Accountants: Four Scenarios Where Businesses Can Claim Capital Allowances
Capital allowances is a longstanding tax relief for commercial property owners, dating back to post World War II. However, it is often not utilised to its full extent to the detriment of taxpayers.
Capital allowances will form part of your annual review for your clients yet recent legislation makes it very difficult to fully utilise the tax relief available. The eligibility and value of a claim depend on multiple criteria, and assessing this is complicated.
Since the passing of the Finance Bill 2012, the rules around capital allowances within commercial properties have changed. Never has capital allowances legislation been so pertinent for commercial property owners and long-term leaseholders. In recent years, changes to capital allowances legislation have included structures and building allowances (SBAs), Super Deduction, 50% first-year allowances, and the most recent “Full Expensing.” Whilst new legislation presents a challenge, with complicated qualifying conditions, it also presents an opportunity to ensure your clients are in the most tax efficient position possible.
Here are four instances where capital allowances come into play, and where you can add value for your clients.
1. A New Property Purchase
Are any of your clients in the process of buying a commercial property? If so, there is a big opportunity for capital allowances but it must be addressed early.
In the UK, following the change in fixtures legislation that came into effect in April 2014, during the sale of a commercial property, capital allowances should be considered before the sale and purchase contract is agreed upon. If the issue of capital allowances is not addressed as part of the sale negotiation of a second-hand commercial property, the buyer’s ability to take advantage of any unused allowances may be lost.
During a commercial property transaction, a document called a Commercial Property Standard Enquiries (CPSE) is passed from the seller to the buyer. Section 32 of the CPSE specifically pinpoints the area of capital allowances, whereby the seller answers questions about the capital allowances position for the embedded plant and machinery. Often, the CPSE enquiries on capital allowances are answered incorrectly, meaning buyers miss out on the benefit of allowances on their property acquisitions. Question 10 in Section 32 asks for the name of the capital allowance specialist. Ryan specialises in this area of tax relief, and consulting with a tax professional like us can prevent this from happening.
There is a two-year deadline from the date of completion to supply an HM Revenue & Customs (HMRC) officer with a completed Section 198 Election to either pass capital allowances to the new owner or for the prior owner to retain the benefit of them. Although this two-year window is useful to ensure capital allowances do not delay completion of the purchase, without the correct treatment in the contract, it can be difficult to settle the subject of capital allowances post-completion.
Ryan’s team of tax relief specialists understands the complexities involved and is experienced in advising both the seller and the buyer on how to answer the CPSE questions accurately so as not to delay the completion of the transaction.
Capital Allowances Case Study: Holiday Park
Ryan assisted a client with a claim for capital allowances on a holiday park they were purchasing the following month, and at this stage, the CPSEs had been completed but contract negotiations were ongoing. Thankfully, the seller had stated in the CPSEs they were willing to discuss the matter of capital allowances if required, and we established via Land Registry that they acquired the property in January 2008 for £850,000.
Qualifying Expenditure
We successfully managed to have our clauses inserted into the contract with the agreement of the seller and, at this point, allowed the transfer to continue and complete as planned without delay.
Following completion, we commenced our full due diligence procedure; however, instead of on behalf of our client, it was based on the seller’s acquisition. With the terms of the contract in place and binding, we had the full cooperation of the seller allowing the process to run smoothly.
The Result
Ryan identified nearly £125,000 of unclaimed capital allowances for the seller who then, as agreed in the contract, disposed of in full to our client, resulting in a tax savings of £23,000.
In addition to the main claim, we were also able to complete an integral features claim for our client based on their purchase expenditure of £3.6 million, given the seller acquired the property prior to April 2008 and before the introduction of integral features. An additional £23,000 of capital allowances was identified and added to the above figures.
Ryan secured a total of nearly £148,000 in unclaimed capital allowances for the client. However, 84% of this amount was generated from the seller. Without their cooperation, the claim would have been restricted to the integral features, which yielded a tax savings of more than £4,000 compared to the significantly larger savings noted above.
This highlights the need for commercial property buyers to take a proactive approach to capital allowances. Given the restrictions the Pooling Requirement legislation imposes, together with the success we have had in gaining the fundamental cooperation and assistance required of the seller post-completion, it has never been more important that the subject of capital allowances is properly addressed and given the time and resources it deserves.
