Capital allowances – a snapshot

As you will be aware, businesses can claim capital allowances on eligible items bought for use within the businesses and claim a writing down allowance ‘WDA’ 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 maze of case law.

This can lead to capital allowances being inaccurately assessed and processed, meaning client miss out on unclaimed tax relief, perhaps 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 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 is able to 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, 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 a 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 vendors solicitors told them it was £1 or forget the 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 of £1 (I’m not sure how much impact a WDA of 18p against his table profits would have had).

STax negotiated with the vendor and their solicitors on Mr Roopun’s behalf and eventually reached an outcome. 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 legal able to claim, their solicitors were looking to out 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 badly 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 2 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 vendors pool in line with s198 CAA2001 (generally market value).

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

If that if that wasn’t enough to contend with, from April 2014 the pooling requirement kicks. This makes pooling of allowances prior to sale mandatory before then 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 (in the words of the BBC “other capital allowance specialists are available”) 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

Over the coming months accountants have a window of opportunity to put measures into place to ensure they have access to the specialist knowledge required to protect their clients’ interests and up hold their duty of care. Come April 2021 clients stand to gain or lose substantial amounts. Practices that add value in this area could stand to benefit greatly whilst those that overlook it may find themselves exposed.