Following on from the April 2014 changes to the Capital Allowances fixtures legislation, there is now more of a requirement for careful planning and technical due diligence to ensure Capital Allowances are not lost to Buyers of commercial property.
Buyers are increasingly reliant on the answers they receive to the Commercial Property Standard Enquiries (CPSE) sent to Sellers. We find that the majority of the CPSE enquiries on Capital Allowances are answered incorrectly or unhelpfully often stating “No allowances” or “N/A”. Relying on this information at face value, many Buyers are missing out on the benefit of allowances on their property acquisitions.
Background – the April 2014 Rules
The way in which Capital Allowances are claimed on commercial property acquisitions was changed radically in April 2014. The changes mean that in order for a Buyer to claim allowances, two requirements have to be met –
- the Seller, if entitled to claim allowances, 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 CAA 2001 s.198 tax election or by tribunal – only then can this “fixed value” be transferred across to the Buyer
There is a 2 year window from completion of the sale of the property for both parties to meet these requirements and a failure to do so will result in the Buyer, and all future owners of the property, having no entitlement to claim allowances on these fixtures.
Commercial Property Standard Enquiries (CPSE)
The CPSE suite of documents was originally launched in 2002 to provide an industry standard for Sellers and Buyers to exchange information during commercial property transactions. The current version of the CPSE (CPSE.1 Version 3.5) was published in July 2015.
Section 32 of the CPSE concerns Capital Allowances and looks to establish –
- If the Seller was a developer/trader or was an investor/occupier
- Whether the Seller made a claim for Capital Allowances while they owned the property and the value of these allowances
- If the Seller knows if any previous owners have made a claim
- If the Seller will comply with the post April 2014 requirements in order for the Buyer to benefit from any claimed and unclaimed allowances
- Understand whether any tenants have carried out fit out works to the property and claimed allowances on this expenditure
Best Practice – Buyers
It is now vital that Capital Allowances are considered early in the transaction if the Buyer is looking to benefit. Ideally, Buyer’s should make their interest in claiming allowances clear in their offer letter and heads of terms.
The CPSE form is a useful tool and asks the Seller a broad range of questions relating to the property. However, more often than not, the section on Capital Allowances is drafted incorrectly and commonly states “N/A” to the majority of questions. It is imperative that the Buyer does not solely rely on these responses when considering their scope to claim allowances.
Instead, in relation to Capital Allowances, the CPSEs should be seen as a useful first step in negotiations with the Seller in order to meet the post April 2014 requirements. In most cases, CPSE responses drafted incorrectly are down to the Seller and their representatives not fully understanding the CPSE questions, their obligations under the new requirements or simply a lack of information and time.
This can be rectified by direct conversation with the Seller by a specialist such as Lovell Consulting who can ask the relevant questions based on the facts of the particular property and simply explain the new Capital Allowances rules. Further mechanisms can then be inserted into the purchase contract to ensure the Buyer can benefit from allowances and meet the legislative requirements.
Best Practice – Sellers
While the CPSE replies may look onerous to a Seller, it is important that they are drafted correctly in order to set out the Sellers intentions. Disclosing the Sellers position early within the CPSE can prevent potentially protracted negotiations with the Buyer and expedite the sale.
This is true whether a Seller has claimed and is looking to retain the benefit of allowances or even if a Seller is a non taxing paying entity or a developer with no entitlement to claim. It is advised that if a Seller or their representatives cannot answer the CPSE questions accurately, a specialist is involved to help ensure there are no delays to completion of the transaction.
More importantly, following the recent High Court decision of Greenridge Luton One Ltd v Kempton Investments Ltd, it is now apparent that deliberately deceitful responses to CPSE responses by Sellers can result in litigation, termination of the sale agreement and a claim for damages. While this case concerned service charge disputes, it highlights the importance of accurate CPSE responses.
To ensure that Capital Allowances are not lost and to avoid potential delay to transactions, it is important that Buyers and Sellers of commercial property have an accurate and useful exchange of information through the use of CPSE. It is recommended to use a specialist Capital Allowances firm to achieve a positive outcome. Lovell Consulting purely specialise in Capital Allowances and has provided advice on Capital Allowances for thousands of commercial transactions throughout our 19 year history.