2. Legacy Portfolio Reviews
Are you aware that you can retrospectively review your clients’ property portfolios to uncover extra tax relief from unclaimed capital allowances? This is a laborious process involving liaison with the clients’ solicitors and interrogating the Land Registry and other property websites. Ryan’s specialists can undertake a no-obligation review of your clients’ past purchases and construction or refurbishment projects to give an assessment of the relief available.
A historical expenditure review involves a thorough assessment of all capital expenditure across a property portfolio to ensure that all available allowances are claimed and safeguarded.
Capital Allowances Case Study: Agriculture
Ryan conducted an audit and survey for a client’s property, comprising of farmland and structures, to identify qualifying capital allowances. While conducting this work, our specialists investigated the historical construction of a grain silo built on the property.
Qualifying Expenditure
Claiming capital allowances for silos is a recent development, following the First-Tier Tribunal ruling in Stephen May and others v. HMRC [2019]. In this case, the court ruled that because silos are fit for their singular purpose based on their design and construction, among other criteria, they qualify as plant and machinery and are therefore claimable as capital allowances tax relief.
The Result
Although this structure had been built some years ago, our experienced team was able to analyse data provided by the client and contractors they employed to produce a thorough report.
The client previously claimed capital allowances for plant and machinery related to the silo; however, Ryan uncovered an additional £267,000 in unclaimed capital allowances.
3. Changes in Property Ownership
When events such as “incorporation” happen, fixed assets are often moved between entities. This movement is also subject to pooling requirement legislation and means that, prior to moving assets, clients need to fully understand the potential impact on a retrospective capital allowances appraisal.
An example would be a building that has been owned in a partnership between husband and wife since 2010 is then transferred to a new limited holding company in April 2021. Come April 2023, the two-year window will close meaning that if allowances haven’t been considered, the ability to claim on that property from a purchase price perspective has evaporated forever.
2014 pooling requirements are not limited to buyer and seller not being connected; it includes any change in ownership on Land Registry.
4. New Builds/Refurbishments/Extensions
Properties purchased from property developers is one of the most important areas in which capital allowances need to be carefully considered. Property developers cannot claim capital allowances, so there is a significant opportunity for your clients to make an unrestricted claim if they are party to a commercial property transaction with a developer. The two-year window does not apply for the developers either. New purchase price can also be considered as opposed to previous purchase price.
An equally significant opportunity is available when your client incurs sizable improvement expenditure on an existing property. Typically, 50–60% of improvement expenditure can qualify for capital allowances depending on the level of structural work that has taken place. There is a significant opportunity for your clients to claim if they are undergoing any improvements to their commercial properties.
Capital Allowances Case Study: Medical
Our client purchased a sizable six-story townhouse in 2010. The property is split between four floors of commercial clinic space with multiple tenants and two floors of residential accommodation.
Qualifying Expenditure
Since the purchase, a programme of refurbishment works was undertaken within the clinical areas of the property. The refurbishments included converting a space into a scanning room, laying clinical-grade lino throughout, and installing wall-mounted air-conditioning units and new data racking within the storage space.
Additional data cabling was installed throughout the area, and the property received a general redecoration with new cabinetry and furniture throughout.
Although the residential areas also received refurbishment, for a capital allowances claim, only commercial areas can be considered—in this case, the clinical and communal areas of the property.
Qualifying costs within the property included:
- Sanitary installations
- Water installations
- Safety and security installations
- Additional fixtures and fittings
The Result
Ryan’s team of surveyors reviewed the property and identified more than £1 million in unclaimed capital allowances for the property, producing a net benefit of more than £400,000 for our client. This claim included fixtures within the purchase price as well as additional fixtures and fittings from the refurbishment works.
The Ryan Claim Process
Step 1: Information Gathering
We collect all initial information about your clients’ commercial property.
Step 2: Assessment
We conduct a technical analysis to determine their entitlement.
Step 3: Survey (not required in all scenarios, to be confirmed during our assessment)
Where required, our surveyor will conduct a site survey.
Step 4: Report
Our tax professionals prepare and compile a detailed Capital Allowances Valuation Report (CAVR), including instructions on how to treat the capital allowances when you include the claim in the client’s tax return.
Step 5: Submit to HMRC
Once you and your client have approved the report, you will submit to HMRC with the client’s relevant tax return. Depending on the timing of the expenditure, this may be an amendment to an existing tax return or included in the current version. As part of our fee, we also deal with any enquiries relating to the claim from HMRC.
Step 6: Tax Relief
Your client receives their capital allowances tax relief.