The new rules on capital allowances in commercial property are now in effect with the passing of the 2012 Finance bill. These rules will greatly affect commercial property owners, leaseholders and importantly, their lawyers.

The central change is the introduction of mandatory pooling of capital allowances at point of sale, which is to be phased in between now and 2014. Although this transitional phase is a two-year period, now is the time to put into operation a process that will deal with the changes and produce the best possible results for your clients.

What has changed?

The practical implications of the new rules are as follows:

• There will be a legal obligation for the mandatory pooling of expenditure on fixtures to be carried out in order to keep capital allowances alive for claiming. This will be phased in over a transitional period from April 2012 to April 2014.
• The new rules require that the seller pool any fixtures prior to the sale of the property. This means that a capital allowances report will be required at the point of sale to ensure that there is a proper audit trail and that an equitable agreement on the allocation of the claim is reached between the seller and purchaser.
• The seller and the buyer have a time limit of two years from the date of the sales transaction to agree the value and apportionment of the allowances within the property. However, this agreement is likely to be reached prior to completion as it forms part of the negotiating process.
• An election by the seller and the buyer as to the apportionment of capital allowances will have to be made using the current Section 198 (owners) and Section 199 (leaseholders) election processes. These processes also have a time limit of two years from completion for submission to HM Revenue and Customs to be valid.

As a quick recap, capital allowances can be claimed on the expenditure on plant and machinery existing within a commercial property or when a property is refurbished. The result can be considerable tax mitigation and often a refunding of overpaid tax in prior years.

A commercial property owner or leaseholder has a legal right to claim capital allowances and professional advisors have an obligation to make them aware of this. Unfortunately though, current awareness levels mean that capital allowances are often overlooked, misunderstood and undervalued. Expertise from a number of fields is required to compile a report that will provide the maximum permissible allowances under complex tax legislation.

A lawyer should be armed with as much information as possible when advising clients. The advice should be accurate and timely and enable the client to make an informed decision on their legal right to claim. Anything less than this and the risk of a negligence claim on you or your firm is very real.

Before the bill – current practice

From our experience, Commercial Property Standard Enquiries documentation and Sections 198 and 199 of the Capital Allowances Act 2001 are areas that are often misunderstood and wrongly completed. There are low awareness levels among lawyers, who often have little realisation of the commercial ramifications of questions on CPSE documents or S198/199 elections that are incorrectly or inaccurately answered. Until now this practice has been accepted as the norm and has seldom been questioned by the client on either side of a commercial property sale or indeed by their respective advisors, but this will not be allowed to continue under the new rules.

Risky business

The changes in the 2012 Finance bill make it vital that CPSE documents and S198/199 elections are correct and contain sufficient detail. Elections must be submitted in the proper format and within the specified timeframe. HM Revenue and Customs’ tolerance for accepting inaccurate, incorrect or incomplete S198/199 notices will be radically reduced following the introduction of the new legislation.

We are not in the business of scaremongering, but if a lawyer is responsible for inaccurate or inadequate information on the documentation then they are in real danger of exposing their clients to financial problems or loss including a possible effect on future property values. Rigorous legal opinion indicates that it is highly unlikely that tax exclusion clauses in a lawyer’s terms of business will mitigate the risk of negligence claims.

The risk of negligence also increases markedly not only when clients are advised incorrectly but also if capital allowance claims and S198/199 submissions are not made in a correct and timely manner. So with the 2012 Finance bill there is a much higher requirement for the lawyer to be more expert in these areas.

Although the full effect of the changes won’t be felt until 2014, it is strongly recommended that approaches to capital allowances are examined now. Implementing a process that will allow for the new rules during this transitional period will allow you to mitigate negligence and add value to your work. In addition, the client benefits as the seller can get the allowances now and they are not eroded by inflation and the buyer can potentially negotiate a portion of the allowances for take up post sale.

The best outcome for both seller and buyer in the negotiation and agreement on capital allowances apportionment will result if this is all dealt with very early in the pre-contract stages of the sale process. This is true during the transitional period as well as post 2014, so solicitors should be assessing their systems now and implementing a smooth and reliable process for dealing with capital allowances.

