Capital Allowances and Demountable Partitions: To Move or Not to Move

What Are Capital Allowances?

• Capital allowances are a form of tax relief that allow businesses and property owners to deduct the cost of qualifying capital expenditure from their taxable profits.
• In commercial property, they matter because a significant part of a purchase, refurbishment or fit out can qualify, especially where the spend relates to plant, machinery, fixtures and other allowable items.
• Key allowance types:
• Writing down allowances (general pool at 14% and special rate pool at 6%)
• Annual investment allowances (100% first year allowances for qualifying plant allowances up to a limit of £1m per annum)
• First-year allowances (100% for general pool and 50% for special rate pool for new and unused plant and fixtures, 40% for general pool assets used as part of leasing business).

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Demountable Partitions — What They Are and Common Uses

• Demountable partitions, as the name suggests, are non-permanent non-loadbearing wall systems such as office screens, moveable walls and modular cubicles, that can be installed, removed, relocated or reconfigured with minimal disruption. They are usually pre-fabricated and are designed to be taken down and re-used rather than demolished.
• Demountable partitions are popular with occupiers as it provides flexibility in segregating space without major and permanent building works. They are often used in offices and warehouses to create separate working/recreational spaces.
• These type of partitions can be removed and reconfigured to another location without major demolition works. Permanent partitions are constructed to be a part of the building fabric and therefore cannot be moved once installed and to remove it requires major works which leaves the partition in a non-reusable state. It is important for tax purposes as demountable partitions can qualify for capital allowances at faster rates whereas solid partitions does not qualify and instead may be claimed at a slower rate.

Do Demountable Partitions Qualify for Capital Allowances?

Qualifying Criteria for Capital Allowances

• To qualify for capital allowances, expenditure must be capitalised and relate to plant or machinery rather than the building itself. In practice, the key criteria is whether the asset is used as apparatus in the trade, forms part of the business equipment, or is simply part of the building. Fixed items can generally qualify if they have a plant function while integral features and building fabric are treated differently and should be considered on a case-by-case basis.
• Jarrold v John Good & Sons Ltd involved a company that installed a number of movable internal partitions in their premises. The partitions were essentially fixed but could be moved by the business during the course of the trade to expand offices or create new areas as required. In actuality, the partitions were seldom moved but the Courts found the partitions to be plant as they were “apparatus with which the company carried on its business”. The courts made an important distinction that apparatus such as movable partitions are not excluded from being plant despite the fact they are part of the “setting”. Demountable screens, using similar tests as Jarrold v John Good, were also held as plant in the case of Leeds Permanent Building Society v Procter (Inspector of Taxes) [1982].
• HMRC’s own internal Capital Allowances manuals recognise the ruling of Jarrold v John Good & Sons Ltd but also advise that “The ‘John Good’ case does not mean that all moveable partitions are plant” and that movable partitions “need to possess mobility as a matter of commercial necessity” and it is also “worth checking whether they have in fact ever been moved”. (HMRC Capital Allowances Manual: CA21120).
• Partitions are treated as fixtures when they are installed in a way that makes them part of the premises whereas they are treated as movable if they are genuinely demountable or relocatable and can be done so without being destroyed.

When Moving or Relocating Partitions Impacts  Relief

• An important criteria to consider when deciding whether demountable partitions are plant or not is the intention to move as mentioned above. If there was evidence that the partitions were moved within the course of business, it could support the argument that they are actually apparatus rather than if the partitions just stayed in the same location.
• If partitions are removed and reused elsewhere in the property, it strengthens the case that they are moveable items and therefore qualifying for capital allowances. If they are sold, they will follow the plant treatment which brings balancing adjustments by taking the difference between the disposal proceeds and the tax written down value of the pool.
• Refurbishment usually entails works to existing space intended to improve or reconfigure the space, whereas replacement works usually indicates substituting existing assets on a like-for-like basis. The distinction between these two is important for tax purposes as like-for-like replacement are treated as revenue expenses whilst refurbishment, particularly if the space shows improvement, would indicate the works to be capital expenditure.

Interaction with Lease and Contract Terms

• In the context of partitions, carefully drafted leases can dictate which party is entitled to claim allowances, as these partitions could either be installed as part of landlord incentives as a capital contribution https://lovellconsulting.com/how-to-obtain-savings-from-landlord-contributions-to-tenant-fitting-out-works/ or a part of tenant fit out works. The importance lies on making clear what the nature of works is and who is paying for the expenditure, as well as documenting evidence of ownership of asset when works are carried out.
• Simplistically speaking, it all depends on who actually incurred the capital expenditure. If the tenant fitted out the space but is reimbursed by the landlord as part of the agreement for lease which clearly states the works are covered as a landlord capital contribution, with the appropriate wording on what the contribution relates to, then the landlord will be entitled to claim. If there are no capital contribution by the landlord, and the tenant genuinely spent monies on installing the demountable partitions, for example, then the tenant will have entitled to claim allowances.
• If a landlord gives a capital contribution for demountable partitions, the contribution should ideally be allocated clearly across qualifying items so the allowances are preserved and not blurred with non-qualifying expenditure. On exit, dilapidations and reinstatement clauses can require the tenant to remove partitions and reinstate the premises, which makes the original lease wording important for both legal and tax purposes.

Recordkeeping, Due Diligence and Timing

• If you are carrying out extensive refurbishment or construction works which involves installing demountable partitions, and have a quantity surveyor (QS) on board, it is of merit to request for the QS to provide a detailed cost breakdown which clearly segregates the expenditure into the various works. A good QS will break down the costs of installing the various partitions and clearly describe what type of partitions were installed (i.e. solid partition, stud walls, demountable glazed partitions etc.)
• The timing of claims is also of great importance as tax savings can be accelerated in the year of expenditure through the use of the annual investment allowance and/or first-year allowances. Although capital allowances can generally be claim retrospectively, provided the asset still exists in the year of claim, these will not attract the accelerated tax reliefs – instead, writing down allowances will be claimed, which spreads the tax relief available over a greater amount of years.

When Capital Allowances May Not Apply

• If solid and not easily relocatable, then will not qualify for plant and instead may be claimed as structures and buildings allowances.
• If replaced like-for-like, then revenue expenditure. If new or improved, then capital expenditure.
• Dwelling restrictions apply for residential buildings and mixed-used spaces where part of the space is used for residential purposes (I.e. apartment buildings with ground floor retail unit – the assets located in dwelling spaces will not qualify for capital allowances).