On 29 December 2008, HM Revenue & Customs published a Brief (R&C Brief 66/08) seeking comments on certain proposed revisions to guidance in the Capital Allowances Manual (CAM).

One of the proposed revisions concerned an update to guidance on the meaning of ‘dwelling-house’ for the purposes of Section 35 of the Capital Allowances Act (CAA) 2001. S35/CAA01 provides that expenditure on plant or machinery ‘for use in a dwelling-house’ does not qualify for capital allowances in certain cases, for example, in the case of an ordinary or overseas property business.

Currently, relevant sections of the CAM (such as CA11520 and CA23060) state, for example, that University halls of residence are not dwelling-houses. However, R&C Brief 66/08 pointed out that the provision of student accommodation has evolved considerably over the years, and that those parts of the CAM therefore require to be updated.

Nowadays, students and other tenants often live in cluster flats or houses in multiple occupation. For example, typical student accommodation might consist of a building with four floors, each containing a separate flat with (say) six lockable study-bedrooms, each with its own en suite facilities. The kitchen/dining room and lounge/TV room for each flat might typically comprise communal areas, for use by the six occupants of that flat.

Specifically for Part 10 of CAA01 (Assured Tenancy Allowances or ATAs) the term ‘dwelling-house’ is given the same meaning as in the Rent Act 1977 (CAA01/S531). This is unsurprising because the assured tenancy scheme was introduced in the Housing Act 1980 to encourage the construction of residential properties for letting.

Because of this legislative reference, HMRC originally assumed that the term would have the same meaning in other Parts of CAA01, and went on from that assumption to conclude that the individual study bedrooms (in the student accommodation example above) would comprise separate ‘dwelling-houses’ (because each allowed for exclusive occupation and access*), but that the communal kitchen/diner and lounge/TV rooms were not part of the dwelling-house(s). This was the view expressed in R&C Brief 66/08.

*Following the decision in Uratemp Ventures Ltd. V Collins [2001] UKHL 43, which was a decision under the Housing Act 1988, and which found that a hotel room could be a dwelling-house, despite the absence of cooking facilities.

Practitioners expressed reservations about R&C brief 66/08 and HMRC therefore invited their further input and discussions. In 2009 HMRC wrote to commentators to clarify that taxpayers should continue to file returns based on the existing published guidance and that any change to the existing guidance would only be applied, at the earliest, to expenditure incurred on or after the date of the formal announcement.

HMRC is, however, naturally keen to remove this area of uncertainty as soon as possible and has therefore sought further legal advice to inform the updated view expressed in this Brief, which will subsequently be included in the revised CAM.

As a result of this further advice, HMRC now considers that the meaning of ‘dwelling-house’ for Part 10 (which is the Rent Act/Housing Act meaning) is specific to that Part, and that the term in other Parts of CAA01 takes its ordinary, everyday meaning.

There are, in fact, several references to ‘dwelling-house’ in other parts of CAA01: in Part 2 (plant and machinery allowances), Part 3 (industrial buildings allowances), Part 3A (business premises renovation allowances) and Part 6 (research & development allowances). Applying the Rent Act/Housing Act meaning to those other Parts would be inappropriate. For example, S277/CAA01 specifically excludes both hotels and dwelling-houses from being an industrial building; the drafter must, therefore, have seen these forms of accommodation as separate and distinct from one another, and this is indicative of the wider legislative intention.

In Uratemp, against the background of the Housing Act, it was pointed out that the purpose of that Act was to give a measure of security to those who make their homes in rented accommodation, at the lower end of the housing market. And, in that particular context, a hotel room containing a shower and basin but no cooking facilities was found to constitute a separate dwelling. In Gravesham* it was held that the distinctive feature of a dwelling house for the purposes of the Town and Country Planning General Development Order, since replaced by the Use Classes Order, was its ability to afford to those who use it the facilities required for day-to-day private domestic existence. The Use Classes order currently distinguishes between dwelling houses, whether used by a single household or as a house in multiple occupation (classes C3 and C4), and various categories of residential institution such as hospitals, nursing homes, etc, (C2), prisons and military barracks (C2A), and hotels and hostels (C1).

* Gravesham Borough Council v Secretary of State for the Environment (1982) 47 P&CR 142

On further reflection, HMRC have concluded that the definition based on the presence of the facilities required for day-to-day private existence is a better everyday description, bearing in mind that the question remains essentially one of fact, so that unusual or controversial cases may still need to be considered in the light of their individual facts and circumstances.

Returning to the example of student accommodation at paragraph four above, HMRC have concluded that the better view is that each flat in multiple occupation comprises a dwelling-house, given that the individual study bedrooms alone would not afford the occupants ‘the facilities required for day-to-day private domestic existence’. In other words, the communal kitchen and lounge are also part of the dwelling-house. The common parts of the building block (such as the common entrance lobby, stairs or lifts) would not, however, comprise a ‘dwelling-house’.

The updated view, as expressed in the revised guidance will apply in all circumstances in relation to capital expenditure incurred on or after 22 October 2010.

In relation to capital expenditure incurred on or after 29 December 2008 but before 22 October 2010 HMRC will either accept capital allowances claims in returns made in respect of communal areas on the basis of the view as set out in R&C Brief 66/08 or on the basis of the view as previously set out in CA11520 and CA23060.

In relation to capital expenditure incurred before 29 December 2008 claims made in returns for open years and filed before 22 October 2010 relying on R&C Brief 66/08 will also be accepted.

Source: HMRC. www.hmrc.gov.uk