This article appeared in The Tax Journal ("the non-taxing weekly for top professionals") on Monday, 7 December 2009.
In a previous 'Back to Basics' article ('Plant & machinery allowances') we discussed the general conditions that a taxpayer must satisfy to claim plant and machinery capital allowances. One of these was that the taxpayer must own the plant or machinery as a result of incurring qualifying expenditure. For chattels this is normally straightforward. However, for fixtures, it can be complicated and this article provides an overview of this area. All statutory references below are to the Capital Allowances Act 2001.
Under English property law assets are divided between 'real' property (also called 'realty') and 'personal' property (`personalty'). Real property includes freehold land and 'fixtures' (that is, anything attached to the land so that it becomes in law part of that land and belongs to the owner of the freehold). Personal property is everything else. Under Scottish law the equivalents of real and personal property are 'heritable' property and 'moveable' property.
In Stokes v Costain Property Investments Ltd  STC 204 the taxpayer, Costain, held a 99-year lease of a property and incurred expenditure installing lifts and central heating equipment, but then found no-one was able to claim capital allowances. This was because, once installed, the assets became in law the property of the freeholder, so Costain could not claim because it no longer owned them. However, the owner of the freehold had not incurred any expenditure and so could not claim either.
Concern regarding this perceived injustice led to the introduction in 1985 of a special set of rules for fixtures, which have developed into what is now CAA 2001, Chapter 14. These rules allow capital allowances to be claimed by a person incurring expenditure on fixtures, by deeming the fixtures to belong to that person, even if the person is not the legal owner.
For capital allowances purposes a fixture is defined as 'plant and machinery that is so installed or otherwise fixed in or to a building or other description of land as to become, in law, part of that building or other land'. It also specifically includes any boiler or water-filled radiator installed in a building as part of a space or water heating system (s 173). Typical examples include: sanitary appliances and fittings, hot water and heating installations, ventilation and air-conditioning installations, electrical installations, lifts and many other kinds of assets. Many, but not all, fixtures will be treated as 'integral features' by s 33A, automatically qualifying for plant allowances at the reduced rate of 10% per annum. These include:
For assets that are not integral features, whether something becomes a fixture depends on:
The first test, which has historically had the greater significance, suggests that property is prima facie a fixture if it is physically fixed or substantially connected to the land. If an asset cannot be removed without causing serious damage to some part of the land or building to which it is attached, it is likely to be a fixture.
However, more recently the Courts have given greater prominence to the second test. This considers whether the asset's attachment to the land is meant to be a permanent and lasting improvement of the land or building (in which case it is a fixture), or whether it has been fixed on a temporary basis and merely so the asset may be used and better enjoyed as a chattel (in which case it is not a fixture).
In practice it can sometimes be difficult to establish whether assets are fixtures. However, some examples of fixtures decided in cases are shown in Table 1 below:
|Video door entry systems, alarm systems, crematorium cremators, swimming pool ventilation and filtration plant||Melluish v BMI (No 3) Ltd  STC 964|
|Domestic fitted baths and taps, mirrors, towel rails, soap fittings, shower heads, fitted kitchen units and sinks (but not light fittings, fitted carpets, curtains, 'mock coal' gas fires and white goods)||TSB Bank v Botham (1996) 73 P & CR D1|
|Automatic and disables public conveniences, bus shelters, information panels and information boards||JC Decaux (UK) Ltd v Francis  STC (SCD) 281|
To further complicate matters, a sub-division of fixtures has arisen in practice between 'landlord's fixtures' and 'tenant's fixtures'. Most commonly tenant's fixtures comprise trade fixtures attached by a tenant for its business and which are removable during its tenancy but not after it has ended. However, once they are fixed, in law all of these assets form part of the land and belong to the landlord (unless and until the tenant chooses to exercise his power and sever them, when they revert back to beingchattels), so they are still fixtures in the broadest sense.
Confusion can also arise because the terms 'fixtures' and 'fittings' are often used interchangeably, as if they mean the same thing, which they do not. This is potentially dangerous, because 'fixtures' has a specific legal meaning, as described above, whereas 'fittings' (effectively moveable chattels) does not. And 'fixtures' have a specific set of capital allowances rules discussed below that do not apply to 'fittings' and which provide a 'comprehensive and exclusive code', so a taxpayer may only claim capital allowances for a fixture if those rules treat that person as owning the fixture.
