In 2023, HMRC wrote to some taxpayers with property income asking them to check that the information provided in the property pages of their 2021/22 Self Assessment tax return was correct. The letter advised that the cost of ‘upgrading a central heating boiler from an older, less efficient model’ was not allowable in calculating the profits of the property business. However, HMRC have now revised their position and sent a correction letter to taxpayers who were sent the original letter admitting that the advice that they gave was wrong. The correction letter informs taxpayers that where they upgrade an item due to an advance in technology and the new item does broadly the same job as the old one, they will generally accept that the replacement is an allowable repair, the cost of which can be deducted in computing the taxable profits of the property business. Consequently, they now accept that replacing a boiler with a more efficient one is a repair not an improvement.

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Repair or improvement?

The distinction between a repair and an improvement is an important one. This is because the former is treated as revenue expenditure and the latter as capital expenditure. This may affect the way in which tax relief is given for the associated expenditure.

A repair is something which restores an asset to its previous condition whereas an improvement enhances that asset. HMRC generally accept that where any improvement arises solely as a result of advancements in technology, the expenditure is regarded as an allowable repair rather than an improvement, as long as the functionality and character of the asset is broadly the same. The example that they quote to illustrate this is the replacement of single glazing with double glazing.

The cash basis is the default basis of accounts preparation for landlords who meet the associated conditions and who have not elected to prepare their accounts under the accruals basis. Under the cash basis, capital expenditure can be deducted in calculating profits unless it is of a type for which such a deduction is specifically disallowed.

By contrast, where accounts are prepared under the accruals basis, only revenue expenditure can be deducted in calculating profits. Relief for qualifying capital expenditure is given in the form of capital allowances.

Action

If you have not claimed relief for a boiler upgrade or relief has been disallowed and you now think that you are entitled to relief, you are advised to email HMRC at responseteam5@hmrc.gov.uk. It is important to include the disclaimer as advised in the letter as, unless the email contains the words ‘I accept the risks associated with using email and I am happy to proceed’, HMRC will not reply by email, and this may lead to a delay. You can also call HMRC on 03000 516640 to discuss the matter.

Partner note: ITTOIA 2005, Pt. 3. Ch. 3; HMRC’s Property Income Manual at PIM2030.