Both owners and occupiers of office buildings can claim substantial capital allowances but this opportunity is often missed. This can be due to confusion over the capital allowances rules changes or because non-specialist solicitors, accountants and tax advisors do not recognise the full potential of available allowances. Frequently, construction cost information can be unhelpful and not nicely segregated for capital allowances purposes.
Office Construction & Fit Out Works by Tenants & Landlords
The main reason allowances are missed on the construction and fit out/refurbishment of office buildings is because of the lack of detail in construction cost information provided by contractors. This information can consist of high level summaries of the works and it is difficult for non specialists to break down and segregate these costs which can result in lost allowances.
Even when good breakdowns of construction cost information are available, the opportunity to maximise capital allowances claims can be missed. Accountants and tax advisors can readily identify and claim simple Plant and Machinery (P&M) items that are nicely labelled and laid out in cost breakdowns such as heating and cooling systems, lifts and electrical services.
However, often elements such as “finishes” or “demolitions & alterations” as well as associated professional fees are largely ignored and treated as ineligible for capital allowances. It is only after a site survey and further segregation and sensible cost assessments that additional allowances and repairs that would otherwise be missed can be identified. Furthermore, less obvious P&M that can often be missed in the construction of office buildings include –
- Builders work in connection with mechanical and electrical services
- Acoustic and thermal insulation within existing buildings where provided
- Demountable partitions
- CAA 2001 s.26 strip out of plant and machinery during refurbishment works
- CAA 2001 s.25 incidental costs such as works to lift and food hoist shafts within existing buildings
Structures & Buildings Allowance
Expenditure incurred on business-related buildings and structures on or after 29 October 2018 will attract a 3% annual writing down allowance on a straight-line basis for the next 33 years. This allowance is designed to encourage investment in the construction of new structures and buildings that are intended for commercial use, the necessary works to bring them into existence and the improvement of existing structures and buildings, including the cost of converting existing premises for use in a qualifying activity. Neither land nor dwellings are eligible for this relief. Where there is mixed use, for example, between commercial and residential units in a property, the relief is reduced by apportionment.
Annual Investment Allowance
The Annual Investment Allowance (AIA) provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance (WDA) of only 18% (or 6% for the special rate pool) depending on the type of asset. Before April 2019 the special rate pool written down allowance was 8%. For chargeable periods spanning April 2019, the rate of WDA will be a hybrid of the rates before and after the change.
The maximum amount of the AIA depends on the date of the accounting period and the date of expenditure. The AIA from 1 January 2019 is £1 million for two years. Thereafter it will revert to £200,000. From 1 January 2016 to 31 December 2018 it was £200,000. Complex rules apply to accounting periods straddling 1 January 2019.
Where purchases exceed the AIA, a WDA is due on any excess in the same period.
General Pool Allowances
Allowances are available for general pool expenditure and tax relief is provided at 18% each year on a writing down basis. This is for assets with a shorter economic life such as carpets, fittings, computers and furniture, demountable partitions and IT cabling.
For plant which is general to most buildings allowances are provided at a slower rate of 6% each year on a reducing balance basis. Examples include lifts, heating and electrical installations.
Where an office building is refurbished, expenditure on repairs such as redecoration, like-for-like window replacement and cleaning is either not detailed or is lumped in with other costs on new installations which cannot be considered repairs. Repairs can be treated as a revenue expense and either deducted 100% in the year of expenditure or follow the accounting depreciation treatment. Typically, 10 – 20% of refurbishment works can be treated as revenue repairs if identified within the construction cost information.
Office buildings are abundant with plant and machinery including air conditioning and ventilation equipment, passenger and goods lifts, lighting and fire alarm systems as well as sanitaryware, fixed furniture and carpets. Even when acquired ‘second hand’ through purchasing an existing office building, it is possible for purchasers to potentially claim allowances on these assets.
Why then is this opportunity to claim often overlooked by buyers and their professional advisors? The problem comes down to the fact that claiming allowances on ‘second hand’ fixtures is complicated and fraught with legislative restrictions. The main complexity is the meeting of new rules brought into practice in April 2014. The changes effectively meant that in order for a buyer of any commercial property to claim allowances, two requirements have to be met –
- A Seller that is entitled to claim allowances (i.e. a tax paying entity) must “pool” and insert the value of all fixtures qualifying for capital allowances within a relevant tax return
- the Seller and Buyer must then agree the value of fixtures to transfer either by a s.198 tax election or by tribunal – this “fixed value” will then be transferred across to the Buyer
These requirements must be met within two years of the purchase of the property; failure to do so will result in the Buyer, and all future Buyers, having no entitlement to claim allowances on their purchase. Due to misconceptions about what these new rules mean for office investors, other property professionals commonly provide incorrect and conservative advice on capital allowances during transactions; if any advice is given at all.
Another reason allowances are often overlooked is simply because of the difficultly in identifying P&M embedded within an existing structure. While obvious plant and machinery assets, such as furniture and sanitaryware, can be easily recognised and documented, assets such as air conditioning and heating installations that are often hidden in ceiling voids or service risers are harder to spot and quantify for capital allowances purposes by non specialists.
It is also important to consider capital allowances during the early planning stages of any construction or refurbishment of office buildings. As detailed above, construction cost information can be difficult to break down for non specialists resulting in lost allowances. By capital allowances early and engaging a specialist capital allowances advisor, co-ordination with your project team can result in maximising allowances through effective planning and design.
Lovell Consulting have a highly skilled and expert team, dual qualified in surveying and tax. Therefore we have the expertise to identify the unusual items of qualifying P&M, as well as segregate the high level construction costs into qualifying P&M items. Furthermore, we can provide practical assistance during transactions.