We act for a number of co-owners of a block of flats which was originally built in 1925. The original metal windows became beyond repair and had to be completely replaced. The decision was made to replace the windows with UPVC double glazed windows at a total cost including decorations of £74,855, as this was much cheaper than replacing them with new metal windows.
We act for a number of co-owners of a block of flats which was originally built in 1925. The original metal windows became beyond repair and had to be completely replaced. The decision was made to replace the windows with UPVC double glazed windows at a total cost including decorations of £74,855, as this was much cheaper than replacing them with new metal windows.
The Inspector of Taxes is seeking to disallow the whole cost as being capital expenditure. He is, however, willing to consider an allowable element under Extra-statutory Concession B4 and would be prepared to accept notional repair of two-thirds with an improvement element of one-third. His reasons for treating this as capital is because the improvements are in the areas of less heat loss, noise reduction and greater security. He states that it is a matter of fact that double glazing is an improvement on single glazing.
We are trying to establish the comparable cost of single glazed units in their cheapest form. We note from an article in Taxation (20 August 1998) that in the context of a repairing covenant dispute it was shown that out of a total contract price of £260,000 only £6,400 represented the additional cost of having double glazing as compared to the cost of single glazing as a straight replacement. The judge in this case decided that this additional cost was trivial in relation to the total contract price and therefore all the work was within the scope of the repairing covenant.
Have any readers had a similar situation to the above? If so, could they let us know how the Revenue was persuaded that there was no capital improvement involved in the work carried out?
(Query T15,843) – GHR.
The relevant part of Extra-statutory Concession B4 reads as follows: 'Where ... repairs of property are obviated by improvements .... so much of the outlay as is equal to the estimated cost of the repairs is allowed as a deduction ...'.
If one accepts the Inspector's argument that the installation of UPVC double glazing constitutes an improvement over installing copies of the original single-glazed units (and there may be those from English Heritage and elsewhere who would argue that aesthetically there is no improvement!), then surely the correct comparison to make is between the cost of the UPVC units and what it would have cost to replace the windows with exact replicas of the original metal windows, not the cheapest single-glazed units available.
I suspect that if 'GHR' approaches a specialist manufacturer who could produce exact copies of the original frames he would find that they cost more than the UPVC double-glazed units. If that is the case, he is home and dry.
The Inspector's suggestion of allowing 2/3rds appears to be entirely arbitrary.
An alternative argument, based on the decision in Conn v Robins Bros Ltd 43 TC 266 is that the cost of alterations to an old building is part of a repair as a result of the use of new techniques and materials and is not necessarily capital expenditure. – Hayloft.
As a general principle, a repair is a repair. Any betterment reflected in the materials is incidental to the purpose, and the Inland Revenue allegations should be rejected accordingly. Repairs often include improvement because of research and development in the industry that cause parts and materials of improved specification to become standard. But while presenting this first line of defence, a little research would not be amiss.
Rotted windows impair the surrounding masonry at contact points, so replacement entails the following:
(a) Suitable replacement units are purchased. Sometimes stock sizes will fit, but often the units must be made to order, especially if multiply glazed.
(b) The rotted windows are removed, together with any surrounding timber seating, and the brickwork and pointing are renewed as needed. New wooden framing is inset to receive the windows, and the latter are mounted and tested to ensure they work properly.
(c) The surrounding surfaces are made good and redecorated.
It will be readily appreciated that (b) and (c) above occur whatever kind of glazing is chosen. When replacing all the windows of my home, and double glazing in the process, I noticed that item (a) was barely one third of the total outlay. So it is suggested that this point be made to the Inspector, and that debate be restricted to the glazing purchase, so steeply reducing the amount at stake. One would take a modest wager that it is under £25,000.
This can be further reduced by ascertaining the comparative cost of single-glazed units. It is recommended that the manufacturer's cost accountant be consulted. Persuade him to give his best guess of the cost of the same windows but with only single glazing. It would not be at all surprising to find the single-glazed product no cheaper. In fact, given that the industry is increasingly turning to multiple glazing, a single paned, thus unusual, order might actually cost more. If written evidence of that can be obtained, the Inspector's allegations would oblige him to agree a disallowance of negative polarity, i.e. a tax windfall. – Man of Kent.
Extract from reply by 'Hodgy':
The position taken by the Inspector appears to be that first you identify the elements of expenditure that are improvements. Then you apportion a notional cost to those improvements and the balance is deductible. This is wrong.
'GHR' must calculate the notional cost of the repairs that have been obviated, and that is the deductible amount. If, as in this case, the notional cost exceeds the total cost, it simply means that all of the expenditure is deductible.
I would refer 'GHR' to the Inland Revenue leaflet IR150 at paragraph 148 where it states that where windows are changed from single glazing to double glazing, the notional cost is the cost of new but equivalent single-glazing units. In this case, I would suggest that equivalent units would be metal-framed windows.
It is evident that the Inspector is not aware of the old adage that you get what you pay for. 'GHR' should not try to ascertain the cost of the cheapest single-glazing units, but instead consider why UPVC is so cheap.