Capital Allowances and Nursing Homes

Are the clients being told that they can unilaterally amend the purchase agreement, without the consent of the vendor, to alter the split of the purchase price between goodwill, property, plant & machinery and stock? As the vendor will have accounted for tax on the basis of the prices stated in the legal agreement, I do not see how it would be possible for the clients to use different figures.

If more cost can somehow be attributed to the plant & machinery, then yes - the client could claim more CAs and yes - these will not be deducted in calculating any capital gains. This is because the plant and machinery is not subject to capital gains tax. Whatever value is attributed to the plant & machinery when the nursing home is sold will be deducted from the CA general pool and a balancing charge may well arise to claw back the additional allowances claimed over the years.

If the client is a company, much the same applies to goodwill.

But, to answer the question - No, I have not had dealings with companies submitting revised capital allowances claims for nursing homes.

Arthur Andersen used to have a department that specialised in exactly this activity - the legislation allows the vendor and purcahsed to jointly elect to determine value, but it doesn't say that the value to one party will automatically be the same as the value to the other. In the absence of an election a just and reasonable apportionment is required and if the vendor has not done this there is nothing to stop the purchaser doing it. Do it within 13 months of the acquisition and you could boost the receipt value by claiming back up to 4% SDLT as well (boosting the value of the P&M will correspondingly reduce the value of the property).

However where expenditure gives rise to a CA claim it does reduce the qualifying expenditure for the purpose of future capital gains.

You may remember a few years ago there was a provision, now repealed, which required claims to be made for expenditure to be treated as P&M within two years of acquisition, and if not made the expenditure could only give rise to claims in later years. This was intended to restrict the activities of AA who were doing this, and backdating by 6 years, or more where there were open assessments and getting more in repayment supplement that the claim was worth! No repayment supplement now, the claim is effective in the year in which made for repayment purposes, means that restriction is no longer needed.

To avoid problems on acquisitions it used to be said that the revenue would accept whosoever's computation was received first!

Making capital allowances claims in this way is routine practice and uncontroversial, but nonetheless a specialist task. There are a number of firms offering this service, but like all professional advisers they vary in expertise, experience and cost. I suggest you check our website www.cap-allow.com where you may find the press articles (especially the Caring Times and Tax Journal 'Common Misconceptions') and FAQ 9 helpful in advising your client and choosing a specialist. A good specialist will work with you and your client and carry out a free-of-charge up-front review to assess whether a claim is possible and what the value might be.

On purchase of a second-hand nursing home, the buyer may claim plant & machinery capital allowances (normally based on a just and reasonable apportionment of the purchase price, although, this may be subject to restrictions - for example to the vendor's disposal value). What is often not understood though is that it is NOT the vendor's prerogative to arbitrarily bring into account a disposal value (for example, tax written down value) and a purchaser is NOT bound by an arbitrary vendor's disposal value, nor by amounts that may happen to be written into the purchase contract (e.g. for 'F&F').

It is also true that claiming capital allowances does NOT prevent the expenditure's deduction in a capital gains computation, so claiming capital allowances cannot create or increase a chargeable gain.

And it is perfectly possible to go back (indefinitely) to claim capital allowances (effectively by treating the plant as additions to the general pool in a later period), as long as the assets are still owned in that later period. For example, we have recently successfully agreed claims with HMRC for unclaimed expenditure going back to the 1980s.

Steven Bone
The Capital Allowances Partnership LLP (www.cap-allow.com)
Co-author of Tottel's "Capital Allowances: Transactions & Planning" and Tolley's "Handbook on The Capital Allowances Act 2001" and "Tax Planning 2007-08"

What the consultants will be doing is not trying to apportion cost between plant and building but at how much of the "building" will qualify as plant. The base cost of the building is only restricted for the capital allowances claim if the building is sold at a loss.

If the parties have made a section 198 CAA 2001 election, that is final for the plant in the building. If they have not, the legislation says that the terms of a contract can be overridden if a different apportionment gives a just and reasonable result. It is obviously designed to prevent vebdors and purchasers overloading one part of the expenditure to obtain a tax advantage but it can be used another way. HMRC will argue to have the vendor and purchaser using the same apportionment.

Steven and also, Paul.

"... a purchaser is NOT bound by ... amounts that may happen to be written into the purchase contract"

You mean that a contract over which solicitors have slaved (well! OK! maybe not slaved, but charged a hefty fee for) is not binding? Are you saying that if the contract signed by both parties specifically states £500k for F&F, the purchaser can treat that as being just a step in working out the total price payable and substitute his own value? If the purchaser values F&F at £750K, is the vendor obliged to use that figure or does the Revenue accept the loss of revenue likely to result from the two parties using different figures? Please could you tell me the legal basis for the purchaser substituting his values for the contract values? Does this apply to all legal contracts for the purchase of businesses?

The apportionment in the contract is not binding because the law requires a just and reasonable apportionment both for CAs and SDLT - otherwise you could allocate the whole lot to P&M and avoid SDLT entirely AND claim capital allowances.

