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Capital Allowances For Fixtures & Fittings

Capital Allowances For Fixtures & Fittings

This news update appeared in Tolley's Practical Tax newsletter for tax practitioners ("Your fortnightly guide to the latest developments") 13 January 2012:

News - Capital Allowances

The detailed plans for changes to the capital allowance legislation for plant fixtures published on 6 December 2011, differ slightly from the proposals set out by Steven Bone in his article in Tolley's Practical Tax 32-25 (see below). Steven advises the main changes are:

Date of implementation

The new rules will not apply to historic expenditure incurred before 1 April 2012 (6 April for unincorporated businesses). They will apply to all expenditure incurred from 1 or 6 April 2014. For expenditure incurred during the two intervening years (ie, between April 2012 and April 2014), the new rules will only bite where the seller has claimed capital allowances. Where the seller has not claimed capital allowances, the tax position will be dealt with under the existing rules.

Mandatory pooling

Expenditure on plant fixtures will have to be pooled at any time after acquisition (rather than the previously proposed one or two years), as long as the pooling takes place in a period beginning no later than the date that the fixtures are sold on or otherwise disposed of.  This is called the ‘pooling requirement’.

Record of Agreement

There will now be no separate Record of Agreement.  Instead in almost all cases it will be preferred for the seller and buyer to agree a CAA 2001, s 198 (or 199) joint election within two years of the transaction.  For property sales this is intended to ideally be a market value ‘just and reasonable apportionment’ of the sale price, capped at the seller’s original cost for the fixtures.  However, it may be for a lower amount and HMRC’s proposal to limit s198 elections to not less than tax written-down value (eg, £1) has been dropped.  If the parties cannot agree, then within two years of the transaction either party can take the matter to the First-tier tribunal for independent determination, in effect, forcing the other party to back down or incur the trouble and expense of arguing the point. An election or tribunal determination is called the ‘fixed value requirement’. 
If the pooling and fixed value requirements are not both met then the buyer and any future owners of the building, will never be able to claim any capital allowances for those plant fixtures.  This will result in a catastrophic loss of tax relief and may affect the market value of some properties.  HMRC has requested comments on the draft legislation by 10 February 2012.

Capital allowances for fixtures and fittings

This article appeared in Tolley's Practical Tax newsletter for tax practitioners ("Your fortnightly guide to the latest developments") on Monday 12 December 2011.


On 31 May 2011, HMRC issued a consultation paper proposing major changes to the rules for making capital allowances claims for plant fixtures in buildings. These will affect all property owner-occupiers and investors. Any legislative changes are intended to be implemented in FA 2012, with effect from April 2012. The proposals include the following.

Mandatory pooling

Taxpayers will be forced to pool all expenditure on plant fixtures within one year, or possibly two years, of when the fixture was acquired.


This will be based on the transaction date, not the end of the chargeable period when the expenditure was incurred. If the expenditure is not pooled in time then in HMRC’s view no allowances should ever be allowed in respect of those fixtures for the current, or any future owner of those fixtures. The new rule is expected to apply to sales and purchases of second-hand property and all construction expenditure (eg, new-builds, extensions and refurbishments). It also looks likely that historic expenditure incurred before April 2012 will be subject to the new rules.

Record of agreement

As a pre-condition to claiming capital allowances for second-hand fixtures, when a property changes hands, HMRC intend to force the parties to submit a formal record of agreement (ROA). The ROA will show how much of the purchase price relates to plant fixtures. HMRC intend that this should be a ‘market value apportionment’ (ie, under CAA 2001, s 562 ‘a just and reasonable apportionment’). It will still also be possible for the parties to enter into a CAA 2001, s 198 election to agree the disposal value of fixtures at a lower amount than the ROA. However, HMRC are considering changing the s 198 election rules, such that the minimum amount that could be fixed would be the seller’s tax written-down value.


Somewhat disingenuously, the consultation document sought to downplay the significance of the ROA as a so-called ‘related administrative requirement’, whereas it does in fact appear to represent a fundamental change in the law.

The perceived problem

The problem which HMRC are trying to solve with these changes is that expenditure on plant fixtures is sometimes being written-off against taxable profits more than once over the economic life of those fixtures (ie, at the same time by sellers and buyers). This perceived problem may or may not be genuine or as widespread as feared.


HMRC believe there has been a recent growth in purported capital allowances specialists who encourage the owners of second-hand fixtures to make substantial capital allowance claims years after the building was purchased. Such claims may be made without an adequate due diligence check into the tax history of the property, and may not correctly apply the existing rules. HMRC see this as relevant to ‘fixtures-heavy’ businesses such as ‘typically medium-sized hotels nursing homes and pubs’. So  HMRC propose dramatically changing the rules in the exchequer’s favour.


Of course, if inadvertent ‘double-claiming’ was genuinely HMRC’s sole concern, there could be no logical justification for it applying its proposals to new construction expenditure. In the case of newly installed fixtures there cannot ever have been any claim made in the past, so it is simply impossible for the perceived problem to exist.

Status of ‘late’ claims

Making retrospective capital allowances claims has been a long-standing and, until recently, uncontroversial matter of practice.


Nothing in the statute currently requires a taxpayer to add expenditure that qualifies for capital allowances to a pool in the period when the expenditure was incurred. Therefore, the flexibility exists to add the expenditure to any later pool (specific attention was drawn to this by HMRC in the Capital Allowances Bill 2001 explanatory notes). This is because the taxpayer has met all of the long-standing basic requirements to be entitled to claim capital allowances as intended by parliament (ie, having incurred capital expenditure for business purposes, on the provision of plant owned by the business).


