenue expenses will not be deductible anyway; for example,
where they fail the ‘wholly and exclusively’ test (see
above).
The capital expenses and repairs rules are explained in more
detail in
PIM2020.
ICTA88/S21A (2) provides for Schedule D Case I & II rules to
be used for the new Schedule A. It directs that the statutory rules
in Part IV Chapter V of ICTA88 apply in computing the profits or
gains, or losses, of a Schedule A business as they do for a trade
under Schedule D Case I, unless there is express provision to the
contrary. Part IV Chapter V includes ICTA88/S74 - S99. The four
rules that are specifically excluded are covered at
PIM1104.
The statutory basis for the use of Case I rules and
commercial accounting principles is covered more fully in
PIM1100 onwards.
In applying the provisions of Part IV Chapter V you should
interpret the legislation for Schedule A purposes as if it read
'Schedule A business' instead of 'trade, profession or vocation' or
'trade'.
For example, the most familiar Case I rule is ICTA88/S74
(1)(a) that an expense may not be deducted unless it is wholly and
exclusively laid out or expended for the purposes of the trade,
profession or vocation. For a Schedule A business, the rule becomes
that an expense may not be deducted unless it is wholly and
exclusively laid out or expended for the purposes of the Schedule A
business. There is more about this rule in
PIM2010.
IT is, of course, a tax on ‘income’. This
principle and the use of commercial accountancy rules lead to the
second leg of the test, that capital expenditure is excluded. For
CT cases, ICTA88/S9 (1) provides that amounts to be taken into
account as income shall be determined ‘in accordance with IT
law and practice’.
ITTOIA05/S272 (1) provides that the profits of a property business are to be computed in the same way as the profits of a trade. The trading income rules in Part 2 of ITTOIA05 that apply for the purposes of computing the profits of a rental business are set out in ITTOIA05/S272 (2) – see PIM1103.
