Can I put extended product warranty against rental income

ognum

I have a new (to me) rental property that has no white goods in it so I need to buy fridge/freezer, cooker and washing machine.

As this property is over 100miles from my home (don't ask) I am considering taking out an extended warranty for 5 years on these products so the tenant can call out if they need repairing.

Can I claim this warranty against tax on my rental income and if so do I charge it all in the first year or spread it over 5 years.

Thank you for any help you can give.

jimmo

You could possibly argue that the extended warranty is a form of insurance which I suppose it is but it doesn’t seem to be the type of insurance that can be claimed.
http://www.hmrc.gov.uk/manuals/pimmanual/PIM2040.htm
If it is simply a part of the cost of buying white goods, initial purchases are not allowable in any event but, if you have not already done so, you need to consider whether to claim the 10% wear and tear allowance from day 1 or to claim on the renewals basis.
http://www.hmrc.gov.uk/manuals/pimmanual/PIM3200.htm

chrismac1

I'd argue this is insuring against damage to some of the contents, hence claimable under PIM2040. The correct accounting treatment is then to spread the cost over the 5 years of the cover. Clearly if you get an enquiry - probably less than a 1% shot for a single rental property - you might get HMRC arguing that the white goods are not claimable so neither is the EW. To do that they'd need to dig down into the "insurance cost" section of your workings, discover the EW item and then disallow it under PIM3200. I'm going to estimate the chances of that during an enquiry into a rental at 20% maximum. So you have a 0.2% risk here per year over each of the 5 years, 1% in total. And you'll have copied and pasted the relevant extract from PIM2040 to back up your treatment, won't you? So it won't be just "Fair cop!" even if that 1% risk turns out to bite.

Most clients when presented with this sort of probability anlaysis want to claim it, but not all.

ognum

chrismac1 wrote: »

I'd argue this is insuring against damage to some of the contents, hence claimable under PIM2040. The correct accounting treatment is then to spread the cost over the 5 years of the cover. Clearly if you get an enquiry - probably less than a 1% shot for a single rental property - you might get HMRC arguing that the white goods are not claimable so neither is the EW. To do that they'd need to dig down into the "insurance cost" section of your workings, discover the EW item and then disallow it under PIM3200. I'm going to estimate the chances of that during an enquiry into a rental at 20% maximum. So you have a 0.2% risk here per year over each of the 5 years, 1% in total. And you'll have copied and pasted the relevant extract from PIM2040 to back up your treatment, won't you? So it won't be just "Fair cop!" even if that 1% risk turns out to bite.

Most clients when presented with this sort of probability anlaysis want to claim it, but not all.

Thanks for this, please can you tell me what the penalty would be if this was found and disallowed?

suso

chrismac1 wrote: »

Clearly if you get an enquiry - probably less than a 1% shot for a single rental property - you might get HMRC arguing that the white goods are not claimable so neither is the EW. To do that they'd need to dig down into the "insurance cost" section of your workings, discover the EW item and then disallow it under PIM3200. I'm going to estimate the chances of that during an enquiry into a rental at 20% maximum. So you have a 0.2% risk here per year over each of the 5 years, 1% in total. And you'll have copied and pasted the relevant extract from PIM2040 to back up your treatment, won't you? So it won't be just "Fair cop!" even if that 1% risk turns out to bite.

Most clients when presented with this sort of probability anlaysis want to claim it, but not all.

So now you are advocating claiming something, because there is a low risk of investigation / discovery under enquiry,

This forum is for advice on cutting tax, not for claiming under false pretences.

The "clients" of yours that do not want to claim it, do they return again or do they go to a reputable accountant.

Gas_Powered_Toothbrush

ognum wrote: »

Thanks for this, please can you tell me what the penalty would be if this was found and disallowed?

Up to 100% of the tax evaded.

jimmo

suso wrote: »

So now you are advocating claiming something, because there is a low risk of investigation / discovery under enquiry,

Oh suso, I think you need to relax. This is a forum and nobody should ever act solely on advice posted on a forum without doing their own research.
As far as I am concerned, chrismac 1 posts an awful lot of rubbish about how terrible HMRC are and how wonderful chrismac 1 is but, deep down, I have to accept that the once proud Inland Revenue is no more.
No doubt those that used to work for Customs and Excise are equally ashamed of what is now HMRC.
However you and I will not change people’s perceptions. Given 2 answers to his question the OP has clearly chosen which answer he prefers and has asked chrismac 1 a supplementary question about possible penalties.
I like to think that I, being one who imposed penalties, would be more able to answer that question than chrismac 1but choose not to answer because I now perceive the OP to be a chancer.

chrismac1

A key difference between accountants and HMRC employees is their attitude to "grey areas". HMRC staff hate them, hence the ever-growing and mushrooming set of rules and regluations, many of which directly contradict one another. It is absolutely not the way I would approach tax law, but HMRC are the ones who get the chance to influence tax laws directly not folk like me. Part of my job is to identify grey areas, explain them to clients and offer them the chance to exploit them.

