Most commercial property owners are unaware of the tax they can claim back in the form of capital allowances, says Shaun Murphy of Portal Tax Claims. This can often result in the rebate of thousands of pounds
Her Majesty’s Customs and Revenue owes billions of pounds to commercial property owners in unclaimed capital allowances, so what can lenders do to assist their
borrowers claim back what is often tens of thousands of pounds per property? At the moment our average claim is over £100,000
Capital allowances are one of the most beneficial and overlooked tax claim in the UK.
So, what exactly are capital allowances? Capital allowances are costs that businesses incur which can be reclaimed against tax as defined by the Capital Allowances Act 2001.
They cover a wide range of commercial property from hotels, retail, industrial and multi-let properties. There are pretty much no exclusions; they can’t be held in a pension fund, by the Government, charity or treated as stock, there is no limit as to the purchase price, and the owner must be a UK taxpayer, but this includes individual, LLPs, plcs and Ltd companies.
Currently, it is fair to say that most commercial property owners are unaware they are eligible for capital allowances and the same is true for many professional advisers, especially accountants where there is often a significant knowledge gap.
It is worth stressing at this juncture that capital allowance is not a contentious tax avoidance scheme or loophole, but is based on established UK statutory law dating back to 1878. And the primary aim was to allow commercial property owners to improve their property.
A brief history will contextualize where we are today, but prior to this it is worth stating our top ten list of improvements to a property that go unclaimed for in terms of tax:
1. Air conditioning
5. Car park security
9. Fire alarms
10. Suspended ceilings
So, how did capital allowance come into being? In 1878, a “wear and tear” allowance was introduced for traders in plant and machinery, allowing them to reduce their income by the allowance amount. For mills and factories a “mills and factories” allowance was available.
In 1945, a new system was introduced. The wear and tear allowance was replaced with an initial allowance of 20 per cent on plant and machinery for the first year. Annual writing-down allowances were used to represent the usage of the asset over the years, whereby the rate was fixed by Inland Revenue – generally 25 per cent for plant and machinery. A balancing adjustment was used when the asset was retired or sold in order to ensure that the total relief was equal to the actual reduction in value over the period of ownership.
At the same time, the mill and factories allowance was replaced by an initial allowance of 10 per cent on new buildings and annual writing-down allowances at 2 per cent. A balancing adjustment was also used when the asset was retired or sold to make total relief equal to actual reduction in value.
The building allowance was confined to industrial buildings. Shops, offices and even hotels were excluded.
An investment allowance, over and above the allowances above, was introduced in 1954 to encourage investment in industrial assets, including buildings.
The system was simplified in a major way in 1971 to eliminate burdensome record-keeping and computational requirements; a further simplification in 1984 saw the elimination of initial and first-year allowances, among others.
There were other changes reintroducing and withdrawing different allowances in pursuit of specific policies until capital allowances were consolidated in 1990. There was a further revision, and the current legislation is the Capital Allowance Act 2001.
Capital allowance can be seen as the writing down of long-term assets used in the business. These assets will typically be used for several years and the cost of the asset is spread over this life. Tax authorities have estimated the useful lifetimes of the major classes of long-term assets and have also prescribed how to compute the capital allowance over this period.
While most businesses already claim allowed capital allowances on moveable assets such as plant, furniture and office equipment, that is not typically the case for buildings.
This happens because the rules for computation of capital allowance on buildings are complex. Individuals cannot claim a specified percentage of the total value of the building. Instead, they must identify the “moveable” items, such as light and water supply fittings, the air conditioning plant and so on, value them and then claim capital allowance on this value. This is further explained later on in this article.
There is no time limit for making capital allowance claims, and commercial property owners can save a significant amount of tax by getting an expert to help them make these claims. Indeed, specialists can often identify anything from 20 – 50 per cent of the original purchase price as capital allowances that can be used against taxable profits
Claiming back capital allowance is thought to be a complicated process, which has in the past put off a significant number of commercial property owners from claiming. Even though most tax advisers are aware of capital allowance, often the legislation is counter-intuitive and opportunities for claiming back the sums owed are often missed.