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From this week the annual investment allowance (AIA) will reduce to £25,000 per annum for all businesses incurring expenditure on plant or machinery.

The measure will have effect from 1 April for businesses liable to pay corporation tax, and 6 April 2012 for businesses within the charge to income tax.

This means that the requirement to deal with capital allowances for small businesses incurring minimal expenditure will be more straightforward as for most of the affected businesses the AIA of £25,000 would cover all of their capital expenditure.

An industry commentator has said “The Treasury tables show that this is one of the biggest sources of tax revenue next year – not much comfort to businesses trying to grow.”

The measure to cut AIA, which enables businesses to claim full tax relief on most plant and machinery expenditure in the year it is incurred, is part of the package of corporate tax reforms, which includes the phased reduction in the main rate of corporation tax, intended to create a competitive corporate tax system and to support enterprise and long-term economic growth.

AIA is reduced from £100,000 to £25,000 to “refocus the simplification and cash-flow benefits it offers on smaller businesses,” (Treasury comment) they add that smaller business will be less likely to be adversely affected by the reduction in the AIA than larger businesses.

Qualifying capital expenditure above this limit will continue to receive tax relief through capital allowances.

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While many businesses claim capital allowances on items such as computers and cars, not many are aware of the huge tax savings that can be made in claiming on other ‘plant and machinery’ items that are embedded in their property.

Most commentators agree that over 90% of commercial properties in the UK have untapped capital allowances within them that could create huge savings for small to medium sized enterprises (SMEs) in tax relief, often over 30% of the purchase price of the building.

‘Machinery’ as a claimable category is rather self-explanatory and items falling into it are often easily defined. ‘Plant’ items however are very different. In basic terms, plant items that can be claimed on are taken to be “apparatus used for carrying on a business”.

This can include items such as removable floor coverings, demountable partitioning, air conditioning systems and toilets and kitchens, but the complex web of rules and case law that is the capital allowances regime means that this definition is in no way exhaustive. In fact, the items falling into this category can be very varied and often unusual — allowances have in the past been claimed on items such as bowling alleys, , fish tanks, zoo cages and artwork. One person even tried to claim on a horse!

Capital allowance claims on existing plant and machinery purchased with a building can only be made once in a building’s lifetime. However, a proportion of capital expenditure incurred on maintenance, refurbishments, alterations, extensions and new installations can also be claimed back against your company’s taxable profits to reduce your tax bill.

This can extend to claiming back on the services paid for throughout the whole process. For example, the capital expenditure on the design, project management or cost control or for the specialist costs of installation of a specific item of plant or machinery can also be taken into account for capital allowances — it is not just the cost of the item itself which is eligible. To take full advantage of the generous rules, SMEs should be sure to keep detailed records, particularly for building works on these projects.

Whether your business owns a factory, office, shop, hotel or other commercial property, the chances are good that it will have a sizeable amount of tax relief hidden away in its fixtures. While the big accountancy and law firms are well aware of these capital allowances and may claim for their international clients on a regular basis, advisors to smaller businesses don’t have access to the same specialist expertise. This is a shame, as £50,000 or so claimed in tax relief through capital allowances can make a much bigger difference to the margins of an SME that it can for the likes of Tesco.

SMEs wishing to take advantage of this system should act fast. Changes to legislation mean that a time limit for making a claim has now effectively been phased in. Although you can still make a claim at any point after the capital expenditure on plants or machinery has been incurred (providing you still own the assets), you must now pool the expenditure and make an election before you sell. It is also possible that a time limit for claiming may be introduced in the future as HMRC have already considered this.

The outlay for identifying, recording and claiming these allowances can seem complex and daunting, but the tax relief available often makes it more than worth it — taking just one example, expenditure of £100,000 on a hotel can typically generate £35,000 worth of tax relief hidden away inside. With these kinds of bonuses on offer, capital allowances could just be the industry’s best kept secret.