A key concept when considering capital allowances for fixtures is the 'interest in land' that is held by the taxpayer (ss 174 and 175). An interest in land may be:
Capital allowances are generally available to the owner of the 'interest in the relevant land', which incidentally is not the same concept as 'relevant interest' for industrial buildings allowances purposes (s 286). For plant and machinery purposes the 'relevant land' is the land or building of which the fixture becomes part (s 173) and future entitlement to claim capital allowances effectively attaches to that interest.
When a taxpayer with an existing interest in land installs fixtures during a newbuild, extension or refurbishment project, the taxpayer is deemed to own those fixtures from the time of installation. If that person does not have an interest in land at that time, no capital allowances are available. If two or more persons with the same level of interest in the relevant land jointly incur the expenditure, each is able to claim for the expenditure each incurs. If they have different interests, the fixture is treated as belonging only to the person with the lower interest (s 176), although the person with the superior interest may be able to claim under the capital allowances contributions rules (s 538 ). This is illustrated in Example 1 below.
John owns a freehold office and Adrian is his leasehold tenant. Adrian installs an air-conditioning unit and John agrees to pay half of its cost. Adrian is the only person able to claim capital allowances under the fixtures rules (s 176), because he has the lower interest. However, John may claim for his expenditure under the contributions rules of s 538.
For construction and refurbishment projects, the claim is based on the actual expenditure incurred on the fixtures, by analysing available accounting and construction records.
In circumstances where a new interest in land is created for a capital sum (for example, a lease is granted), the lessee is only able to claim capital allowances if both parties jointly elect for the fixtures to be treated as belonging to the lessee. This is only possible if the lessor would have been entitled to claim capital allowances (lessors that are not within the charge to tax, such as pension funds, are regarded as being within the charge to tax for this purpose). The election must be made within two years of the lease taking effect (s 183).
If a new interest in land is granted for a capital sum, but the lessor was not entitled to claim capital allowances (other than simply not being within the charge to tax), the fixtures are treated as belonging to the lessee, but only if no person has previously been entitled to allowances and the fixture has not been used for the purposes of a trade by the lessor or a connected person (s 184).
Where a property is acquired secondhand, any fixtures already in place which were owned (or deemed to be owned) by the vendor are treated as belonging to the purchaser (s 181).
For second-hand purchases, the buyer's claim for expenditure on fixtures is by default based on a 'just and reasonable apportionment' of the total purchase price for the whole property (s 562). This is a specialist exercise and HMRC guidance instructs Inspectors that they must consult the Valuation Office Agency and not negotiate adjustments to those figures themselves. However, for fixtures on which the seller has claimed capital allowances the buyer's claim is restricted to the seller's disposal value. In practice, where property is sold for at least as much as it originally cost to build or buy, this is normally the full original cost claimed by the seller, meaning that the allowances claimed are all 'clawed back' (s 185). This is illustrated in Example 2 below.
Peter acquires an office building for £2 million. Following a specialist valuation and apportionment exercise, it is determined that the value of the land is £500,000 and replacement costs for the building and plant and machinery fixtures are £ 840,000 and £360,000, respectively. Peter's just and reasonable apportionment to those fixtures is £423,529.
Allowances may be restricted if the vendor has previously made a claim.
Alternatively the buyer and seller may jointly elect for the seller's disposal value and matching buyer's claim to be for a stated amount, provided that does not exceed the original cost or actual sale price of the fixtures. The election must be made within two years of the completion date of the transaction (s 198). A similar election may be made where an election is made under s 183 to treat fixtures as belonging to a lessee (s 199). These elections are not possible for chattels.
Legislation also exists to prevent the obtaining of a 'tax advantage', defined as the obtaining or increase of an allowance or avoiding or reducing a charge (s 577). Where, as part of a scheme or arrangement for obtaining a tax advantage, a taxpayer brings into account a disposal value which is less than the 'notional written-down value' of that plant (that is, assuming that all allowances that could have been claimed had been claimed), that notional amount is substituted for the actual disposal value and neither a balancing allowance nor charge may arise for the seller, but the buyer's claim is restricted to the actual low consideration (s 197). However, merely electing for a low s 198 value does not, of itself, fall to be treated as coming within s 197.
Legislation and practice in relation to plant and machinery allowances for fixtures are extremely complicated and this article gives only a basic overview. Timely expert involvement is the key to maximising tax savings and minimising risks in this area.
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