A quirky capital allowance case with a surprising result.
Businesses obtain tax relief for expenditure on capital assets such as machinery or office equipment by claiming capital allowances.
In general, these claims must be made on a Tax Return and for companies, this means the time limit for making a claim is two years after the end of the accounting period when the expenditure was incurred. So, if the asset was purchased during the accounting year ended 31 December 2016, the claim must be made in a Tax Return which is filed or amended by 31 December 2018.
So far, so good. Here’s where things get more complicated.
There is another time limit for making a capital allowance claim if HMRC open an enquiry into a Return after it is submitted. This time limit is 30 days after the enquiry is closed.
In the case of Dundas Heritable Ltd, the company filed its Tax Returns late, after the two-year time limit for claiming capital allowances had passed. The claims included within the Returns were therefore out of time and HMRC opened an enquiry in respect of the late claims and subsequently issued a closure notice denying relief because the claims were late.
The company then argued that the claims could not be late as they were made within 30 days after the closure of the enquiry.
HMRC argued, quite reasonably, that the validity of the claim should be determined by the circumstances in place when it was made. It would make no sense for a claim which was late when it was made to be “validated by the very process required for corrective action” as the only way for HMRC to challenge a late capital allowance claim is to open an enquiry.
Here’s where things get weird.
Remarkably, both the First Tier Tribunal and the Upper Tribunal agreed with the company.
The effect of this decision – which sets a legal precedent when made by the Upper Tribunal – seems to be that a company can make a capital allowance claim in a Return at any time. HMRC can only challenge and disallow the claim by making an enquiry into the Return, and this automatically extends the time limit for making the claim so that it is no longer late.
Don’t you just love tax?
