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HMRC's Capital Allowances Proposals - What Accountants Need to Know

Capital Allowances – Plant Fixtures in Buildings: What Accountants Need to Know

Fundamental Rule Changes Proposed by HM Revenue in April 2012

This article was available to dowload from AccountingWeb in September 2011.

Summary

Intended rule changes

On May 31st 2011 HM Revenue & Customs (‘HMRC’) issued a consultation paper proposing major changes to the rules that allow capital allowances claims for plant and machinery fixtures in buildings.  This will affect all property owner-occupiers and investors.  The consultation process closes on 31 August 2011 and the changes are intended to take effect from April 2012.  HMRC intends:

 

 

Action needed

Where no capital allowances have been claimed for fixtures or it is suspected that capital allowances might have been underclaimed taxpayers and their advisers should strongly consider promptly obtaining specialist assistance to investigate and submit any additional claim before the rules change in April 2012 and it risks becoming too late.  Making such a claim can often generate tax savings of 10-15% (and as much as 25%) of the expenditure incurred.

 

The Capital Allowances Partnership Limited are leading experts in this specialist area and represent the Tax Faculty of the ICAEW on HMRC's working group considering the proposed changes.

 

There is no downside in talking to us because we will carry out a free-of-charge and no obligation initial review to assess the feasibility of claiming, estimate the potential tax savings that might arise, and propose an appropriately tailored fee.  Our fees always reflect the client’s needs and can be based upon the value we deliver.  In which case, they are, in effect ‘no win no fee’ and the client will always keep the lion’s share of any tax savings generated. 

 

As we only advise on capital allowances and other property tax reliefs and do not audit accounts or look to provide tax compliance or general advice, all of our clients have their own auditor or tax agent who deals with all other tax matters.  We have worked with many accountancy firms, from individual practitioners up to top ten firms and are highly experienced at supporting other firms in this way. We like to work with accountants and not against them.

Details

Calculating the amount that may be claimed

When a business buys property it acquires a combination of assets.  These include land and buildings (ie, the ‘building’, ‘structure’ or ‘premises’) that do not qualify for capital allowances as well as plant and machinery fixtures, the cost of which can be written-off for tax. 

 

Fixtures typically include assets like fire alarms and sanitary equipment (such as WC, basins etc) plus many others.  For expenditure incurred from April 2008 they include major building elements now specifically designated as plant in all circumstances by Capital Allowances Act 2001 (‘CAA 2001’) s33A.  These are called ‘integral features’ and include electrical systems and lighting; cold and hot water; heating, ventilating and air conditioning; lifts and external solar shading. 

 

When property is purchased, by default the expenditure qualifying for capital allowances is calculated by preparing a ‘just and reasonable apportionment’ of the purchase price (CAA 2001, s562).  The aim is to reflect the value that each constituent part makes to the value of the whole, and simply deducting a land value is not sufficient.  An apportionment is a specialist tax valuation exercise.  Similarly, Inspectors of Taxes are instructed to consult the Valuation Office Agency and must not negotiate these themselves.  Alternatively, the parties may agree an amount for the fixtures and within two years of the Completion date of the transaction enter into a formal CAA 2001 s198 election to record this.  In most circumstances though a s198 election is inadvisable for buyers because a negotiated amount is generally much lower than the value that would be attributable under an apportionment. 

 

However, it is not that simple because for P&M fixtures upon which a prior owner has claimed capital allowances, the buyer’s claim is limited to the seller’s disposal value.  In most cases in practice (eg, in the absence of a low CAA 2001 s198 election), this is usually the full original cost claimed by the seller (meaning that by default all the capital allowances pass to the buyer).  Therefore, as a recent, albeit in our view misdirected, tax tribunal decision showed, to avoid problems it is vital to investigate the capital allowances history of the property and take expert advice to properly interpret this (Mr & Mrs Tapsell & Mr Lester v HMRC Commrs [2011] UKFTT 376 (TC)).

Current time limits to claim

 

Under the normal self-assessment rules, taxpayers have a, broadly, two-year window to claim capital allowances (ie, a year to file the tax return and a further year to amend it). 

 

However, nothing requires the qualifying expenditure to be added to a capital allowances pool for the chargeable period in which the expenditure was actually incurred. Therefore, taxpayers are free to make late claims by adding the expenditure to a capital allowances pool for any later period, as long as the P&M is still owned in that later period [CAA 2001, s58(4)].  Currently, this provides the flexibility to help taxpayers who did not claim capital allowances as early as they could have. This is a longstanding and, until recently, uncontroversial principle.

The perceived problem

HMRC’s perceived problem (which may or may not be genuine or as widespread as feared) is that, expenditure on qualifying plant fixtures may sometimes be being written-off against taxable profits more than once (ie, by different owners) over the economic life of those fixtures.

 

Fundamentally, it would appear that this is happening because property sellers are continuing to claim capital allowances when they should not be doing so (by neglecting to deduct an appropriate disposal value from their capital allowances pool after selling the plant, as required by statute).  HMRC perceives the problem as being exacerbated by a recent growth in purported capital allowances specialists who have been encouraging the owners of second-hand fixtures to make substantial late fixtures claims, without having carried our adequate due diligence into the tax history of the property, as is required to properly apply the rules.  HMRC lacks the resources to deal with this, so intends changing the rules in the Exchequer’s favour.

The proposed changes

HMRC intends:

 

 

 

The likely outcome

Unfortunately, these changes will place an added administrative burden on buyers, rather than on the sellers who are largely responsible for this perceived problem.
 
The changes will also be at the cost of unfairly denying capital allowances to buyers who have met all of the long-standing criteria for claiming them.  The likely outcome will be the denial, through no fault of their own, of capital allowances for many unsuspecting property owner-occupiers and investors.

Action needed

Although recent expenditure is easiest to review (eg, within the last six years, because records are routinely kept by advisers for that long) in principle it is possible, to go back indefinitely.

If your client has not already done so, it can revisit its freehold acquisitions and potentially apportion part of the purchase price to assets qualifying for capital allowances (subject to preparing detailed report and investigating the tax history of the property).  It can only make a claim in an open accounting period, but that can include claims arising from earlier acquisitions.

Contact us

For further information please contact The Capital Allowances Partnership Limited

 

Please e-mail our General Enquiries address info@cap-allow.com or call our General Enquiries number 0333 123 1203, which costs the same as a standard landline call (even from your mobile phone).

 

Alternatively, based on your location, call or e-mail one of our Directors.

 

View and save Capital Allowances – Plant Fixtures in Buildings: What Accountants Need to Know as a PDF file.

Tags for this article: capital allowances, plant, fixtures, proposed changes, mandatory pooling, record of agreement

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