Capital allowances: Britain's biggest tax break?

Jeanette Edmiston, technical manager at Portal Tax Claims, examines the often overlooked issue of capital allowances and explains how they can benefit SMEs.

SME businesses are regularly hailed as the backbone of the economy and the key to the successful recovery of UK plc. Just like larger organisations, they have not escaped the economic pains of the last few years. However, help may be at hand from that most unlikely of benefactors – HM Revenue & Customs – as millions go unclaimed every year in tax allowances and reliefs.

One such underutilised tax break is capital allowances: tax relief available on investment into plant and machinery used in the business. Many will know the basics about capital allowances but very few claim them to the full extent. In fact, over 90 per cent of UK commercial properties are said to contain significant unclaimed allowances within them.

Who can claim and on what

Hotels, bars, factories, restaurants, offices and many more commercial properties are all potential treasure chests of capital allowances.

The savings can be particularly striking for many leisure sector businesses. In a recent case involving a hotel we found as much as 68 per cent of the total purchase price of the building could be reclaimed in tax relief.

Restaurants purchased as going concerns typically find allowances worth 40 per cent or more of the purchase price and the reality is that the vast majority of UK businesses are sitting on untapped capital allowances. On average, the relief equates to around 30 per cent of the purchase price paid, provided it continues to be used in the purchaser’s business.

Why does the percentage of unclaimed relief remain so high? The answer lies in the definition of “plant and machinery” in the context of the capital allowances legislation.

“Plant” is an incredibly broad term and can encompass such diverse items as carpets, mirrors and air conditioning units, depending on what business you are actually in.

In a long-running case against HMRC, JD Wetherspoon argued, amongst other things, that toilet cubicle partitions fall within the definition of plant when trying to claim allowances for pub refurbishment, so you can see how varied the items can be if you can make a case for why it is material to your business. Case law demonstrates that the definition of qualifying expenditure has been stretched to include bowling alleys, zoo cages and artwork in some situations.

How it works

In principle, claiming capital allowances is a simple process. Your property would need to be examined and the capital expenditure you have incurred analysed to extract the qualifying items and related costs. Then a report is sent to you or your accountant, which they can file with HMRC claiming tax relief on the proportion of the total expenditure on the building that relates to qualifying fixtures against your company’s taxable profits. It should be highlighted at this point that capital allowances will only be given on existing fixtures once.

Many lose out on tax relief by only claiming tax relief for the actual cost of the fixtures. Remember that a proportion of the expenditure incurred on fees and other incidental costs can be claimed too and, in some cases, some or all of the VAT can also be claimed.

This also applies to refurbishment, alteration, extensions and new installations, and can also include the cost of consultants for the design, project management and installation of the item, plus any specific costs you can attribute (for example, transportation costs or craneage costs). Small businesses need to be aware of this and should keep comprehensive records and itemised receipts to ensure they can take full advantage of the rules.

Conclusions

Many businesses have seen staff cuts in the course of the recession, with many of the remaining employees having to take on more work, and sometimes the pure administrative burden of identifying, recording and claiming these allowances can seem large to an already stretched team.

However, the rewards for doing so are usually more than worth it, particularly so for SMEs. The top accountancy firms already have dedicated teams that specialise in capital allowances, demonstrating the very real demand from national and international clients, but the truth is that the tax relief can make a much bigger difference to the margins of a family-run hotel in Manchester than to an international hospitality empire.