Overcoming the Complexities of Capital Allowances and Commercial Property
Capital Allowances (CA) are the hidden gem of UK corporation tax, providing a vital opportunity to offset some of the costs of a business. Although many tax advisors and accountants dealing with business tax are already accustomed to managing CA, the introduction of new and complex rules over the last decade has made calculating allowances for fixtures in commercial property a particularly complex area.
It’s increasingly difficult for advisors to be specialists on this topic, whether that’s keeping up with legislation or understanding the practicalities of CA.
But there are still some critical points that all accountants and tax advisors should understand to protect clients’ interests if they own, or are looking to own, commercial property.
What’s are capital allowances worth?
CA may be available for between 15-45% of the cost of a property, so potential tax savings can be substantial for those owning commercial property. But it goes without saying there are many affecting variables.
Working out the sums isn’t straightforward, so the obvious responsibility of the tax advisor is to guarantee that tax relief value is not lost due to an oversight or insufficient understanding of all the relevant rules and requirements.
Where does the value come from?
While the cost of a building itself is not eligible, certain integral features are. Specifically, the value of the allowances comes from the fixtures of the property.
When it comes to CA, the term ‘fixture’ has a technical definition of ‘plant or machinery that is so installed or otherwise fixed in or to a building…as to become, in law, part of that building.’
This is where it can get confusing. ‘Plant and machinery’ cover items like tables, chairs, computers, cars – but there are other things that are fixed to the building in one way or another, that don’t come under this definition.
Fixtures for capital allowances purposes include things like toilets, lifts and lighting (that are fixed to the property in some way). This is different from ‘fixtures and fittings’ for accounting purposes.
To realise the full value of a claim, it’s crucial to recognise that CA claims cannot only be based on the figures in the accounts for fixtures and fittings – only picking up these items like tables and computers could result in under claiming.
Applicable fixtures, such as toilets, lifts & lights might be under ‘additions to the property’, so claiming only for items categorised as fixtures and fittings in accounts will result in overlooking what’s eligible.
For accountants and tax advisors, the key is to establish the value of these features. This point has crucial implications for the size of the claim, and also applies to the sale and purchase agreement of a property, where once again there are distinctions between different categories.
An agreement might involve £400,000 to a property, £100,000 to goodwill and £15,000 to fixtures and fittings. The buyer will be likely to claim plant and machinery allowances for the fixtures and fittings, but the main part of a CA claim will be within the £400,000 – which shouldn’t be overlooked.
Eligible expenditure and time limits
If a property was bought several years ago and allowances weren’t claimed back then, it may be possible to bring the eligible expenditure into the current year. But, this can only work under some conditions:
1. The person must still own the items in question at some time in the chargeable period for which the claim is first made (no claim can be made for a period after that in which a property is sold).
2. If a property is refurbished and fixtures are replaced, some tax relief can be permanently lost. It all depends on whether items are capitalised (allowances can be claimed) or written off as revenue expenditure (no claim can be made).
3. No claim for either annual investment allowances (AIAs) or first-year allowances (FYAs) will be possible for delayed claims.
What does it mean for capital gains tax?
Claiming CA for fixtures in a property doesn’t equate to a higher capital gain arising in a sale.
Simply put, if a property was bought for £400,000 and sold at £600,000, the gain will be £200,000 regardless of whether or not allowances were claimed.
Changes to the rules – pooling and fixed value requirements
Important changes to legislation regarding CA came into effect in 2008, and then again later in 2012 and 2014. The introduction of AIAs meant that most businesses can claim accelerated allowances for most types of qualifying expenditure, with an annual limit not set at £200,000 (which must be shared by various entities).
2008 saw the introduction of ‘integral features’. This expanded the range of assets that qualified for CA to allow cold water systems, lighting and electricity. Crucially, this cut-off date still has a huge impact on claims made today.
The buyer will need to know whether or not the vendor was able to claim on particular features previously i.e. if a person selling a property bought it in 2007, the buyer can assume the owner didn’t already claim for integral features.
Other important legal changes followed in 2012 which also affected buyers. Both requirements involve some action by the vendor, thus it’s crucial to consider them before signing a sale and purchase agreement:
– Pooling requirement – the vendor has to add the full value of the fixtures in the property to their CA computations, before transferring any such value to the buyer.
– Secondly, the Fixed Value requirement determines parties must sign a fixtures election to determine a value at which the fixtures will pass for CA purposes from one party to another.
However, these rules are not imposed for fixtures for which the vendor was unable to claim (i.e. before 2008).
Commercial Property Standard Enquiries (CPSEs)
The final section of CPSEs relates to capital allowances – a solicitor acting on behalf of a buyer will usually raise them. CPSEs can be problematic.
Firstly, they can include ambiguous questions about former claims by the vendor and CPSE replies are often challenged due to the fact they rarely provide suitable information for moving forward.
In many cases, the buyer’s solicitor will make it clear in their terms that they do not want to be responsible for capital allowance matters. So, ultimately the responsibility will end up falling with the accountant or tax advisor.
Given the potential value of claims, this is when it might be worth getting the specialists in. They can review the replies from the vendor’s side (and respond to them, if acting on behalf of the vendor).
If the vendor owned the property before 2008, or has not yet made a full capital allowances claim, a valuation of the property to get an idea for the fixtures it contains will be necessary.
The problem is that many accountants aren’t qualified to do this – again, specialist input will limit any risk for both an advisor and client.
Maximising claim value
Working through a capital allowances claim is not always a straightforward process – the additional legislation has made this area even more complex for business owners and tax advisors to navigate.
Past owners’ capital allowance history, granted leases and connected parties will all have an effect on any potential claim and this article highlights only some of the challenges faced.
Approaching capital allowances without a deep-seated understanding of the practicalities and complexities involved is likely going to cause problems both for the client and advisor from the outset.
Sweeping a potential claim under the carpet is equally a no-go. Getting the right advice is crucial in satisfying new legislation, maximising tax savings and minimising risks for clients who own commercial properties.
Professional advisors should have, at minimum, some awareness of both the risks and opportunities of capital allowances, and introduce other specialist support if appropriate.