It is difficult to see how this could offend the exchequer because in effect, the taxpayer has lost out by deferring claiming the tax relief to which it was legitimately entitled.

Unfair to start-ups

The requirements to agree a market value apportionment and claim allowances at the time of the transaction will mean that many businesses may have to incur professional fees at a time when they cannot readily afford to do so. This will particularly hit new start-ups and lossmaking businesses who are unlikely to take the benefit of the allowance until a much later date.

Smaller businesses suffer

The experience of most capital allowance specialists is that many property owners (particularly smaller owner-managed businesses) fail to claim, or significantly underclaim, capital allowances for plant fixtures. First, they often do not realise that a claim is possible. Second, without specialist help it can be difficult to accurately identify and value plant fixtures incorporated into the fabric of a building.


Therefore, rather than retrospective capital allowances claims having: ‘the potential to produce a significant tax loss for the exchequer’ (as HMRC claim), it is more likely that the exchequer currently benefits because many capital allowances claims are not made or are understated. That is why ‘late’ claims are made by buyers – to remedy this shortcoming once they become aware of it.


If buyers are prevented from claiming, simply by failing to meet additional technical obstacles, the proposed changes will mean that the exchequer will increasingly benefit. Indeed, HMRC acknowledge this in their consultation document, admitting that: ‘businesses (perhaps especially smaller, unrepresented businesses) might inadvertently miss this deadline and so lose out.’ In my view this is highly likely, especially in the early years of any rule changes.


This is because in practice the ROA will need to be best dealt with at the time of the transaction. Tax accountants are not generally consulted then. Instead the deal is normally handled by the conveyancing solicitor. Unfortunately, many real estate solicitors, particularly practitioners in smaller fi rms, admit that their knowledge of direct tax is limited. Therefore, inevitably ROAs will be missed. The parties will also have to remember to pass the ROA to their tax advisers and to submit it to HMRC within the transaction-related deadline. I expect many will be forgotten – meaning that buyers will lose out, and lawyers and accountants will face professional negligence claims.


A major concern is that despite HMRC’s professed reasons, regrettably the proposed changes appear to have revenue raising by ‘stealth’ as a main objective.

Existing law is adequate

The perceived problem, which the proposals are attempting to solve, appears to stem from a fundamental misunderstanding of the law. Alternatively, perhaps it is a lack of will or resources within HMRC to properly police it.


Capital allowances permit capital expenditure to be written-off for tax purposes in place of depreciation shown in the financial accounts. To prevent ‘double-claiming’ (eg, by the seller and buyer at the same time) the legislation includes a mechanism of balancing receipts. That is, when a taxpayer who has claimed capital allowances sells a property containing plant fixtures they are required to account for a disposal value representing the value received (or deemed to be received) for the plant at that time (CAA 2001, s 61).


For property sales the disposal receipt is calculated as the part of the sale price that falls to be treated as expenditure incurred by the purchaser (CAA 2001, s 196). This means that by default (ignoring CAA 2001, s 198 elections) a ‘just and reasonable apportionment’ of the sale and purchase price (CAA 2001, s 562), which cannot exceed the seller’s original claim for those plant fi xtures (CAA 2001, s 62).


Therefore, if a property is sold for as much, or more than it cost to buy (ie, no depreciation has been suffered), the buyer’s apportionment of the higher sale/purchase price will equal or exceed the seller’s apportionment. Hence, the seller’s writing-down allowances will be fully clawed-back, capped by s 62. In  cases where the property is sold at a loss, allowances will be clawed-back to the extent that the apportionment exceeds tax written-down value (ie, tax relief will only be retained for depreciation actually suffered).


If economic depreciation has not actually been suffered, capital allowances are meant to pass to the buyer, like a baton in a relay. Therefore, HMRC’s perceived problem can only exist if a seller that has claimed capital allowances neglects to account for an appropriate disposal value, as already required by statute. This is a problem caused by sellers, not buyers. But buyers will suffer the additional burden of agreeing a ROA, and be catastrophically penalised if they neglect to do so or do not pool their expenditure in time.


Furthermore, to prevent a buyer from inflating or ‘ramping up’ their capital allowances claim, the legislation already limits the buyer’s claim for plant fixtures upon which the seller (or relevant prior owner post-24 July 1996) has claimed. This restricts the buyer’s claim to the disposal value that was brought into account, as above (CAA 2001, s 185).


The fixtures rules ‘work on an asset-by-asset basis’ (HMRC Capital Allowance Manual, para CA26850), and HMRC receive information on capital allowances claims and disposal values in submitted tax computations. Also, it already has adequate powers to enquire into these computations (including ‘discovery’ powers) and keep such records as it feels necessary to administer taxes. Furthermore, for a number of years now, routine conveyancing standard enquiries have sought to elicit relevant capital allowances information from sellers (eg, question 19 of the industry standard British Property Federation endorsed ‘CPSE.1’ form). However, despite all this, HMRC bizarrely assert that ‘it is not clear to what extent current owners pursue previous owners for the necessary information’.


Current legislation and good practice already protect the exchequer in a way that is fair to both sellers and buyers. However, instead of acknowledging and enforcing this by requiring sellers to apply the law, HMRC have concluded that it is best to change the law in favour of the Exchequer and sellers. In effect, it has decided to endorse sellers failing to properly account for disposal values.


Unfortunately, the proposed changes will penalise buyers by introducing an additional administrative obstacle, which in many cases is likely to prevent them claiming allowances as parliament intended. This cannot be justified.


View and save Capital allowances for fixtures and fittings as a PDF file. 

Tags for this article: capital allowances, plant, machinery, fixtures, fixed value requirement, pooling requirement, mandatory pooling

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