Revenue Tax Briefing Issue 47, April 2002
A scheme for the renewal and improvement of certain resort are as was introduced by the Finance Act 1995 (now Chapter 4 Part 10 Taxes Consolidation Act 1997)
The qualifying period for this scheme is the period from 1 July 1995 to 30 June 1998. This period was extended to 31 December 1999 where the relevant local authority certified on or before 30 September 1999 that at least 50% of the total cost of the project was incurred by the end of June 1999. Under Sections 352 and Sections 353 TCA 1997 capital allowances are, subject to all the relevant conditions being met, available in respect of expenditure incurred in the qualifying period on the construction of certain buildings and structures, including registered holiday cottages and tourist accommodation facilities that include listed holiday cottages, in qualifying resort areas. The capital allowances available are:
Up to 75% Free Depreciation or 50% initial allowance in year 1, and 5% annual allowance thereafter to a maximum of 100%.
50% Initial Allowance in year 1 and 5% annual allowance thereafter to a maximum of 100%.
Section 354 TCA 1997 provides for a double rent allowance where a person pays rent under a qualifying lease in respect of a qualifying premises, which includes registered and listed holiday cottages, occupied by the lessee for the purposes of a trade.
By virtue of Section 355 TCA 1997 both double rent allowance and capital allowances, subject to certain exceptions, cannot be claimed in respect of a holiday cottage in a qualifying resort area. If the lessee wishes to claim double rent allowance then the investor must disclaim all capital allowances due in respect of the expenditure on the construction/refurbishment of the holiday cottage. This restriction does not apply to certain transitional projects:
and that person can prove that plans had been prepared and that discussions had taken place with a planning authority between 8 February 1995 and 5 April 1996 and that the planning authority can give an affidavit to this effect.
The treatment of the income arising from the letting of holiday cottages is a significant factor in determining what allowances may be claimed in respect of registered/listed holiday cottages in qualifying resort areas. If the income is regarded as rental income then free depreciation cannot be claimed nor is there any entitlement to the double rent allowance. If the income is regarded as trading income and assessable under Case I then subject to the owner occupying the cottages for the purposes of the trade free depreciation may be claimed. Subject to disclaiming capital allowances, if appropriate, the double rent allowance will be available to the lessee where the income is regarded as trading income and the cottages are occupied for the purpose of the trade by the lessee.
Since 1994 Revenue has consistently held the view that the letting of holiday cottages is not a trade within Case I Schedule D. The income arising is assessable under Case V Schedule D. Consequently free depreciation and double rent allowance would not be due for the holiday cottages located in the qualifying resort area. Prior to 1994 Revenue accepted Case I treatment where a scheme of holiday cottages satisfied the requirements of Bord Failte registration. It is accepted that the combination of earlier Revenue practice and legislative provisions may have created an impression that the operation of schemes of holiday cottages in Qualifying Resort Are as which would be capable of registration by Bord Failte would qualify for Case I treatment. In the circumstances Revenue will not seek to challenge claims for accelerated capital allowances or double rent allowances in respect of schemes of holiday cottages within the qualifying resort areas where projects proceeded in good faith, on a genuine expectation of the availability of these allowances. The possibility of such expectation would arise only in relation to the larger schemes of holiday cottages that would satisfy the Bord Failte registration requirements i.e. those schemes that had in the past been accepted by Revenue as coming within Case I. Apart from satisfying the specific Bord Failte requirements the operators of such schemes would typically provide services such as
It must be emphasised that the accelerated capital allowances and the double rent allowance will only be available to schemes of holiday cottages located in the qualifying resort areas and to which the provisions of Chapter 4 Part 10 TCA 1997 apply.
Many holiday cottage investments within the qualifying resort area proceeded on the basis that the income from the letting of the holiday cottages was rental income assessable under Case V of Sch. D. These cases will not be re-opened.