Section 198 and 199 Elections

Section 198 elections (S199 for leasehold) are joint elections that set the transfer value of Capital Allowances when a commercial building changes hands.

Making a valid, robust election can be crucial for vendors. Without a correctly structured election, vendors are left in dangerous waters. Tax savvy purchasers could challenge, or potentially ignore invalid elections altogether, and seek to impose a transfer value that is advantageous to them.

But what makes a robust s198 election? In short, a good s198 is detailed and exact.

s201 CAA[2001] states the elements that must be present.

1.) Parties’ details: Names, tax ref
2.) Particulars of interest being acquired (including date of transaction)
3.) Information to identify the property: address and title no.
4.) Amounts to be transferred
5.) Information sufficient to identify the plant & machinery

Generally, the first four points do not cause too many issues, however, there is an interesting variety of ideas on what satisfies point 5. HMRC’s guidance states the following “the rules work on an asset by asset basis, inspectors may accept a degree of amalgamation where it will not distort the tax computations” [HMRC CA manual para 26850].

So s198 elections should list as much detail as possible, only contain items claimed on, and only amalgamate at an elementary level. You will not get penalised for having more detail than is required! Submitting a detailed election should cause no problem or great amount of extra work where a thorough analysis was conducted to substantiate the original claim.

Sweeping statements like “all plant and machinery in the building” or generic lists which cover everything that could possibly exist in a commercial building, are not sufficient and could lead to substantial problems further down the line.

Historically, it has only been buyers or sellers who could gain or lose by deploying the correct strategies in this area. With the changes in the FA2012 there may be a new interested third party, HMRC.

If the fixed value requirement in the new legislation is not met within two years of a transaction, then not only do buyers have a starting position of NIL but a market value disposal value can be imposed on the vendor. The difference becomes a permanent tax gain to the treasury. So whilst HMRC may have let invalid elections slide in the past, there could be a new strong motivator for an inspector who takes a “proactive interpretation” of the new legislation, to start rejecting these invalid documents.

We offer a free Section 198 Election review in which we can also give you a clear idea if a claim can be made.

Speak with our team today who are always happy to help.



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