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Capital Allowances Claims in Buildings

This article appeared in The Tax Journal ("the non-taxing weekly for top professionals") on Monday, 24 January 2011.


When preparing capital allowances claims for plant in buildings a combination of specialist tax and property/valuation skills is required. Understanding the complicated capital allowances rules and how they fit within a client’s broader tax affairs is a fundamental prerequisite. In particular, on property acquisitions, a purchaser’s claim may be restricted by the seller’s disposal value (eg, CAA 2001 s 185 or s 198). It is therefore, important to establish the correct entitlement and basis of claim before starting any valuation or claim preparation. The precise nature of the valuation techniques involved depends on the type of project. However, understanding building costs and being able to prepare supportable cost estimates for construction work are a common feature of all capital allowances claims for plant in buildings.

New construction work

The complexity of preparing claims for new construction work can vary greatly depending on the type of project and availability of construction cost information. The method of construction procurement dictates what level of information is available.


Historically, new buildings were procured under a ‘traditional’ method where bills of quantities would provide a line-by-line priced schedule of the work, allowing a relatively straightforward analysis of qualifying and non-qualifying costs. More common nowadays are ‘lump sum’ type of contracts, such as Design and Build, where only summary level costs are available, for example, one price for the entire heating, plumbing and electrical element of the project. From a tax perspective, this category may comprise elements of non-qualifying, general (that is, main pool) plant, integral features plant, long-life assets and expenditure qualifying for 100% enhanced capital allowances (CAA 2001 ss 45A–45J). Therefore further segregation of the costs is required to achieve the correct tax treatment and ensure that relief is realised at the optimum rate. For example, costs such as sanitary appliances, fire and intruder alarms, sprinkler installations and data communication  installations may all be included under a lump sum cost for building services. Without a further breakdown of this element, these general plant assets that qualify for relief at 20% may be missed completely, or at best subject to the reduced rate of 10% for integral features. The early appointment of a capital allowances specialist can resolve this problem because the information required may then be produced as part of the tendering process, but, due to the procurement method, need not form part of the contract documents. If appointed at the inception stage of a project, capital allowances surveyors have the opportunity to ensure a suitable level of cost information is made available to support a detailed and maximised capital allowances claim. This also provides the opportunity to alert the project team to the benefits of specifying assets that qualify for the 100% relief available under the enhanced capital allowances regime.


Where an adequate breakdown of project costs is unobtainable, some form of measurement and valuation of the building elements is necessary to provide the required cost segregation. A detailed site survey provides the opportunity to record evidence of qualifying assets and take on-site measurements of ‘problem’ areas. Once quantities are known, an estimate of the cost of the qualifying assets is required within the context of the overall construction cost. An experienced capital allowances surveyor will have an in-house database of costs for this purpose. However, published sources are available, such as building price books and the RICS’s Building Cost Information Service (BCIS).


Skills of valuation and professional judgement are required when determining what element of preliminaries and professional fees can be included in the claim for qualifying expenditure. Preliminaries are a contractor’s general cost items for management  and the provision of site-based services. A pro rata allocation of these costs continues to be resisted by HMRC which prefers to see an element of disallowances, arguing that certain preliminaries costs are too remote from the provision of the qualifying assets. The well known Wetherspoon’s case addresses this point and the judgement so far supports the taxpayer’s contention that, in the absence of a detailed breakdown of individual preliminary items, a pro rata allocation is acceptable. An appeal is forthcoming so it will be interesting to see how this issue develops.


Some alternative methods of claim preparation may be considered where the profile of expenditure does not lend itself to a detailed analysis of each project. For example, when faced with a large number of projects that are broadly similar (perhaps a uniform programme of shop refurbishments) it may be uneconomical to prepare a detailed analysis of each project and equally time consuming for HMRC to check. In this scenario, selecting a sample of properties for detailed analysis and extrapolating the result across the portfolio is often a better option. It is, however, important to seek HMRC’s agreement to this approach from the outset as it may be resisted, or HMRC may attach conditions to the sample of properties or statistical validity of the result. Once the results are accepted, it is often possible to adopt this approach for a fixed period with a high-level benchmarking exercise each year to ensure the continued accuracy of the approach, reducing the cost of compliance.

