CAPITAL ALLOWANCES: CHANGES TO THE FIXTURES RULES – New draft legislation

Following the Autumn Statement, the conclusions of several tax consultations were made public on the 6^th December the new draft legislation for the Capital Allowances Act 2001 (CAA 2001) was published.

The changes cover a number of areas, but by far the most significant is the changes to the fixtures regime. This change will dramatically affect the way capital allowances are claimed on fixtures and have a far-reaching effect on the property industry. This note sets out the main points in relation to the changes and comments on how these will affect the way claims are made in the future.

The responses and changes announced are in respect of:

• Capital allowances on fixtures
• A technical change to allow capital allowances claims on properties where Business Premises Renovation Allowances (BPRA) has been claimed
• Enhanced Capital Allowances (ECAs) in certain designated Enterprise Zones
• A restriction to claiming capital allowances on equipment that attracts a Feed-in Tariff or the Renewable Heat Incentive
• The abolition of capital allowances for Safety Measures at Sports Grounds and Flat Conversion Allowances

Fixtures

The main proposals put forward in the consultation were to introduce time limits for making claims and to require expenditure to be pooled with certain time limits.  The other issues that comment was invited on included creating a new ‘record of agreement’ or tax history document to show the value of fixtures within a property and what happened at each subsequent sale, and comment on whether limiting the amount that can be included on an election was welcome.  PTC was represented on the consultation panel at the first meeting in July 2011 where there was a detailed and lively discussion of these and other issues.

Following the comments at the July meeting and other formal responses to the consultation documents, HMRC have now issued their conclusions and draft legislation for the final proposals to go forward.

Mandatory pooling

The government has significantly ‘relaxed’ the initial proposals relating to mandatory pooling,  but are still proposing that taxpayers must pool the value of qualifying fixtures any time after acquisition of the fixtures and before a sale or other disposal of the relevant property containing the fixtures.  In addition, the seller and purchaser must now agree a value for the fixtures within two years of the transaction or, if they cannot agree, undertake a formal proceeding using the HMRC appeals process (First Tier Tribunal process) to agree the value to be allocated within two years of the transaction. (The process must be commenced but will not necessarily be concluded in this time frame).

Failure to pool the expenditure will prevent a future owner of the fixtures from making a capital allowances claim on them.

Putting the expenditure in the pool does not mean that a claim must be made on the expenditure pooled – a claim can be made on all, part or none of the pooled expenditure – but the process of identifying what expenditure can be pooled must still take place.

In summary, this measure means that an owner of an existing property must pool expenditure on fixtures before he sells the property to the new owner, to give the new owner an entitlement to claim.  This will place new obligations on the seller and the subsequent purchaser (new owner) who must now agree the value attributable to fixtures in the sale with two years of the date of the transaction.

From Portal Tax Claims perspective, the new fixtures rules are an improvement on what we might have expected following the initial consultation process.  The ‘relaxing’ of what was initially proposed is a welcome development and shows the value of consultation on these measures.  They are probably more workable and remove the need to make hasty claims on historic expenditure  One change in the new regime is that claims in the future will be based on what the vendor was entitled to claim, rather than the purchasers expenditure on the fixtures, which may arguably have been a higher value.  However, where the seller is not entitled to claim allowances (such as a pension fund or a developer) because they do not incur qualifying expenditure, there is no requirement to pool to enable a subsequent purchaser to make a claim.  At the most recent consultation meeting in December 2011 HMRC confirmed that where the seller is a non-taxpayer or not entitled to make a claim (eg the fixtures are integral features that only qualified after 2008), then providing no other owner had an entitlement to claim, the requirement to complete a s198 election will not apply for those assets and the new owner can make a just apportionment claim.

Record of Agreement

The other point discussed in consultation was the proposed introduction of an additional ‘record of agreement’, which was an extra document that every taxpayer would have been required to complete.  This has also been ‘softened’ so that the existing mechanism in CAA s198 can be used, although completion of it will be mandatory on sale.

If taxpayers can’t agree values within the 2 year timeframe, they can go to a tribunal and have the figures determined for them.

Transitional provisions

The proposed changes will be subject to transitional provisions in relation to transfers occouring between April 2012 and April 2014

An additional technical change: Business Premises Renovation Allowances (BPRA)

As part of the consultation and additional technical issue emerged concerning the claiming of Capital Allowances on fixtures that previously formed part of a BPRA claim.  The proposed change will now allow future purchasers of a property to claim allowances (under Part 2 of CAA2001) on the price relating to fixtures, (to the extent that they not already been relieved), under Part 3A of CAA 2001.

Enhanced Capital Allowances with certain designated Enterprise Zones

The Proposal to introduce Enterprise Zones was announced in the Budget in 2011. The Chancellor confirmed that the 100 per cent FYAs available on expenditure incurred in just 6 Enterprise Zones will only be available to trading companies and there will be a specific exclusion for expenditure on assets for leasing.

Amongst other qualifying criteria, the expenditure must also be on plant and machinery that is unused and not second hand and must comprise investment not replacement expenditure.  The allowances in the 6 applicable zones will be available from 1 April 2012 to 31 March 2017.

Due to the limiting of the relief to both specific geographic locations and to P&M expenditure only, fewer and fewer people will actually be entitled to a lower level of relief than we would have expected

This is the new criteria for EZA relief:

It must be on plant or machinery that is unused (so new and not second-hand), and must:

• comprise investment not replacement expenditure
• not be on a means of transport, or transport equipment for the purposes of a business in the road freight or air transport sectors
• not be taken into account for the purposes of another State aid grant or relevant payment made towards that expenditure
• not exceed a total of €125m for the investment project

Restriction on Capital Allowances available for equipment that attracts a Feed in Tariff (FiT) or a Renewable Heat Incentive (RHI)

Legislation will be introduced in Finance Bill 2012 to ensure that expenditure from April 2012 on solar panels will be designated as special rate expenditure, although, the Annual Investment Allowance (AIA) will continue to be available .

Additionally, from April 2012 (or April 2014 for Combined heat and Power (CHP) installations) the current 100 per cent Enhanced Capital Allowances (ECAs) given on energy and water efficient plant and machinery will not be available in respect of expenditure on plant and machinery where it generates electricity or heat that attracts tariff payments under either of the FiTs or RHI schemes.   [ECAs may still be claimed in respect of qualifying equipment as long as no tariffs are paid.]

Any ECAs given, in respect of expenditure incurred from April 2012 (or April 2014 for CHP Installations), will be withdrawn if FiTs or RHI tariffs are paid subsequently.

Abolition of Capital Allowances on safety at sports Grounds and Flat Conversion Allowances

The response to the consultation issued on 6th December 2011, confirmed that both Capital Allowances on safety at Sports Grounds (sections 30-32 of CAA2001) and Flat Conversion Allowances (Part 4A CAA2001) will be repealed in Finance Bill 2012 with effect from 1st April 2013 for Corporation Tax and 6th April 2013 for Income Tax.

Full details of the proposed measures are available on the HMRC and Treasury websites.