This article was written by Jeanette Edmiston – Technical Team Manager

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Isabel Shuter of Portal Tax Claims explains how the Finance Bill 2012 will affect capital allowance claims

For anyone thinking of buying or selling a commercial property, the proposed new legislation on claiming capital allowances on the fixtures within such properties is an area that must be understood and complied with. Under the normal self-assessment rules, taxpayers broadly have a two-year window to claim capital allowances (a year to file the Tax Return and a further year to amend it). However, nothing requires the qualifying expenditure to be added to a capital allowances pool for the chargeable period in which the expenditure was actually incurred. Therefore, taxpayers are free to make late claims by adding the expend- iture to a capital allowances pool in a later period, as long as they still own the plant and machinery (section 58(4), Capital Allowances Act 2001).

Currently, this provides taxpayers with flexibility and assists those who do not claim capital allowances as early as they could have. However, because of this late claims are being submitted by current owners. This means that the vendor of the property may no longer be trading when a subsequent owner makes a claim. Therefore HMRC have no means of ensuring any symmetry between the values of the fixtures that are sold from one party to another.

In addition, HMRC feel that sellers of property are continuing to claim capital allowances when they should not be doing so (by not deducting an appropriate disposal value from their capital allowances pool after selling the plant, as required by statute) and HMRC thinks the problem is growing as awareness of capital allowances causes an increase in late claims being made.

To address their concerns, during 2011 the Government held several tax consul- tations regarding the proposed changes to the operation of the Capital Allowances Act 2001 in different areas. The results of these consultations were made public, together with new draft legislation with respect to fixtures, on 6 December 2011.

Though other areas were considered – such as Enhanced Capital Allowances (ECAs) in certain designated Enterprise Zones and the abolition of capital allow- ances for safety measures at sports grounds and of Flat Conversion Allowances – the most significant proposal was a remodelling of the capital allowances regime for fixtures in buildings, and it is these changes that I shall describe in this article. These changes will have a significant impact in the way that capital allowances on fixtures are claimed and may well have a far-reaching effect in the property industry as a whole.

Currently, when a property is sold, the buyer’s capital allowances claim is generally calculated  using a ‘just and reasonable’ apportionment  of the purchase price (section 562, Capital Allowances Act 2001), although the amount may be restricted by past claims made by any previous owners of the property. This is a specialist exercise that may be done many years after the property has been bought. Alternatively, within two years of the transaction the parties have the option of negotiating an amount for the fixtures and confirming this by making a formal ‘section 198’ (or ‘section 199’) election.

There were several proposed changes to the Act that were discussed at a consultation meeting in July 2011.  Some of the original proposals being put forward were to  introduce time  limits  for making capital allowance claims and to require expenditure to be pooled within a certain time limit. Also discussed was whether limit- ing the amount that can be included on an election was welcome and whether the creation of a new document called the ‘Record of Agreement’, which would act as a tax history document showing the value of fixtures within a property and what happens to them at every sale, was necessary.

The Finance Bill 2012 provisions

Following the comments raised at the consultation meet- ings and other formal responses to the consultation documents, HMRC have issued new draft legislation. It is contained in a new section 187A, Capital Allowances Act 2001.

The new legislation requires that taxpayers must pool the value of qualifying fixtures before a sale or other disposal of the relevant property. Additionally, from 1 April 2012 for corpor- ation tax payers and 6 April 2012 for income tax payers, the seller and buyer must also agree on a value for the fixtures within two years of the transaction and make a mandatory section 198 election.

If the parties cannot agree, either party can, within two years of the transaction, unilaterally refer the matter to a Tax Tribunal for an independent determination. Similarly to the ‘pooling requirement’, if a joint election is not agreed or the amount is not referred to a Tribunal in time, then no capital allowances will ever be available to the buyer or any other future owner of the property.

If the appeals process is used, then this must commence within two years of the date of the property sale.

If the qualifying expenditure is not pooled prior to sale after the operative date, then future owners of the property will be prevented from making a capital allowances claim on the fixtures in that property.

All qualifying property owners must identify and pool their qualifying expenditure, but this does not necessarily mean that a claim has to be made. Capital Allowance claims can be made on all, part or none of the pooled expenditure, depending on the taxpayer’s circumstances.