Purchased property claims

In the absence of a CAA 2001 s 198 election between buyer and seller to agree the value of qualifying fixed plant, the purchaser’s claim will be based on a just apportionment of the purchase price in accordance with CAA 2001 s 562. The Valuation Office Agency’s  (VOA’s) preferred method for achieving the apportionment is known as the ‘multiplier formula’ and this is by far the most commonly used method in practice.


Q = P x (A / (B + C))


Q = qualifying expenditure
A = the replacement cost of the qualifying assets
B = the replacement cost of the building (including plant content)
C = the land value (that is, bare site value)
P = purchase consideration


When preparing claims in this way it is necessary to value the three elements of the acquisition: land, non-qualifying building and qualifying plant (further split between integral features and general plant). The valuation of building and plant is based on an assessment of what it would cost to reconstruct the property, in that location, at the date of purchase, essentially a quantity surveying exercise. As with new-build expenditure, a site survey is required. However, given the lack of any actual detailed construction drawings, specifications or costs, surveys for apportionment claims are by necessity complex and thorough because they form the entire basis for the reconstruction cost estimates on which the claim is based. The surveyor should seek to obtain an accurate measure of the internal floor area and site area, prepare a comprehensive schedule of the qualifying assets and note the general construction details of the property. Particular attention should be paid to the building’s services installations since much of the qualifying plant is contained within these elements.


A detailed estimate of the reconstruction cost for the entire building is then required in a format that clearly identfies the assets that are included under each qualifying category. Where vendor’s disposal value restrictions apply, the reconstruction cost estimates may need to take account of the original cost of the building when first built. When preparing claims for property that is occupied by third party tenants it is important to ensure that only plant that belongs to the claimant is included in the claim. Where the property has been extensively fitted out or refurbished by a tenant it can be difficult in practice to identify what belongs to the landlord.


Reconstruction cost estimates must reflect the date of purchase and the location of the property. Significant geographical and timing variations in building costs exist and estimates must reflect this. Many purchasers of property do not initially realise they are entitled to claim capital allowances. Consequently many claims are prepared retrospectively, years after the transaction and such estimates must be back-dated to the date of purchase. A common approach is to use the BCIS’s price indices, which are published quarterly.


For the purpose of the multiplier, it is also necessary to value the land element of an acquisition. The VOA guidelines require the valuation to assume that it is a bare site with planning consent for the current use. Although no capital allowances are available for land (CAA 2001 s 24), the application of the multiplier means that its value does affect the qualifying expenditure. Therefore, an accurate and supportable valuation is required. Commonly, the surveyor will adopt the comparable method for land valuation which involves identifying similar land transactions and making necessary adjustments to key variables to reflect the site-specic circumstances of the case. Comparable land values can be supported by residual calculations. These are based on establishing a gross development value for the completed property and deducting other development costs to identify the notional value of the land. The detailed valuations and assessments and the function of the multiplier should be clearly disclosed in a detailed capital allowances report for submission to HMRC. It is worth remembering that valuation is not an exact science and the aim is to produce robust valuation estimates that are credible and supportable. HMRC routinely refers apportionment claims to the VOA who reviews the eligibility of the items claimed and checks the accuracy of the valuations against their own information. Where discrepancies or inaccuracies are found the VOA will challenge the claimant’s valuations. This can lead to protracted costly negotiations and may result in a reduction in the amount claimed, an unexpected tax liability, interest, and possibly penalties if the claim is found to be negligent.



Other than for the most straightforward claims, some element of valuation and property skills will be required when preparing detailed capital allowances claims for plant in buildings. For new construction claims, the ability to liaise with the project team to extract the required level of construction cost information and, where necessary, fill in the gaps with supportable, accurate cost estimates are common requirements. On property purchases, due to the function of the multiplier, each element of the formula has a direct impact on the level of allowances that can be claimed and a specific capital allowances valuation is required to ‘unlock’ the value of qualifying plant that is wrapped up in the purchase price. 

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Tags for this article: capital allowances, plant, machinery, buildings, valuations, multiplier, bare site valuation, reconstruction cost estimate

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