When to call in a capital allowances specialist?
Many construction professionals have some knowledge of capital allowances. This can be helpful as it flags the benefits of tax savings to clients. Though as, Alexander Pope mentioned, ‘A little learning is a dangerous thing’.
This article flags why allowances are helpful to tax paying clients. It sets out some potential traps, opportunities and outlines when it is appropriate to call in a specialist.
Why bother?
Some clients and advisors take the view it is too complex to bother with. There has to be some sympathy here as on one hand Government creates initiatives to save tax but on the other it makes the legislation complex and each year the legislation changes.
However it is worth persisting as this is a completely safe and legitimate means of reducing taxation. Successive Governments have widened the scope for capital allowances into energy efficient plant and remediating contaminated land. In fact it is currently very generous and since 1 January 2016 the first £200,000 of capital allowances are available as a tax deduction in one year. This will apply till 1 January 2017.
Some areas of tax avoidance have become politically unpalatable but in this area the Government is actually seeking to encourage claiming of these allowances to help boost UK capital expenditure.
The value of capital allowances depend on the effective tax rate of the entity claiming. For instance £1m of allowances will save £450,000 of tax over time to a 45% tax payer. Conversely the value will drop to £200,000 to a company paying tax at 20%.
Allowances are provided over time and expenditure needs to be segregated into allowances qualifying at different annual rates which are currently energy efficiency 100%, land remediation 150%, pool plant 18% and integral features 8%.
As well as claiming capital allowances on current projects it may be possible to claim allowances now on properties purchased or refurbished many years ago.
Be careful giving advice!
A recent tax case Mehjoo v Harben Barker illustrates advisors sometimes need to refer in other specialists. In this case Harben Barker failed to introduce a non domicile tax specialist and as a result were sued by the client for negligent advice. This means that all advisors need to know the limitations to their knowledge and when to call in a specialist.
In the context of capital allowances, set out below are some examples of when it will be beneficial to advise that the client takes specialist advice. It can be dangerous in this area to try and do DIY capital allowances analysis. Specialists can normally identify more allowances and are able to more easily reach agreements with HMRC.
We have seen many cases of construction professionals still giving incorrect advice and allocating construction expenditure based on case law and legislation that was changed more than 5 years ago. Unless you follow legislation on an almost weekly basis it is dangerous to give advice.
Opportunities to consult a capital allowances specialist?
The key triggers are set out below when clients carry out one of the following:-
.Purchase of a commercial property
.Construction expenditure and the cost records are poor.
.Expenditure on unusual building features and a specialist tax opinion is required.
.A review of the tax computations indicates limited allowances claimed on historical expenditure
.Contaminated land being cleaned up.
Case studies
The following case studies highlight the benefit of bringing in a specialist capital allowances advisor.
Purchase of an office for £1m
Client bought an office ad there was a tax election for £2. In this case the client was only expecting allowances of £2. However due to a change in tax legislation the new owner could claim more allowances for integral features that the seller could not have claimed. This resulted in extra allowances for the buyer of £150,000.
Refurbishment of restaurant £0.3m
A restaurant was refurbished and the invoices from the builder just stated ‘building works’. Requests for more details provided scant further information. A capital allowances specialist segregated expenditure providing a report identifying allowances of £250,000.
Unusual building features
The building works may include some green energy plant and you are unable to identify from the client or contractor whether they qualify for 100% enhanced allowances. It could also contain some glazed partitions and a mezzanine. Overall you are not sure whether they meet the requirements of the legislation. A capital allowances specialist will be able to advise whether they meet the requirements of legislation and practice.
Non qualifying cumulative additions £2m
A review of a new client indicated that there were cumulative non qualifying leasehold improvements of £2m. Allowances had only been claimed on accounts coded fixtures and equipment. A specialist reviewed the additions incurred over a 4 year period and identified additional allowances of £1.2m.
House developer contaminated land
House developer had some clean up costs relating to Japanese Knotweed and oil pollution. This had not been identified for 150% contaminated land relief. A claim was made for this expenditure which resulted in a tax saving of £100,000.
What kind of specialist do you need?
There are a variety of capital allowances specialists. Ideally they should be dual qualified and experienced in both surveying and tax. Competent firms typically have teams combing chartered surveyors and chartered tax advisors and are experienced in analysing costs and dealing with both HMRC and Valuation Office. Also they will fully disclose their analysis to HMRC. Competent firms have typically been working for 5 or more years. In recent years some marketing based firms have sprung up and we recommend that you are wary of instructing sales based firms who may have limited technical expertise.
Conclusion
The case studies have demonstrated the potential to provide excellent service to clients by bringing in competent specialists. It is likely to result in stronger client relationships and substantially reduce the risk of litigation.