The proposed ‘Record of Agreement’ that was originally discussed in the July 2011 consultation meeting was to be a mandatory document that every taxpayer with a qualifying pool would have to complete, showing their tax written down value for assets at the time of sale. However, following discus- sions, this has now been revised and HMRC have agreed that the completion of the current section 198 election form (or section 199 election form for leaseholders) would be sufficient to identify the agreed pool value at the point of sale.

Transitional provisions

There will be a transitional period introduced from April 2012 to April 2014.

When a purchaser acquires a property on or after the expiry of the transitional period (1 April 2014 for corporation tax and 6  April 2014  for income tax), any seller who could have claimed capital allowances must have pooled the expenditure or claimed a 100%  first year allowance in order that the purchaser can claim capital allowances.

This requirement also applies to a previous owner, other than the seller, where that previous owner sold the property on or after the commencement date for the new rules (1 April 2012 for corporation tax and 6 April 2012 for income tax).

Whilst the pooling requirement will not apply to purchasers until after the two year transitional period, the same is not true of the fixed value requirement or the disposal value require- ment – they will apply from April 2012.

Any expenditure that falls after April 2012 will need to be taken into account with the new legislation in mind, although expenditure incurred by a previous owner before 24  July 1996,  when HMRC began to keep computerised records for capital allowances, will not be immediately affected if it has been held by a non-taxpayer since that date.

Potential difficulties with tax-exempt purchasers There is a concern about the potential permanent loss of allowances where there is no motivation for the buyer, if a property is  purchased after the expiry of the transitional period. For example if a seller, who could have claimed but did not, sells to say a pension fund, the rules require that the seller pools expenditure and enters into a section 198 election (fixed value requirement).

Failure to comply results in the permanent loss of allow- ances to the buyer and all future owners, even though no prior restrictive claim for plant and machinery fixtures may have been made. Whilst raising awareness will improve the like- lihood that the non-taxpaying entities will push for the procedure to be followed (with allowances preserved  for future use), experience dictates that neither side will welcome the cost and responsibility of identifying the qualifying expenditure for pool- ing, assuming that either side is aware of what needs to be done.

We agree that proof of tax history is essential for making a claim, but given the potential imbalance it may have been preferable for organisations that cannot claim allowances to be given an exemption from the pooling requirement.

Summary and action points

In conclusion, for every sale transaction of commercial property (or furnished holiday let), allowances must be pooled before the sale and there must be an agreed value allocated to the fixtures within the property within two years of the date of the sale. This must be submitted by both parties on a section

198 (or section 199) election to HMRC, who must also agree any claim on which the election depends. Any adjustment to a claim by a vendor will automatically adjust an election when the value allocated to fixtures is more than a nominal value for each pool. All of the usual rules relating to elections will continue to apply.

Where no capital allowances have been claimed for fixtures or it is suspected that capital allowances might have been underclaimed, taxpayers and their advisers should strongly consider obtaining specialist assistance to investigate and submit any additional claim before the rules change in April

2012. Making such a claim can often generate tax savings of 10% to 15% (and as much as 25%) of the expenditure incurred.

To get an accurate valuation of the assets within a property, both hidden and apparent, there are professional and special- ist capital allowances companies who should be consulted and who will produce a detailed report setting out the claim that can be made and the procedures to be followed.

For further information on these services, please contact Portal Tax Claims on 0845  000  0450  or visit the website www.portaltaxclaims.com.

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Portal Tax Claims have once again jumped ahead of the curve with the introduction of its expert online case tracking system enabling clients to follow the progress of their cases anytime, anywhere. Used internally by the firm for a number of years, the bespoke computerised case management system known as Solcase Online has finally been made available and visible to all clients who log in to the Portal Tax Claims site, allowing them to track the progress of their claim.

The advanced system shows clients exactly what work has been done on their case so far. It shows any important upcoming dates (such as surveys or report due dates) and allows them to contact the administrator overseeing their case directly by delivering a message straight into their “to do” list allowing clients to feel safe in the knowledge that their message will always be received.

The new online case tracking system is just a small part of Portal Tax Claims continuing commitment to the industry and to their clients where they seek to provide the highest level of client care and quality of service around.

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As property owners look to reap returns from their UK homes, many are forgetting that they may be owed substantial amounts of cash from their offshore properties.

