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 recent April 2014 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
Enhanced capital allowances (ECA)
There may also be scope to claim 100% first year allowances on energy and water saving technologies installed in offices such as efficient lighting and air conditioning and water efficient sanitaryware. The Enhanced Capital Allowances (ECA) Scheme allows a 100% first year ‘write-off’ against taxable profits for business that invest in certain efficient technologies that meet qualifying criteria. ECA are a complicated area as an understanding of the qualifying performance criteria and the legislative requirements is vital in order to be eligible for this lucrative tax relief. ECAs effectively accelerate the allowances, which would otherwise be written down over many years at 18% or 8%.
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 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 imbedded within an existing structure. Whilst 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.
For investors in office buildings, it is imperative that the Buyer’s position and intentions are set out early in the offer letter and heads of terms. Lovell Consulting have provided wording on a number of recent office building transactions and typically we find that the first party to consider allowances has the most favourable result. It is vital to obtain specialist capital allowances advice before opportunities are missed.
Lovell Consulting can discuss and negotiate with Sellers to confirm the entitlement to claim allowances and provide contract clauses and tax elections to pass these allowances to purchasers. Due to the abundance of P&M in offices, we can often identify up to 35% of the purchase paid as qualifying for capital allowances.
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 vague and difficult to break down for non specialists resulting in lost allowances. By considering allowances early and engaging a specialist capital allowances advisor, co-ordination with your project team can result in maximising allowances through effective planning, design and claiming accelerated tax reliefs such as ECA.
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.