Some accountants are bravely proclaiming they do not require specialist valuation support when clients buy or construct buildings. This article considers why this can be a dangerous economy which may result in PI claims.
A Property purchases – “My lawyer and accountant claim the allowances – why do I need a specialist?”
Since the mandatory pooling rules were introduced from April 2014 some are wondering whether specialist capital allowances analysis is still relevant. Some accountants are taking the view “seller will have pooled all the allowances -bingo- we just need a tax election”.
There are many reasons why there may not be a tax election with the amount of allowances for the buyer to claim;
- Seller is non-taxpayer, sovereign wealth entity or charity who could not pool or claim allowances.
- Seller maybe part pension entity and part tax paying. Just accepting an election on the tax paying portion would miss allowances due on the pension entity proportion.
- Seller is a loss making company who did not need the allowances and does not need to enter into a tax election.
- Seller maybe overseas fund who does not understand what pooling or claiming means
- Property developer who could not claim allowances as all costs are in trading stock
- Seller has claimed some allowances but not made a full claim to allowances.
- Seller could not make an integral features claim but buyer maybe able to as explained below.
- Lawyers and agents are generally focused on completing the deal quickly and are not incentivised to address capital allowances issues unless prompted
In all the above cases there could be allowances to pass to the buyer but often will be missed without timely assistance as they may be of no value to the seller. The result is a completed transaction with a contract silent on capital allowances. These examples highlight that there are many cases where there may be no tax election and a valuation is required.
In reality the transfer of allowances from seller to buyer often requires the intervention of a capital allowances specialist to ensure both contract wording beneficial to the client and that the tax election format required by HMRC is complied with. Typically we help with establishing;
- Whether there are unclaimed allowances on the property, seller is often unaware
- Negotiating the amount to pass to the buyer
- Valuing the allowances where the seller is exempt from tax and capital allowances have never been quantified.
- Persuading tax paying seller to pool allowances where no claim has been made
Post completion, it is often too late to ensure allowances are transferred or retained. It requires input at the transaction stage.
A specialist can help with;
- Guidance on best practice for property lawyers during transaction to ensure value is safeguarded whether acting for seller or buyer
- Asking the right questions to establish whether further allowances are available to the buyer even where seller says they have claimed everything
- Interpreting and further research into CPSE replies to establish buyer’s entitlement
- Quantifying the plant and machinery element for purchases or properties about to be sold where there is just a contract and no other information using the approved Valuation Office apportionment methodology
- Extracting allowances by assessing building costs or breaking down large payments to contractors where detail is limited or non-existent
- Identifying the maximum level of allowances by benchmarking to similar properties which we have already reached agreement with HMRC
- Negotiating directly with Valuation Office and HMRC to reach agreement effectively
Integral features overage claims
We often see CPSE replies to enquiries on the basis that seller has claimed and will retain all the allowances and there is a £2 tax election. On further investigation, the seller only claimed on their refurbishments and not on the original property acquisition. Where the seller acquired the property pre-April 2008 they are entitled to claim allowances under the old-rules and not the extended definition of plant and integral features from April 2008. Buyers can benefit because this falls outside the mandatory pooling provisions so nothing needs to be agreed with the seller. The buyer claims on an unrestricted apportionment of their purchase price for these items. This can make preparing the claim more complex.
Mixed ownership sales
It is common to see properties purchased from joint owners such as 50% pension fund and 50% tax payer. Any tax election will apply solely to the tax payer’s share and a buyer may have entitlement fully on the pension fund share if certain conditions are met. We regularly research and advise in this scenario.
B Property expenditure – “let’s just get the cost information from the builder.”
Clients will sometimes have significant property expenditure such as new build, fit out and refurbishments. Accountants sometimes consider just getting the information from contractor and preparing a DIY analysis is all that’s required.
This can be effective for smaller projects and where there is perfect cost information available. However, in practice there are often complications such as;
- Builder has gone bust or uncooperative
- No bill of quantities or costed schedule of works was ever prepared
- Information that is available includes lump sums or element costs for ‘structure’ or roof, partitioning, floor finishes
- Design and build project and limited costs details or breakdowns available
- Significant projects running over more than one accounting period
For larger property new build, fit out or refurbishments, to extract the full extent of allowances the property will need to be surveyed for capital allowances purposes. Typically this gives up to 50% more allowances and tax savings than a non-specialist analysis. For a £1m office fit out, allowances can represent around 85% of project cost. Involving a specialist will provide information on;
- The level of builders work in connection with installation of mechanical and electrical services, for example
- Lump sum items which can be measured and costed appropriately using surveying principles
- Identifying tax sensitive items such as decorative assets and office partitioning
- Full information on professional fees, contingency sums, contractor overheads and profit which can be apportioned increasing allowances
- Identifying 100% enhanced capital allowances
- Identifying less obvious 150% expenditure on decontamination
- Carefully segregating repairs from improvements.
It is interesting and significant that when speaking informally to HMRC and their colleagues in Valuation Office they generally cite general practice accountants as the worst culprits for wrongly claiming allowances. In fact most of the published capital allowances cases where the tax payer loses are where a non-specialist has analysed the allowances.
We see many examples in practice where an accountant or tax advisor has done a DIY bodge and it’s their client who pays either in lost allowances or extra fees defending a HMRC enquiry. A good specialist will identify more allowances, more efficiently and cost effectively.
