This article appeared in Accountancy, July 2012
Minimising tax bills by claiming capital allowances is an important part of cashflow management during difficult economic times. A number of key changes have been made to the capital allowances rules recently, including Treasury announcements and new rules relating to fixtures in purchased property.
In particular, the government has cut the main pool rate of writing-down allowance for most plant and machinery from 20% to 18% (of the reducing balance). The application dates for corporation tax began on 1 April 2012, while application for income tax was effective on 6 April 2012.
Similarly, the so-called ‘special’ rate for integral features plant and machinery, long-life assets and installing heat-conserving insulation to buildings has fallen from 10% to 8% (reducing balance).
The annual investment allowance (AIA) gives 100% capital allowances for the first (but not necessarily earliest) tranche of expenditure on plant and machinery. This has been slashed from £100,000 to just £25,000, effective from April 2012. The impact is expected to be particularly severe on smaller owner-managed businesses which make large ‘one-off’ purchases (such as an expensive piece of production equipment, or freehold trade premises). In such cases the expenditure perhaps would have been mostly or completely written-off in full when the allowance was £100,000, but this is unlikely to be the case under the reduced £25,000 limit.
The calculation includes a trap for the unwary. Businesses with a period that straddles April 2012 must divide the allowance on a time-apportionment into two separate periods. However, the maximum allowance after the date when the allowance reduces must be limited to the expenditure actually incurred after that date. Therefore, a business may find that even though the total expenditure on plant is less than its maximum AIA, it is unable to shelter it all because too much was incurred after April 2012.
One of the most significant changes is that two new obstacles are introduced before a buyer of commercial property can claim allowances for fixtures in second-hand property purchases. From April 2012, where the seller has claimed capital allowances for fixtures, for the buyer to claim any capital allowances, the parties must, within two years of the completion date, either:
This is called the ‘fixed value requirement’. If it is not met because there is no valid election or tribunal determination then the buyer will irrevocably lose all capital allowances (as will any subsequent purchasers of the property). This is expected to damage the market price of affected properties. Note, too, that this does not remove the obligation on the vendor to account for a disposal value on the basis of a just apportionment.
A key point is that an election is not mandatory (because the tribunal option exists instead). A consensual election is ordinarily likely to be in both parties’ interests, but only if the value proposed is fair. Indeed, the government has put on record that the freedom to elect for less than market value should not detract from the underlying right of either party to insist on a just and reasonable apportionment (that is, market value apportionment).
So if, for example, the seller is not playing ‘fair’ and seeking to impose a lower value on the fixtures than would result from an apportionment, the buyer can take this into account in the price offered for the property, or refer the matter to the tribunal. HMRC has indicated that a tribunal hearing is not something to be feared, nor should the time and cost involved be prohibitive.
From April 2014, the rules will be tightened so that even where the seller has never claimed any capital allowances but could have done, it will be required to pool the expenditure, ie, formally notify it to HMRC in a tax return. This is called the ‘pooling requirement’ or ‘mandatory pooling’. Before the buyer is able to claim any capital allowances, it will need to get the seller to go through the motions of claiming capital allowances (that is, pool the qualifying expenditure, but not claim any writing-down allowances), and then agree to pass these on to the buyer.
Enhanced capital allowances (ECAs) give 100% tax relief for expenditure incurred on certain ‘green’ plant and machinery (ie, some energy-saving, water-conserving and quality improving plant). A new sub-technology has been added – heat pump driven air curtains. However, three technologies, have been removed from the list. These are combustion trim controls, energy saving controls for desiccant air dryers and sequence controls.
Legislation currently allows companies (and only companies) to surrender losses arising from claiming enhanced capital allowances in return for a cash payment from government (broadly equal to 19% of the loss, subject to a PAYE and NIC cap). It is likely that Finance Bill 2013 will include provision to extend this for a further five years to April 2018.
The government has established new enterprise zones in disadvantaged areas giving business rates discounts, simplified planning approaches and superfast broadband. Some of these areas have been designated as enhanced capital allowances areas.
Unlike old-style enterprise zones, these new zones will not give allowances for the cost of the building itself (that is, the ‘bricks and mortar’). However, they will give 100% plant and machinery allowances, substantially accelerating the tax relief available, compared to conventional 18% or 8% per annum writing-down allowances.
There is also new anti-avoidance legislation to deal with transactions to obtain allowances. The intention is to restrict allowances where there is an avoidance purpose to the transactions, or where the transactions are part of an avoidance scheme or arrangement. The rules work to cancel any tax advantage.
Where the amount on which capital allowances could be claimed would otherwise be artificially inflated, the buyer’s claim will be limited to the amount without the uplift. In addition, where allowances would be obtained at a higher rate or sooner than would otherwise be the case, then the rate increase or timing benefit is reversed.
As recommended by the Office of Tax Simplification, two allowances will be repealed for expenditure incurred from April 2013.
Changes will be made to the 100% flat conversion allowances for expenditure on converting parts of business premises into flats (typically, flats above shops), and the plant and machinery allowances for expenditure on safety precautions at sports grounds.
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Tags for this article: capital allowances, plant, machinery, fixtures, annual investment allowance, AIA, fixed value requirement, pooling requirement, mandatory pooling, enhanced capital allowances, ECAs, anti-avoidance, flat conversion, sports grounds
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