LONDON LUTON HOTEL BPRA PROPERTY FUND LLP V THE COMMISSIONERS FOR HMRC
FIRST TIER TRIBUNAL TAX CHAMBER
This is a significant case heard by the First Tier Tribunal (FTT) concerning a BPRA claim and the definition of qualifying expenditure ‘on or in connection with’. HMRC have typically considered that BPRA claims often include items of expenditure that they deem to be too remote to the physical work of repairing and renovating commercial property to qualify for the enhanced tax relief. Such disputed items include promoter fees, interest, franchise costs, residual profit and IFA fees. The case heard by the FTT included such disputed items and the case focused on the definition of what the legislation means by ‘on or in connection with’. The conclusion of the FTT was that it partly found in favour with the taxpayer’s interpretation.
It will be interesting to see whether HMRC challenge the conclusion reached by the FTT. We understand there are many outstanding BPRA claims disputed by HMRC and the outcome of this case will have wide implications.
The claim was made on behalf of a syndicate (LLP). They had paid a developer £12,478,201 (excluding land) to renovate and convert a flight training centre into a hotel. They included all costs in their BPRA claim, including the following contested by HMRC:
- The interest amount – £350,000
- The Capital Account – £2,000,000
- IFA fees – £372,423
- Promoter fees – £310,000
- Legal fees – £153,409
- Franchise costs – £272,862
- FF&E and other non-qualifying amounts £587,556
- Residual profit – £1,209,510
The LLP contended that the entire £12.478m qualified for BPRA allowances as it represented the total price for an ‘entire package’ of assets and services that resulted in a fully branded hotel business together with the cost of borrowing.
HMRC disputed that the BPRA legislation extended to include the entire development cost including the 8 payments listed above as they considered they did not come within the definition of ‘qualifying expenditure’ under Part 3A CAA2001 for BPRA purposes.
They therefore sought to reduce the BPRA claim down to £7,222,439.
The FTT agreed with the LLP that the following were clearly incurred ‘in connection with’ the conversion of the property:
- Interest Amount / Licence Fee – these costs were necessary to enable the contractor to access the site to carry out the works.
- IFA Fees – the FTT found that these services were for raising equity finance
- Promoter Fees – it was concluded by the FTT that these fees were incurred in connection with the conversion and renovation of the property and therefore qualified for BPRA
- Franchise Costs – where the costs related to the LLPs obligations under the Franchise Agreement for a compliant branded hotel, these costs were ‘in connection with’ and therefore were allowed. However, costs incurred on removing the original hospitality consultants was disallowed
- Other Non-Qualifying Amounts – costs incurred in relation to the curtilage of the property such as tarmacking external areas, landscaping and drainage qualified for BPRA in full.
- FF&E – as the items claimed within this heading were all fixed to the property – such as cupboards and reception desks – they were allowed in full.
- Residual Amount / Developers Profit – the LLP had claimed these costs in their entirety. However the FTT agreed with HMRC that these costs should be apportioned over the project costs.
The FTT determined the following were too remote to be deemed to be incurred ‘in connection with’ the conversion of the property:
- The Capital Account – £2m of funds was deposited by the LLP was put into a capital account held by the developer. The FTT agreed with HMRC that this was not real expenditure incurred on the renovation works, merely a circular and self-cancelling cash flow. However it is important to note that this expenditure did not flow back to the LLP.
- Legal Fees – the FTT concluded that most of the legal fees related to the original purchase and therefore did not qualify for BPRA. However, where the legal fees did not relate to the purchase of the land, they were allowed.
This is a positive outcome for properly prepared BPRA claims and gives more clarity on what can be included within the claims. The tribunal decided that the words ‘on or in connection with’ are to be given a wider definition.
There is the possibility that either party to the case can appeal.
The LLP may appeal on the conclusion reached on the Capital Account as it arguably should be treated as part of the developers profit and therefore apportioned across all project costs. However, as most BPRA claims do not have a Capital Account, the direct impact on wider BPRA claims may be negligible.
HMRC may appeal, especially as the FTT accepted that costs incurred on works within the curtilage of the building and outside the curtilage qualified for BPRA. Therefore car parks, drainage, fencing and walls were deemed to be ‘on or in connection with’.
BPRA claims ended for expenditure incurred after 5 April 2017 so the impact of this case is largely retrospective.