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.
(Mouse over the points below for more information)
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 to 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.
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. STax 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.
So, what has changed?
The good news is that the new legislation only has a bearing if you are buying or selling a building. However if you are transacting, the new legislation is ignored at your own peril. Transference of allowances in a sale is not an area most general practice accountants are comfortable advising on, let alone your solicitor.
The new legislation comprises two core components:
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.