A recent capital allowances decision highlights the importance of establishing the tax history for purchased properties The Granleys v Commissioners for HMRC (TC01231). It also demonstrates the need to use capital allowances specialists with experience in both tax and surveying.
Background
- The Granleys, a partnership, acquired a care home in December 2003 for £650,001.
- Within the purchase contract £40,000 was allocated to fixtures and fittings.
- In September 2003 the vendor instructed a firm to prepare a capital allowances report. For various reasons, this report was never provided to the vendor.
- The report was subsequently provided to The Granleys and identified plant and machinery allowances (PMA) of £106,014, in addition to the contract allocation of £40,000.
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The Granleys assumed that without the report the vendor would not claim PMA.
- The vendor did in fact claim PMA over two accounting periods.
Relevant Legislation and Guidance
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When acquiring a second-hand property, s562 CAA2001 requires a just and reasonable apportionment of the price paid for the whole of the property.
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This applies regardless of any contract allocation.
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In addition, s185 CAA2001 restricts a purchaser’s PMA claim to the disposal value of a former owner. The maximum disposal value is limited to original cost.
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No restriction applies on assets which have not previously been subject to a PMA claim.
Decision
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The Commissioner stated “there is every possibility that the vendors claimed in respect of some or all of the fixtures … the disposal value they are likely to have used is … £40,000.”
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HMRC contended that “all available evidence indicates that a claim was made by the previous owners in respect of the additional PMA” of £106,014.
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The Granleys additional claim was rejected as s185 CAA2001 had not been applied correctly and their PMA claim should have been restricted to the vendor’s disposal value of £40,000.
Lovell Consulting View
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If the vendor claimed £106,014, we wonder why HMRC and the tribunal did not apply s562 CAA2001 to calculate the disposal value.
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If the property was sold at a profit, the correctly calculated disposal value would be £106,014, not £40,000. This would result in a full clawback of PMA for the vendor.
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Lovell Consulting thoroughly researches the tax history for each client property.
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When an entitlement is established and it is found no s198 CAA2001 election is agreed but a vendor is not forthcoming with details of their claim, Lovell Consulting will:
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Use quantity surveying techniques and published cost data to estimate the vendor’s original claim;
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Fully disclose our assumptions within our report;
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Provide evidence of prior claims and correspondence with prior owners.
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This case illustrates the need to engage capital allowances specialists who can apply the legislation as intended.