Leaving aside the rules, in my view the OP has spent this money to improve the speed and quality of the service he or she offers the tenant in the event of machine breakage. So leaving aside the letter of the law, I have no ethical problem with the concept that this is a business expense. Moving on to the "grey area" issue, all we need to find is one clause or one tax case which backs up the approach we are going to take. In this case we clearly have this over the definition of the word "contents". Maybe this was loosely drafted, maybe the HMRC guy who did it was not paying attention. Nay matter. If you asked 100 people at random whether the contents of their house includes the washing machine, 98 would say yes, 1 would be a fool and the other one would work for HMRC.

Job done. We clearly have a grey area. So now my job is to offer that to the client, outline the accounting treatment and explain exactly the risk to the client. This - with the help of other posters - has been done. I make no ethical or moral judgement over the issue, I am equally happy if the client claims it or does not claim it though in the event he or she claims it we document the relevant clause in the PIM so we can justify our treatment in 5 years time if needed. Anyone who thinks that is bad accountancy is HMRC and not a client!

ognum

jimmo wrote: »

Oh suso, I think you need to relax. This is a forum and nobody should ever act solely on advice posted on a forum without doing their own research.
As far as I am concerned, chrismac 1 posts an awful lot of rubbish about how terrible HMRC are and how wonderful chrismac 1 is but, deep down, I have to accept that the once proud Inland Revenue is no more.
No doubt those that used to work for Customs and Excise are equally ashamed of what is now HMRC.
However you and I will not change people’s perceptions. Given 2 answers to his question the OP has clearly chosen which answer he prefers and has asked chrismac 1 a supplementary question about possible penalties.
I like to think that I, being one who imposed penalties, would be more able to answer that question than chrismac 1but choose not to answer because I now perceive the OP to be a chancer.

Jimmo thanks for this, it made me laugh! If only you new how straight I am with my tax affairs I would always rather pay up. I have a tax accountant who also keeps me straight

I am a landlord who tries to give my tenant the best and I thought this would be a good way of providing them a service. The total cost is about £250 pounds spread over 5 years so hardly a big deal.

Of course I am interested in the penalty, 5years in prison would be a definite deterant even if it's a grey area which none of you seem to have clear answer to.

It is not worth me stirring up the wrath of HMRC for £50 a year! By the way I am a she.

Pennywise

I can't believe how this matter has caused such diverse opinion. To my mind, it's definitely an allowable expenditure and I'd not even have the conversation with the client about if's and but's because it's an open and shut case to me.

OK, I note that this kind of insurance isn't specifically mentioned as allowed in the link mentioned above, but then that list isn't an exclusive list - it's merely an illustrative list of what is normally allowable, so unless extended warranties are specifically mentioned as not allowed, then we can ignore that manual reference.

So, let's get back to basics. The general rule for any expense allowability is "wholly and exclusively". So is the extended warranty "wholly and exclusively" for business purposes? There can only be one answer and that is "yes", as long as the white goods are used wholly and exclusively within the rental property for the purposes of the rental business. http://www.hmrc.gov.uk/manuals/pimmanual/PIM2005.htm

The next question is whether the expenses fall to be disallowed because they are of a capital nature. Again, open and shut case, these aren't capital expenses - it's an insurance policy to cover future repairs and replacement, so it's not capital, so isn't disallowed on that score either.

So, so far, I'm happy with the legal position. My next usual step is to look at it from a "common sense" point of view. If the white goods break down, then if there was no policy, the cost of repairs would definitely be allowable. If the OP had adopted the "renewals basis" for capital goods, then any replacement cost would also be allowable. BUT if the OP had adopted the 10% W&T method, then the replacement wouldn't have been allowable, so this latter point may be relevant. If the repair costs and maybe the replacement costs would be allowed in future years when a breakdown occurred, then it's inconceivable to me that taking out insurance to cover the costs of such eventuality wouldn't be allowable.

Finally, at this stage, I'm happy and confident to claim the extended warranties, the only question now remains is the period in which they are claimed. As the usual accounting principles have to be applied, if you spend say £100 on date of purchase, for a warranty that covers 5 years, then if that amount is "material" then I'd allocate it evenly over the 5 years, i.e. charge £20 per year for 5 years. If not material, then I'd charge it in the year of purchase.

So, all in all, very little doubt in my mind that it's allowable. Even if the tax inspector argued it wasn't and was successful in his argument, then any penalties won't be anywhere near the 100% suggested by an HMRC stooge above as a frightener - they'd be in the 0-35% range and I'd be arguing for them to be at the lower end, in fact, I'd argue for zero. The reasons being that 100% is for deliberate concealed evasion, whereas this matter can't be anything other than accidental and innocent, especially when an argument as above is presented, i.e. where there is common sense, logic, and legal background to a matter that isn't specifically mentioned as disallowable in the tax legislation nor property income manual.