What is capital allowance?
The rules for claiming Capital Allowances on second- hand fixtures have changed. It is no longer feasible to leave the evaluation of Capital Allowances until after a commercial property changes hands. This tax issue must now be dealt with at pre-contract stage to avoid blindly destroying value. This process involves working closely with solicitors and Capital Allowances specialists to interpret tax implications of the CPSE replies.
So here is a checklist for accountants who may not yet be fully conversant with the revised legislation.
Advising the property buyer
- Has the seller claimed Capital Allowances? From April 2014 the buyer must satisfy the "pooling requirement", which means that if the seller is a taxpaying investor or owner occupier then the seller must claim Capital Allowances on the fixtures. No claim by the seller means no Capital Allowances for the buyer!
- If the seller has not claimed but could claim allowances, ensure that the seller undertakes to make a full claim within a stipulated time frame (to suit the filing deadlines for both parties) and then passes on the Capital Allowances via a s198 election (i.e. an election in accordance with section 198 of the Capital Allowances Act 2001). This will necessitate correctly drafted clauses within the sale and purchase contract.
- Establish the value of any fixtures that have not been claimed.
This will definitely involve complicated valuation issues and will necessitate an s198 election where the pooling requirement applies.
- If the seller has made a claim, negotiate the level of Capital Allowances to be passed to the buyer via an s198 election. This could involve valuation and arbitrage issues.
- If the seller has made a claim but it is not possible to reach agreement via an s198 election, consider an application to the Tax Chamber of the First-tier Tribunal after completion. There will be valuation and legal issues that must be overcome to ensure that such an application is in the buyer’s best interests.
- Whilst comprehensive enquiries on Capital Allowances are likely to be raised by the buyer’s solicitor at pre-contract stage (such as those in CPSE.1 version 3.3), specialist advice may be necessary to interpret the replies and to raise any necessary supplementary enquiries.
Advising the property seller
- If the seller has made a claim, an s198 election will ensure tax certainty. Without the election (or an incorrectly drafted one) the seller is at risk of claw-back of Capital Allowances.
- Consider tax arbitrage. To which party are the allowances most valuable?
- Recognise the value of cooperating with the buyer so that the pooling requirement can be satisfied. Even though no claim is made before sale, the agreement reached with the buyer could include retaining some allowances when a claim is made at a later date. Alternatively, an increase could be agreed to the sale price. Of course, the seller will be in a far stronger position if the buyer does not agree the Capital Allowances position with the seller before completion.
Advising the property owner
- If the property was acquired before April 2012 then there is no deadline for action to safeguard the Capital Allowances. The owner can make a claim now for the fixtures within a property acquired many years ago. However, the level of Capital Allowances is likely to be restricted if any previous owner has made a claim. This necessitates full investigation of ownership history back to 24 July 1996.
- If the property was acquired between April 2012 and April 2014 then it is not necessary for the seller to have made a claim but if a claim was made then an s198 election must be agreed with the seller within two years of the acquisition date or an application made to the Tribunal. This is termed the "fixed value requirement". Therefore, in view of this deadline, the owner should review all properties held to see whether action is necessary to safeguard any available Capital Allowances.
- Expenditure on new fixtures as part of a development or refurbishment is unaffected by either the pooling requirement or the fixed value requirement. These requirements only apply to a subsequent owner. However, both types of projects involve specific complications such as apportionment of on-costs, categorisation between capital and revenue expenditure and being able to break down lump sum invoices to extract all qualifying items. If details of actual expenditure are unavailable, then a specialist can be used to produce the detailed cost information, reconciling it to actual costs which can then be analysed for qualifying expenditure.
A change for the better - Annual Investment Allowance
As far as Capital Allowances are concerned, there was a change for the better in the 2014 Budget. For expenditure incurred from April 2014 until the end of 2015, the Annual Investment Allowance is raised from £250,000 to £500,000. This effectively means that a property owner who makes a Capital Allowances claim of up to £500,000 will benefit from the whole tax saving in the year of expenditure.
Therefore incurring new expenditure on fixtures within a property, whether by acquisition, development or refurbishment has become far more attractive for taxpayers. It also means that the stakes have increased for the property owner, making the accountant’s role more critical.
For any commercial property which is likely to be sold in the near future, it may be prudent for accountants to establish whether a Capital Allowances claim has already been computed on the premises to avoid complications during a purchase transaction which could delay completion and result in lost tax relief.
In the interests of clarity and simplicity, this information does not cover all the Capital Allowances issues that must be considered. It is always advisable that the accountant seeks specialist advice as early as possible.