However Stephen seems to be ignoring s41 which will restrict losses by reference to CAs given - the most likely CGT outcome for P&M which, especially in a nursing home will probably, in the fullness of time be scrapped. Trus the giving of allowances doesn't affect a gain (should such a beast arise) but that is because the would be a clawback of allowances, by balancing charge or restriction of pool value, up to the amount of cost. So the reassurance about gains that advisers give here is not strictly kosher IMHO.

Jim has it perfectly right and large numbers of these claims go through in practice without any problems (if you know what you are doing).

In the absence of a valid s198 CAA 2001 election (which is generally inadvisable for a buyer), by default a 'just and reasonable apportionment' is required for capital allowances by s562 CAA 2001 and for SDLT by Sch 4, Para 4 FA 2003. As long ago as 1955 it was held in the High Court that contract allocations are not binding (Fitton v Gilders and Heaton 36 TC 233). I understand from lawyers that they are an unlawful attempt to contract out of statute, which requires a just and reasonable apportionment (or election).

On the capital gains point Paul is right that capital allowances may affect capital loss calculations. However, this rarely happens in practice. Jim is correct that the focus of the capital allowances analysis will be on plant and machinery fixtures (e.g. sanitary appliances, heating etc.), which are in law part of the land/building. These typically remain fixed to the building when it is sold and are normally sold at a profit with it. Therefore, capital losses are rarely relevant.

Steven Bone
The Capital Allowances Partnership LLP (www.cap-allow.com)
Co-author of Tottel's "Capital Allowances: Transactions & Planning" and Tolley's "Handbook on the Capital Allowances Act 2001" and "Tax Planning 2007-08"

I suspect there is another issue here and that is Paragraph 4-Sched 4 - FA2003, the HMRC contention is that there can be no free goodwill where a property is normally valued by reference to its accounts. This is patently a nonsense and being currently addressed by the RICS. However if a taxpayer accepts that in a transaction where £1.5 million was paid and £500k was allocated to free goodwill, the goodwill is all adherent or inherent it forms part of the price paid, and can be included in the cap ex for the CAA computation. Ignoring any allocation to FF&E, which as chattels are outside the scope of SDLT, this means that the figure brought into account by the vendor may relate to a property value of £1 million and not the total consideration paid, which affects the sum to be apportioned. I do not entirely agree with Mr Bone, as where a disposal figure is brought into account , post 24th July 1996, by the vendor per s 175 CAA 2001, and also Tottels CA Transactions and Planning Chapter 4, this limits the purchasers ability to claim, in relation to those items already subject to a claim but not those 'missed'. The interaction with CGT relates to the ability to claim indexation allowance, where appropriate on the expenditure incurred..

I suspect Chris is using the expression 'valued by reference to its accounts' in a rather different sense to that which would be understood by an accountant. We would acknowledge that free goodwill can be shown as an asset on a balance sheet even though it is an intangible intangible where a payment is made for it. Most intangible assets are evidenced by the existence of an independent legal right - such as a patent - it is a legal asset and as such an intangible but the entitlement to the right can be established independently and so in a legal sense can be said have a tangible legal existence. Goodwill, certainly FREE goodwill, has no such right that can be recognised as an enforceable legal right and yet it has a value, and that is the amount that is paid in excess of the attributed economic value of the assets on the balance sheet. If this goodwill is created rather than purchased we do not recognise its validity on a balance sheet even though its value may be as tangible as purchased free goodwill.

This may be part of the difficulty here that we are all, the profession, valuers and the revenue talking about subtly different aspects of intangible asset recognition, but the bais premise from an accounting and taxation perspective is, i submit, still clear. The act requires a just and reasonable apportionment, it does not restrict available allowances to agreed contractual sums except where a claim has been made for capital allowances by the vendor where the allowances available are capped at the amount of the original cost, it does permit the parties to the contract the right to elect which value should be used, being the WDV at the beginning of the period of sale, but in the absence of such election the values are not determined by the contractual apportionment where a business is sold - this may by definition not be a just and reasonable apportionment.

We are moving slightly off the original point but this is rather a hot topic. There is no valuation concept of free goodwill from a 'property valuers' standpoint, it is an accounting or fiscal concept. Unfortunately terms used in relation to goodwill have different meanings for different groups and the HMRC standpoint and definitions are different to those used by the RICS. The valuation of 'property' by reference to its fair maintainable trade, see GN1 of RICS Red Book is also a slightly grey area as when valuing 'a fully equipped operational entity', it is on an all inclusive basis and relates both to a continuance of the trade and to the setting in which the trade is conducted. From an HMRC perspective to argue that all goodwill in such a situation is inherent or adherent links it to the property and prevents such goodwill being written down against trading profits, it also increases the SDLT take. However where this linkage is accepted by the taxpayer the 'goodwill' changes from being an intangible asset into part of the tangible property asset and therefore its value is capable of apportionment as part of the total acquisition cost . Where it is an intangible it is separate to the property asset and not so allocatable