Radical changes set for capital allowances system

Jeanette Edmiston warns that legislation in the Finance Bill will bring radical changes to the capital allowances system – and the industry needs to be ready

The Finance Bill 2012 contained the final legislation which will bring sweeping changes to the way the capital allowances system for tax relief on plant and machinery operates.

This new approach was heralded by the HMRC consultation in 2011, and was developed into the final legislation we now have during a series of discussions with a team of specialist capital allowances advisors over the last six months.

We expected radical change and the final legislation hasn’t disappointed. As expected, it has introduced an aspect of mandatory pooling and highlighted the need for detailed and accurate s198/199 elections as part of the sale process.

As capital allowances have not been prioritised in the past, and often only considered after a property has been acquired, making their consideration obligatory on all commercial property transactions is a move that will have wide reaching implications for all accountants working on commercial property deals.

Initially, from April 2012, these new rules will only apply where the seller has already claimed capital allowances and therefore the ‘pooling requirement’ will not apply (as this will already have been done).

However, from April 2014 the legislation will apply in full to all transactions.

The new rules require that expenditure on plant fixtures will have to be notified to HMRC (pooled) in a tax return by the seller in a chargeable period any time before the fixtures are sold or otherwise disposed of. This is the new ‘pooling requirement’.

Additionally, in almost all cases, the seller and buyer must agree a CAA 2001 s198 or s199 joint election, or refer the matter within two years of the transaction to the First-tier Tax tribunal for determination.

This is called the ‘fixed value’ requirement.

The final legislation contained a further, unexpected announcement in the form of clarification of the application of the rules during the transitional period.

From the initial draft legislation in December 2011, it was always clear that the rules would not apply to all property owners immediately, but there was confusion over exactly how this would work.

The clarification and readjustment of the sections now make it clear that mandatory pooling will not apply to property owners that have held a property and claimed before the operative date of the 1st or 6th April 2012.

If that same property is only sold once, or not sold at all during the transitional period up to April 2014, the new requirements will not apply.

For these owners the new rules will only be relevant from April 2014. The practical effects of this are as follows:

• Any commercial property where a claim has already been made and is sold during the April 2012 – April 2014 transitional period will not be subject to mandatory pooling, but they will be subject to one or the other fixed value requirements, the most likely of these will be the joint agreement of a s198/199 election.

• However if the same property is resold again within this period then it will become subject to the pooling requirement and fixed value requirement (and s198/199 election will need to be made or an application made to the tribunal)

This means that it is more beneficial for an owner who has not made a claim and who is not intending to sell in the next two years to claim capital allowances now to avoid the benefit being eroded by inflation or being subject to further HMRC amendment which could devalue the allowances.

As was expected, all commercial property sales will be subject to the pooling requirement by April 2014, so all professionals that deal with commercial property transactions should make clients aware of the considerable tax savings available through capital allowances and encourage them to claim at the earliest possible time.

However, as already pointed out, capital allowances have not figured highly on the agendas of many accountants or solicitors to date.

In fact, it has been suggested that the vast majority of commercial properties have unclaimed inherent capital allowances within them that can often be worth over 30% of the purchase price of the building in tax relief to clients.

It follows then that the client could stand to lose out significantly if they are not correctly advised by their accountant or solicitors and particularly if elections are not properly prepared when the property is sold.

As disgruntled clients who come to realise the value they have ‘lost’ are likely to think about bringing claims against advisors, not taking note of these changes could be a costly mistake.

We are not in the business of scaremongering, but awareness of capital allowances across the profession is not yet at the level needed to avoid mistakes or missed opportunities arising.

We are, however, heartened in that we have seen a big rise in demand for information and training on the subject in recent months.

Although the total effect of the changes won’t be in full force for everyone until 2014, best practice would suggest that acting as if they were in effect now is the safest way to proceed.

If you help your clients to understand the complexities of the pooling requirement and the fixed value requirement now, you can ensure a smooth changeover to the new regime and develop an impressive track record on handling the new work stream.

By Jeanette Edmiston, Technical Manager at Portal Tax Claims