Capital Allowances – A Snapshot

As you will be aware, businesses can claim Capital Allowances on eligible items purchased for use within the business, and claim a Writing Down Allowance against taxable profits.

Everyone knows to claim on plant and machinery, such as tools and office equipment. However, when it comes to fixtures, fittings, and integral building features, it can become complicated due to the difficulties of accurately valuing systems embedded in a property and the labyrinth of case law.

This can lead to Capital Allowances being inaccurately assessed and processed, meaning clients miss out on unclaimed tax relief, potentially to the tune of hundreds of thousands of pounds.

Fixtures, fittings, and integral building features include bathroom suites, systems relating to heating, lighting, water, or ventilation, as well as lifts and moving walkways, to name a few. Individual claims can sometimes amount to as much as 35% of the value of a freehold, but each case is unique and must be assessed individually.

Capital Allowances rules state that only one owner can take full advantage of the available tax relief during the lifetime of the building, so if the previous owners did not claim, the current owner could be in line for a windfall.

Lincoln Holland JV Ltd, a Brighton-based property development and investment business, bought a large residential building in Brighton with several other investors to let out as 37 separate apartments. Capital Allowances do not extend to ‘dwelling space’, so the plant and machinery in the apartments were out of the picture. However, STax conducted a Capital Allowances survey, reviewing the systems in the communal areas, such as the halls, lift, and the plant room, which are not classified as dwelling areas.

It was calculated that Lincoln Holland JV Ltd was entitled to claim Capital Allowances of over £320,000 as a result of their expenditure.

The rules governing which items are eligible to be pooled are complex and vary significantly from building to building and across different industries. To accurately assess a taxpayer’s full entitlement requires a fusion of tax knowledge and surveying expertise. Because of this, many practices choose to bring in outside specialists.

CAPITAL ALLOWANCES AT POINT OF SALE

When a commercial building changes hands, the parties should enter into a joint section 198 election (s198) to fix a transfer value for the allowances.

Quite often, you will see a proposed s198 election at £1, commonly when you have a larger, tax-savvy vendor selling to a smaller SME. This is, of course, great news for the seller as they will retain the tax benefit on the items in the building. However, if advised correctly, a better deal can generally be negotiated for the buyer.

For example, care home owner Robin Roopun was in the process of buying two care homes. The vendor issued an election to fix the capital allowance value at £1 in the new buildings. Mr. Roopun’s solicitors were unable to advise him, and the vendor’s solicitors told them it was £1 or no deal.

A capital allowance value of £1 would have meant that Mr. Roopun would have simply lost all of the tax benefit of the plant in the buildings, except for £1 (I’m not sure how much impact a WDA of 18p against his taxable profits would have had).

STax negotiated with the vendor and their solicitors on Mr. Roopun’s behalf and eventually reached an agreement. Mr. Roopun retained the right to claim on the plant and machinery, which included many items that might normally have been overlooked, such as kitchen equipment, extractors, cold water systems, and pipework. Many of these items the vendor hadn’t claimed and wouldn’t even have been legally able to claim. Their solicitors were looking to put the election in place “just to be sure”!

Across the two properties, Mr. Roopun claimed £342,000, slashing his corporation tax by nearly £79,000 (23%) as the homes were purchased by his limited company.

2012 FINANCE BILL

In most transactions, s198 are not put in place or are implemented so poorly as to be technically invalid. Because of this, the Treasury felt there was a risk that businesses were double claiming allowances and brought in new legislation to enforce the use of these elections.

Legislative changes in the 2012 Finance Bill (s187a & s187b CAA2001) have transformed the way Capital Allowances are dealt with during a property transaction. The new legislation is broadly broken down into two distinct areas: the fixed value requirement and the pooling requirement.

The fixed value requirement states that a transfer value (of some sort) must be fixed on any items the vendor is required to bring a disposal charge into account for, i.e., previously claimed items. This has been in effect since April 2012.

If the fixed value requirement is not satisfied within two years of completion, either by a s198 election or by recourse to the tribunal, then all of these allowances will be lost to the buyer (expenditure treated as NIL), and HMRC can impose a disposal value against the vendor’s pool in line with s198 CAA2001 (generally market value).

So, it’s a complete train crash for both parties, and the difference is netted out of the system for good. To reiterate, we’re talking a full loss of all allowances on these items for the purchaser (almost certainly devaluing their building overnight) and potentially a substantial clawback of previously given tax relief on the vendor. This is not a piece of legislation to be ignored!

If that wasn’t enough to contend with, from April 2014, the pooling requirement kicks in. This makes pooling of allowances prior to sale mandatory before needing to address the fixed value requirement. Anything not pooled will also be lost for good.

LIABILITY

With the new legislation having a potentially deep bite, it is paramount that taxpayers are advised correctly. Otherwise they stand to potentially lose substantial amounts and will in many cases be look for someone to blame. But who owes the duty of care here?

As we saw in Clarke v Iliffes Booth Bennett [2004] a solicitor has a duty of care to understand and advise on every facet of a contract they are instructed on, regardless of what their care letter states. We would envisage that if put to test this would extend to Capital Allowances in a commercial conveyance.

However they will often look to shift the duty of care on to the taxpayer’s accountants telling the taxpayer to speak to their accountant, this might be you. If you are providing general accounting services it is unlikely that your engagement letter covers the transference of Capital Allowances in a property deal. However if you do give any advice to your client, you now owe a duty of care even if you are not being paid for your input.

If you are to give advice it would be prudent to put in place a separate engagement letter and be 100% sure of what you are advising your client to do. This has always been good practice but is essential now in light of the recent Mehjoo v Harben Barker [2013] ruling. If in any doubt we would recommend referring to specialist like STax rather than risk tabling partial advice. In the words of Gaius Octavian Ceasar [Rome 2005] “The graveyards are full of middling swordsmen”, don’t be one of them!

ACT NOW

If you own a Commercial Property and have not spoke to a Capital Allowance experts get in touch with STax on 0207 147 9940 or alternatively use our: Capital Allowance Calculator to see give you an indication of whether you can make a Capital Allowance Claim.

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