The new environment for capital allowances.
Why specialist help is essential.
In the present environment tax planning has become very political. One area that successive UK governments have encouraged is the claiming of capital allowances.
Businesses are overlooking millions of pounds worth of tax allowances and your clients are likely to be among them. The reason the majority of commercial property owners have not claimed is thought to be because embedded plant fixtures are often never separately valued.
Once a property is purchased or refurbished these freehold additions or leasehold improvements not reviewed to extract the latent tax savings. Until a survey of the property is carried out by a capital allowances specialist qualifying items will remain unclaimed.
Changes to the Finance Act from April 2014 are another reason tax allowances could be permanently lost to a new buyer and all future owners.
It is possible you have not appreciated the availability and extent of this tax relief before because it requires a specialist surveyor to review the building costs and accounts.
From April 2014 a new requirement was introduced called “the pooling requirement.” For transactions after this date where the seller could have claimed allowances the buyer is required not only to fix the value of allowances to be passed on from the seller but the seller is additionally required to pool the allowances in their tax return.
What the new rules really mean
If these two requirements are not met within the 2 year post transaction deadline the buyer and all subsequent owners forfeit their entitlement to allowances. The allowances are lost.
These rules mean a real risk of irrevocable lost value for clients, even where they still own the property – purely through overlooking the new legislative requirements. The result is not just lost tax savings but the loss of value to pass on when the property is sold. Capital allowances are often an effective carrot in marketing a property.
The recent case of Mehjoo v Harben Barker shows the necessity of referring to specialists given the increasing complexity of niche areas of tax law. This reduces risks of PII claims.
Where there is an intention to purchase a commercial property we can assist from the outset to give the best chance of maximising value for your clients.
When a commercial property is sold significant capital allowances often transfer, in many cases without the parties knowledge. Unsurprisingly, the better advised party usually comes away with the best deal.
- For the seller this means highlighting the value available to the buyer which can be a useful bargaining tool, particularly if it offsets less desirable aspects in the deal.
- For the buyer the tax savings can mean an immediate cash flow benefit and in some cases can make a marginal deal work.
The compelling case for using a specialist
For commercial property owners capital allowances offer typically tens of thousands of pounds worth of windfall tax savings. Typically, for a purchase 20% to 25% of the purchase price qualifies for tax relief over time.
Accountants and their advisors will sometimes be aware and handle the capital allowances claim as part of routine tax compliance. However, retaining a specialist will give comfort that the full extent of qualifying expenditure has been picked up.
The potential complete loss of allowances on properties purchased since April 2014 is another reason to pass on details of relevant transactions to a specialist for review. This is done at no cost to the client, if further allowances cannot be found, while giving certainty that allowances are not being missed.
The approach taken by an accountant to claiming allowances is typically a desktop invoice review. In contrast, following entitlement due diligence a specialist surveyor will often take a top down approach and visit the property with an expectation of what is claimable on similar properties.
There are a vast array of qualifying items, some only so if they are trade related and many items qualify based on case law precedent. The legislation contains no comprehensive list of items qualifying for allowances. A specialist will approach the claiming of allowances differently to an accountant;
- An accountant will classify fixed assets into accounts separate categories. Typically, FF&E (Furniture, fittings and equipment), typically only the loose items such as furniture and computer equipment and moveable equipment and trade related kit; with buildings additions included in Freehold land and buildings or leasehold improvements. In many cases the accountant will claim FF&E in full but not look to analyse the buildings category at all.
- An accountant will list and claim allowances on all computer equipment, desks and printers for example as these are clearly used in the trade. Often the embedded floor boxes for telecoms and computer power supplies are unclaimed as costs form part of the property purchase or fit out contract. A specialist is able to extract these costs, itemise and give them an appropriate value.
- An accountant will understand how to claim a hotels furniture and loose equipment. A capital allowances specialist will be able to identify all ambient features such as panelling and decorative items; and in addition all items integral to the hotel building which are used in the business such as thermal insulation, central heating and lighting.
- An accountant will list and claim all gym equipment and loose fittings in a sports centre but may not claim sprung floors or builderswork in connection with floor strengthening to support gym equipment which will need valuing and appropriate description for a claim to be made.
- As you would expect an expert with construction knowledge for similar property types will know what to look for and typical items that should be present. They will find and quantify and value these items based on a site survey. This more in-depth approach can typically yield tax savings many multiples of the specialist’s fee.
Interaction with capital gains taxes
One reason for nervousness in highlighting a claim for allowances is often the perception that they are a timing or cash-flow benefit only which is clawed back on sale of the property.
For example, it is often thought that the tax on the gain in value of the property will be increased if allowances are claimed. In reality, the capital gains tax legislation is explicit on this point.
There is no requirement to reduce the base cost of the asset by amounts claimed as capital allowances (TCGA1992 s41).
Working with us
We will only take on an assignment if we see an immediate value for the client. This means we first consider if the current tax position of the client and liaise with you or their accountant to understand if immediate savings are possible.
We have in house capital allowances RICS qualified surveyors, Chartered Tax Advisors CTA who are able to see the project through from engagement to agreement with HMRC. If any negotiations are required to agree the claim the cost is included in our fee which means no nasty surprises if tricky questions are received from the tax inspector.
The majority of our work is referred by professional firms and we are well aware of how to successfully handle client relationships to efficiently dovetail with your team.
In 17 years we have not had a capital allowances claim rejected and the majority are agreed at close to the filing position. Mike Edwards who lead the HMRC capital allowances valuation team recently joined Lovell Consulting and strengthens our team in this respect.