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.
- 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.
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
When acquiring a second-hand property, s562 CAA2001 requires a just and reasonable apportionment of the price paid for the whole of the property.
This applies regardless of any contract allocation.
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.
No restriction applies on assets which have not previously been subject to a PMA claim.
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.”
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.
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
If the vendor claimed £106,014, we wonder why HMRC and the tribunal did not apply s562 CAA2001 to calculate the disposal value.
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.
Lovell Consulting thoroughly researches the tax history for each client property.
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:
Use quantity surveying techniques and published cost data to estimate the vendor’s original claim;
Fully disclose our assumptions within our report;
Provide evidence of prior claims and correspondence with prior owners.
This case illustrates the need to engage capital allowances specialists who can apply the legislation as intended.