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Finance Act 2012 Analysis - Capital Allowances

Finance Act 2012 Analysis - Capital Allowances

This article appeared in The Tax Journal ("the non-taxing weekly for top professionals") on Monday 7 September 2012.

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Various capital allowances changes have been introduced. The major change affects claiming plant and machinery allowances for the purchase of second-hand fixtures. If these new requirements are not met the buyer cannot claim capital allowances. Nor can any future owner of those fixtures. For expenditure incurred from April 2012, where an owner since April 2012 has claimed allowances, a value for the fixtures must be formally established within two years of the transaction. From April 2014, even where the seller has not claimed but could have done, then the seller must pool the expenditure before the buyer can claim.

 

Finance Act 2012 ('FA 2012') ss 41–46 and their accompanying Schedules introduce a number of changes to the capital allowances rules.

 

However, the change with the widest signicance concerns claiming plant and machinery allowances for the purchase of second-hand fixtures (for example, the fixtures element of freehold purchases).

 

Fixtures: how the rules work

FA 2012 s 43 and Sch 10 introduce new ss 187A and 187B into the Capital Allowances Act 2001 ('CAA 2001'). These include serious obstacles that must be navigated before the buyer of a property can claim capital allowances for plant and machinery fixtures. If the new requirements are not met, the result will be disastrous. Not only will the buyer lose the ability to claim capital allowances, but so will any future owner of those xtures. This is even anticipated to damage the market price of affected properties. These rules are best considered by looking at when they take effect.

Expenditure incurred between April 2012 and April 2014:

The new rules apply to expenditure incurred from 1 April 2012 (corporation tax) and 6 April 2012 (income tax). However, until April 2014 they only apply where the seller (or previous owner since April 2012) has not claimed any allowances for fixtures.

 

From April 2012, where the seller (or a prior owner since then) has claimed allowances for fixtures, and therefore must account for a disposal value, a new 'fixed value requirement’ or ‘disposal value statement requirement’ applies. The obligation is expressly upon on the buyer to prove that this is satised. Whether or not these new rules are met has no effect on the disposal value that the seller must account for. A seller cannot therefore avoid accounting for disposal proceeds by neglecting or refusing to assist the purchaser in establishing his entitlement to claim.

 

The ‘disposal value statement requirement’ only applies rarely (such as when a property is bought from someone who had previously accounted for disposal proceeds on the discontinuance of his business). In the vast majority of circumstances the ‘fixed value requirement’ will apply. This obliges the buyer to take formal steps to establish the value of the fixtures within two years of the transaction completion date. The obligation is met if a ‘relevant apportionment of the apportionable  sum’ is made, or the buyer obtains certain specifed written statements.

 

A relevant apportionment of the apportionable sum occurs when there is either:

 

 

The alternative written statements only apply when property is acquired from a person who is not entitled to claim allowances (eg, a charity), who bought the property after April 2012 but did not agree an election or seek a tribunal determination. Before being able to claim in such cases, the buyer must obtain a written statement from the charity conrming that it did not establish a relevant apportionment of the apportionable sum and also a written statement from the (taxpaying) predecessor in title of the disposal value brought into account by it when it sold the property to the charity.

Expenditure incurred after April 2014:

For expenditure incurred from 1 April 2014 (corporation tax) and 6 April 2014 (income tax) a second obstacle is introduced. This is known as the ‘pooling requirement’ (commonly referred to as mandatory pooling).

 

Where the seller was entitled to claim capital allowances (that is, could have claimed – irrespective of whether it actually did) then the buyer is prevented from claiming unless the seller has first pooled the expenditure (that is, formally notied it to HMRC in a tax return). This rule does not apply if the seller could not claim because it is outside the charge to tax (eg, charities), or if the fixtures did not qualify for allowances in its hands.

 

The expenditure must be pooled by the seller in a chargeable period beginning on or before the day on which the past owner ceased to own the fixture, or the past owner claimed a first-year allowance on the expenditure (or any part of it). This means that the expenditure can be pooled potentially up to a few years after the building has been sold – as long as it is pooled in the tax return for an accounting, or tax, year which had already started on the day the property was sold. See the Example.

 

Example

A company has a 31 December accounting year end. It owns a freehold office but has never claimed capital allowances for fixtures. On 5 January 2015 it sells the freehold.

 

For the buyer to be able to claim allowances, the seller must pool its expenditure on fixtures in its tax return for the period ended 31 December 2015 (or an earlier open period). This is because the next period ending 31 December 2016 does not begin until after the freehold has been sold. The seller can claim allowances in its 2015 return by amending that return at any time up to two years from its period end (that is until 31 December 2017; Finance Act 1998 ('FA 1998') Sch 18 para 82). In this example the seller has nearly three years from the date of sale to prepare the apportionment and pool the expenditure

 

Fixtures: points to watch for advisers

Some commentators have described elections as ‘mandatory’. This is clearly not true because the tribunal alternative exists instead.

 

Perhaps more damagingly, others have suggested that an election is ‘essential’ or ‘imperative’. Ordinarily, consensus ought to be in both parties’ interests to avoid the trouble and expense of going to a tribunal unnecessarily. And indeed, the government’s stated hope is that an election will become a standard part of all commercial property sale and purchase agreements.

 

However, a key point is that an election is only suitable if the proposed amount is fair. HMRC has made clear that the flexibility to elect for less than market value should not be seen as detracting in any way from the underlying statutory right of either party to insist on a CAA 2001 s 562 ‘just (ie, fair) and reasonable’ apportionment. So if, for example, the seller tries to impose a lower value on the fixtures than would result from an apportionment, then the buyer can take this into account in the price offered for the property, or seek a tribunal determination. In the absence of an election the tribunal is obliged to follow statute, which should, in the majority of cases, result in most or all of the allowances transferring to the buyer. The tribunal is intended to be relatively informal, and providing that the rules are clearly and logically explained, and the buyer’s position is properly supported, a tribunal application is not something to be feared. Nor should the time and cost involved be prohibitive.

 

Because the first rule change (from April 2012) only applies to fixtures upon which a previous owner since April 2012 has claimed allowances it is vital, at the pre-contract stage, to establish the capital allowances history of the property as far as possible. This can be complicated. In future, conveyancing advisers will need to pay careful attention to obtaining meaningful replies (having taken specialist advice, as appropriate). The more information a buyer can obtain, the easier it will  be to protect his position. Buyers’ solicitors may also want to consider specically advising sellers that the buyer will be relying on the answers given to claim tax relief, and obtaining appropriate protective warranties.

 

For the second rule change (from April 2014), crucially, if the seller has not claimed any allowances, and declines to do so, the buyer has no right to refer the matter to the tribunal for a determination. This is because the expenditure must be pooled first before the tribunal can get involved. So the buyer will, in effect, be  disempowered and the allowances will be forever lost to any owner. Therefore, it will be vital to agree this at the time of the transaction, or it is going to be diffcult and expensive, if not impossible, to resolve aferwards.

Miscellaneous changes

Other miscellaneous capital allowances changes introduced by FA 2012 include:

 

 

View and save Finance Act 2012 Analysis - Capital Allowances as a PDF file.

 

Tags for this article: capital allowances, Finance Act 2012, plant, machinery, fixtures, section 198 election, fixed value requirement, pooling

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