It is also an area that not all accountants are overly familiar with, and often different specific skill-sets are required to identify and make a claim.
Many commercial property owners aren’t entirely sure what items they can claim on, which is in truth understandable. Firstly, they need to understand the difference between what is called ‘First Fix’ and what is called ‘Second Fix’. Individuals claim on ‘plant and machinery’ from what is known as the Second Fix when they claim.
They cannot claim on First Fix, which comprises all the work required to take a building from the foundations to the application of plaster on the internal walls. In other words, ‘First Fix’ would include walls, floors, ceilings, inserting cables for electrical supply and inserting pipes for the water supply.
An individual can, however, claim on ‘Second Fix’. This comprises all the work after the building has been plastered. Second Fix includes things, such as connecting electrical fixtures to cables, connecting sinks and baths to pipes, fitting doors into doorframes, lighting, installing cookers and washers, flooring, alarm systems and air conditioning units. (Types of allowances are listed at the end of this article).
So, capital allowances are allowed as a deductible expense for computing taxable income and allow long-term expenditures, such as on buildings, plant and machinery and furniture, to be written off as expenses over their expected useful lives.
The process for making the claim is actually fairly simple. Firstly, surveyors or valuers need to identify those items that can be claimed for and produce a detailed report stating clearly why the items are eligible. In addition to being accurate, the report must also be in a format approved by HM Revenue and Customs. From here on in any professional adviser who is familiar with the process should be able to make a satisfactory claim within a matter of weeks. To save time and hassle we would advise using a specialist company and ideally one that offer a no report no fee service as the costs of pursuing a case that delivers no value can be expensive.
Finally, how can lenders help? In short, lack of resources, expertise and complex legislation are all contributing factors to commercial property owners not claiming but the biggest reason is a general lack of awareness – which is where lenders can help. Whenever a business owner is looking to refinance one of the questions that could be posed is have you sought professional help on any potential capital allowances owed to you.
Furthermore, lenders can increase awareness with brokers that specialize in commercial loans as many could receive an introductory commission for cases which in current times can only be a good thing.
Shaun Murphy is CEO of Portal Tax Claims
Types of allowances under Capital Allowances Act 2001
Plant and machinery allowances
The expenditure must be “qualifying expenditure” incurred for the purposes of a “qualifying activity”, such as trade, business or profession. The types of expenses that fall under this category are extremely varied and have been sought to be listed in the Act.
Industrial buildings allowances
(i) Walls, floors, ceilings, doors, gates, shutters, windows and stairs,
(ii) Mains services, and systems, for water, electricity and gas,
(iii) Waste disposal systems
(iv) Sewerage and drainage systems,
(v) Shafts or other structures in which lifts, hoists, escalators and moving walkways are installed and
(vi) Fire safety systems.
Agricultural buildings allowances
Agricultural buildings include farmhouses, cottages, fences and such agriculture-related constructions.
Flat conversion allowances
This has been defined as “qualifying expenditure” incurred in respect of a flat, i.e. a separate set of premises forming part of a building and divided horizontally from another part of the building.
Mineral extraction allowances
Mineral extraction “consists of, or includes, the working of a source of mineral deposits.”
Research and development allowances
Qualifying expenditure on research and development under the meaning given by section 837A of the Income and Corporation Taxes Act 1988 (ICTA).
Qualifying expenditure on the acquisition of know-how, i.e. industrial information or techniques to assist in manufacture, processing, mineral extraction, agriculture, forestry and fishing.
Qualifying expenditure on the purchase of patent rights.
Dredging generally means removal of anything forming part of, or projecting from the bed of the sea or any inland water for maintenance or improvement of the navigation of a harbour, estuary or waterway.
Assured tenancy allowances
Qualifying expenditure incurred on a building which is, or includes, a dwelling house let on tenancy.