Capital Allowances For Commercial Property Owners

CODE FO PRACRTIVCE 9

capital allowances

 

Capital Allowances for fixtures & fittings 

A large proportion of our work revolves around capital allowances on fixtures. This is highly relevant if you are buying/selling, building, renovating or simply own a property.

The low profile of capital allowances and the complexity of the rules relating to fixtures have resulted in tens of billions of pounds of tax relief going unclaimed, so you might very well be sitting on a substantial untapped tax windfall.

Back in late 2011 the thought of a huge latent claim coming home to roost caused Mr Osborne many sleepless nights (deep into the credit crunch there was of course nothing else worrying him!). To reduce this risk to the Exchequer the Finance Act 2012 brought in wide reaching changes to capital allowances on fixtures.

Capital allowances on fixtures not only represent significant opportunities but are now also a veritable mine field waiting to blow up in the face of the uninitiated.

What are capital allowances ?

In short capital allowances are a form of tax relief given in place of depreciation (which is not allowable for tax purposes) on qualifying items of plant and machinery. This extends too many fixtures and integral features in a commercial building (and some larger residential ones) such as the plumbing, electrics, security system and fire alarms to name a few. Whilst claiming allowances on the movable items (machinery, vehicles etc.) is nothing extraordinary, many are unaware they are entitled to claim a proportion of the purchase consideration of a property? This is allowed because the purchase expenditure was deemed to have been in part for the fixtures in place at the time. Furthermore, due to the difficulties of accurately valuing systems imbedded in a property and the maze of case law in this area, allowances are often inaccurately assessed and processed even when taxpayers are aware of their right to claim. This means that many businesses are claiming only the tip of the allowance iceberg while most of the value remains hidden.

Historic capital allowance claims ?

Calculating an apportionment of the original purchase consideration can deliver claims as large as 35% of the value of a freehold i.e. £350K of tax relief for a purchase of £1m. This work requires a fusion of tax and surveying expertise that is rarely found in general accounting firms. Churchill Tax has many years’ experience of successfully making such claims in a manner compliant with HMRC and the VOA guidelines. Accurately assessing qualifying items and processing a claim will in many cases form the basis of a substantial write off against the taxable profits of a business, resulting in a lower tax charge or even in some cases a cash rebate. Allowances are transferable at the point of sale, generally by section 198 election ‘s198’ (a s198 is a jointly signed election detailing the fixtures and fixing their corresponding transfer values). These elections are often overlooked and are poorly understood by a large section of the conveyancing community. This has led the Treasury to suspect that double claiming may be occurring and motivated them to bring in new legislation to effectively enforce the use of these elections

capital allowances what has changed

1) Fixed Value requirement – effective from April 2012:

From April 2012 if a transfer value is not fixed on fixtures that the vendor has claimed, by either a s198 election or by recourse to the tax tribunal, then the qualifying expenditure for the purchaser will be set to NIL on all these items. This is binding on all future owners, which will devalue the property overnight. Given it is said you make your money in property when you buy, this is a far from ideal start!

Furthermore, HMRC are within their rights to impose a disposal value set at the current market value against the vendor’s pool. This means HMRC can effectively claw back previously given allowances, leading to a potential tax charge on the vendor and of course a permanent mismatch in the Treasury’s favour (Treasury estimates that this will net them £35m a year in tax by 2016/17, we expect this figure to be much higher).

2) Mandatory Pooling requirement – effective from April 2014:

For transactions completed post April 2014, pooling (assessing, valuing and claiming) of allowances prior to sale by the vendor is now mandatory. This works in conjunction with the Fixed Value requirement detailed above.

So with both in operation, anything not quantified, claimed and then transferred in a 100% correct manner will be lost forever and George will sleep easy!

What should you be doing?

If you are buying or selling, what has or hasn’t happened with regards to allowances needs to be discussed at an early a stage as possible. If discovered early the availability (or not) of allowances can be factored into the negotiations and reflected in other areas of the deal. When addressed at the 11th hour it could derail the whole transaction. We are more than happy to bring the weight of our sector expertise and experience to help you negotiate the best possible outcome. To be unguided in this area will leave you vulnerable to sharp practices being deployed by the other side and 100% at the mercy of HMRC and the new legislation.

Even if you have no planned changes to your holdings, a review of your property by a specialist is a must. Very few general practice accountants, outside of the big four, make much if any provision for this area. Contact us for a free no obligation appraisal of your holdings and position.

Whilst the above covers a lot of the work we do it is by no mean exhaustive. If you own a commercial or residential building there will almost certainly be areas we can add value. We pride ourselves on operating in a transparent and open manner when it comes to fees. All charges and engagements will be agreed and set out in writing prior to chargeable work commencing. So give us a call today for a free initial appraisal.

capital allowances what has changed

Capital allowances for commercial property owners

We know there are lots of commercial property owners who have not yet claimed this established tax relief on their properties and are maybe unsure of how to claim and what they need to do to complete the process. If you own a number of commercial properties or a single property which cost more than £300,000 it’s worth talking to us about how to benefit from capital allowances. Our experienced team can guide you through the process and ensure the benefits are considered in the round alongside any other tax implications for your business.

What Capital Items Can I Claim?​

Did your commercial property cost more than £300k? If it did, talk to us to discuss claiming Capital Allowances on the following:

  • Water heating systems
  • Ventilation systems
  • Security alarm systems
  • Fire Extinguishers
  • Gas installations
  • Carpets
  • Extensions or alteration to the property
  • Kitchen fittings

Also Viable are Integral features

  • Cold water systems
  • Space heating systems
  • Water heating systems
  • Ventilation systems
  • Electrical systems

Capital Allowances made easy for Commercial Property Owners

Capital allowances are a tax relief for businesses for the purchases they’ve made on capital items.  A large proportion of fixtures within commercial property may qualify for Capital Allowances but often go unclaimed.

Changes from April 2012 & April 2014 mean that capital allowances are an important consideration when buying or selling commercial property.

What you need to know

The Pooling Requirement

Since April 14 the vendor must have pooled all of their expenditure which qualifies for capital allowances. Including fixed plant & machinery and integral features.  You don’t have to claim any writing down allowances, just recognise what’s been spent. If you sell a property without doing so, the purchaser will not be able to claim. This could affect the sale price.

What’s the “Fixed value requirement?”

The vendor and purchaser must agree the value of the fixtures transferring within 2 years of completion. By completing a 198 election.

The value of a fixture set by the election must not exceed: The amount the seller previously paid for the fixture, or it’s actual sale price.

The Annual Investment Allowance (‘AIA’)

The AIA can provide accelerated allowances for current year capital expenditure. It is set at £200k P/A from January 2016 onwards. Expenditure covered by the AIA will qualify for a 100% writing down allowance.

Case Study: Capital Allowances

  • The company had acquired 5 commercial properties (freehold and leasehold interests) over several years.
  • The properties were a mixture of car dealerships & workshops with office space. Several of the properties also had extensions.
  • In total over £7,300,000 was spent on the acquisition, construction and alteration of the properties.
  • Our survey covered all 5 sites and were able to identify over £1,400,000 of expenditure which qualified for capital allowances.
  • As a result of our findings the company’s tax saving was over £280,000.

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