In 1776 Sir Joshua Reynolds painted a portrait later purchased by the 5th Earl of Carlisle. The painting was taken for display at the family seat at Castle Howard in Yorkshire where for the next 200 years it remained until being sold for over £9m in 2001 on behalf of the late Lord Howard.
The recent Court of Appeal decision in HMRC v The Executors of Lord Howard of Henderskelfe confirmed that this painting was plant and therefore was a wasting asset exempt from capital gains tax. The facts of this case neatly illustrate the tests used to decide when decorative assets can be plant and so qualify for capital allowances.
As background, established case law provides two tests that can indicate when an asset is plant;
- Function test: The asset needs to perform some active function and be used in the normal course of a business
- Permanence test: The asset needs to be used on an ongoing basis within the business as opposed to being an item of trading stock intended to be held only until it can be sold on.
The painting was displayed at Castle Howard being one of the main attractions for visitors since 1952 when the Castle was first opened to the public. The Executors used these facts to argue the above two tests were met and that the painting was clearly a permanent piece of the ‘business apparatus.’ HMRC unsurprisingly took issue with this but the Court of Appeal held the painting was definitely and actively used for promotion of the trade. This could have been for example, in the company’s material marketing the Castle and brochures for visitors.
While HMRCs arguments relating to the permanence test suggested the lack of formal agreement between the legal owner of the painting and the company using it in their trade for display at Castle Howard meant it could not be plant. This is because the painting could have been removed at any time though the facts did not support this position.
Another point used by HMRC was that the painting was not plant in the hands of the Executors who owned it. Helpfully the Court held that an asset could not be plant in the hands of a person using it for business purposes while at the same time not being plant in the hands of its owner.
This case related to a painting which is a chattel for tax purposes being ‘tangible moveable property.’ By the way, it is worth noting the tests used above also apply to determine when an asset is plant where the decorative assets are not moveable, for example, mosaics, murals and sculptures or feature walls hotels or restaurants that are also part of fabric of the building itself ratified in the case CIR v Scottish & Newcastle Breweries Ltd.
HMRC will accept paintings may qualify for capital allowances if they improve the ambience in trades where ‘atmosphere’ could be said to improve custom. So this is clearly more relevant to trade related properties like restaurants and hotels or client facing areas in offices rather than general office areas where customers may never visit. HMRC guidance frames it in terms of trades where ‘selling atmosphere is part of the business.’
HMRC may still choose to challenge cases where capital allowances are claimed on high value paintings within non trade related property and are not on display to the public. Their internal guidance says tax inspectors should only accept items of decor as plant if the:
- trade involves the creation of atmosphere/ambience and in effect the sale of that ambience to its customers, and the
- items on which plant or machinery allowances are claimed were specially chosen to create the atmosphere that the taxpayer is trying to sell.
The guidance specifically gives the example of a painting on an accountant’s office wall that is owned by the accountant not being plant because selling atmosphere is not part of an accountants business. However, times have moved on since this guidance was written and it is now normal for paintings to be found in a modern office environment intended to promote brand values, create ambience for visiting clients and for staff wellbeing for example.
So a practical approach in more everyday situations where the value of paintings or decorative plant items are of much lower values would be to consider these items as purchased as part of the working plant and machinery of the business, particularly if they are on display in the business rather than held in storage, despite the HMRCs guidance. Furthermore, any painting worth less than £6,000 will be seen as a chattel for CGT purposes by HMRC and so exempt. Chattels are tangible moveable property and where used in a business will also likely be plant for capital allowances purposes.
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