Those who own furnished holiday lets, both in the UK and within the European Economic Area, could be entitled to claim large sums of money through sizeable capital allowances.

This comes down to the fact that despite the relatively small income that is generated from a furnished holiday let, it is still classified as a commercial property and therefore the owner is still entitled to claim.

Considering the current state of the European property market, this is good news for the majority of furnished holiday letters.

The conditions in Spain, where huge numbers of Brits currently own property, are among the worst and there are currently an estimated 700,000 empty new homes in the country.

The message then to the Brits who have held on to their overseas property through the financial turmoil is to claim back what is rightfully yours, before the opportunity is gone.

By Katie-Jill Rowland

About Portal Tax Claims LLP

Portal Tax Claims is a specialist capital allowance claims company which is part of the Portal Group that works in collaboration with your existing advisers to identify and create retrospective and current capital allowance claims that lead to significant tax refunds

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In a separate article, we looked at First Year Allowance (FYA) that typically involves allowing taxpayers to write off a percentage of the expenditure of providing a capital asset in the year it was acquired. Writing Down Allowance (WDA) is different in that you can claim up to a set percentage of the balance (such as 20%) to be claimed as capital allowance each year. The allowance is calculated on the written-down value, i.e. original cost minus all the capital allowances claimed in past years.

The above practice is clearly evident in the case of single assets. In the case of these assets, when the asset is disposed off, the disposal value is compared with the written down value and a “balancing adjustment” is made. If the disposal value is higher, the excess capital allowance claimed in past years is added back in current year as “balancing charge.” If the disposal value is lower than the written down value, the difference in value is allowed to be claimed in that year as “balancing allowance.”

The scenario becomes somewhat complex when more than one asset is “pooled” for capital allowance purposes. Pooling involves adding expenditure on new assets to the pool total and deducting disposal proceeds from the total. If disposal proceeds exceed the expenditure in the pool, the excess is added to income as balancing charge.

Balancing allowances are not allowed in the case of pooling until the qualifying activity ends. At that time, any remaining qualifying expenditure in the pool is allowed as a balancing allowance.

Certain assets are required to be accounted separately for capital allowance purposes. These are single asset pools, and either a balancing charge or balancing allowance can arise when the asset is disposed off. Assets to be maintained as single asset pools include:

• Cars above the cost threshold where the expenditure was incurred before 1 April 2009 (where the taxpayer is within the charge to corporation tax) or 6 April 2009 (where the taxpayer is within the charge to income tax) CA23500;
• Short life assets CA23600;
• Ships CA25000;
• Assets used partly for other purposes CA27000;

There can be more than one multi-asset pools and the long-life asset pool is of particular significance for property businesses. We will look at the issue in a separate article.

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Where a fixture goes along with the leased property to a lessee, the owner of the fixture is determined by the particular facts of the case.

Where the lessor was or would have been entitled to claim PMA on the fixture, and the lessee pays a premium for the lease that is treated as capital expenditure for the fixture, the lessor and lessee can elect to treat the lessee as the deemed owner of the fixture. If such an election is made, the lessee becomes entitled to claim PMA on the fixture.

The lessor will then show a disposal event for the fixture.

On the other hand, if the lessor was not entitled to claim PMA on the fixture, then the lessee, who carries on the qualifying activity in which the fixture is used, will be treated as the owner of the fixture entitled to claim PMA. This usually happens when the lessor is holding the fixture in a trading capacity and not for a qualifying activity.

If it so happens that the PMA has already been claimed by another person entitled to claim it, for example, if the lessor had earlier leased the fixture to a person carrying on a qualifying activity (and claims PMA on the fixture), and subsequently grants a superior lease to another person, this latter person will not be entitled to claim PMA on the fixture.

Where a lessee incurs expenditure on installing a fixture, and the lessor makes a contribution towards the cost, the latter can claim PMA on the contribution if the lessee, who is the deemed owner of the fixture, is entitled to PMA.

It will be noticed that the rules relating to PMA are more than a bit complex. Taxpayers should consult a specialist on capital allowances for immoveable property to ensure that they claim what they are entitled to.

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