Proposed changes to capital allowances legislation and its effect on commercial property claims

 

On December 6th 2011 draft clauses for the Finance Bill 2012 were published.  Some of these draft clauses relate to capital allowances legislation and therefore the rules which must be applied when making capital allowances claims.

The good news is that for property purchased before April 2012 the rules remain unchanged. A capital allowances claim is still possible regardless of when the property was purchased, subject to the usual constraints which may apply due to previous claims etc.

For two years from April 2012, where the seller has not claimed capital allowances the rules also remain unchanged.  

However, where the seller has claimed capital allowances a section 198 election agreement will need to be drawn up between the parties to divide the capital allowances between them as they see fit. HMRC has not pushed through its’ original proposal to insist that the amount of capital allowances allocated must be the equivalent of the “Tax Written-Down Value” (TWDV). Therefore the parties are still fully free to agree the value of capital allowances available. If a S198 election agreement is missed then any right to claim capital allowances on the property will be lost entirely to both the new owner and any future owner.

If the parties cannot agree the values for the purposes of the election agreement either party may refer the case to the First-tier Tax Tribunal but this is unlikely to be a common occurrence given the likely cost of taking such an action.

One of the major changes to be made is that even if the seller has not claimed any capital allowances there will be a mandatory requirement for capital expenditure to be identified and pooled by the seller (that is, notified to HMRC). Broadly, this can be done up to two years after the sale of the property.  This leads to the strange possibility that the buyer may have to ask the seller to pool the expenditure after the sale has been completed which would be achieved by the commissioning of a capital allowances specialist. There will obviously need to be a negotiation over who pays for the capital allowances claim in these circumstances and how any identified capital allowances will be allocated between the parties.

If the seller has not pooled the capital allowances qualifying expenditure within the required period then the right to claim capital allowances is lost not only by the new owner but by any subsequent potential purchaser.  Furthermore, a S198 election agreement must be entered into. If either requirement is missed then any right to claim capital allowances on the property will be lost entirely to both the new owner and any future owner.

Where capital allowances claims are missed in this way it could actually reduce the potential value of the property in a buyer’s eyes so making a capital allowances claim is an imperative for owners of commercial property.  Potentially conveyancing solicitors will need to take much more interest in capital allowances or risk being sued by their clients for not providing the correct advice at the time of sale / purchase.

HMRC has admitted that “businesses (perhaps especially smaller, unrepresented businesses) might inadvertently miss this deadline and so lose out” so obviously expects that potential capital allowances will go unclaimed and that this will reduce the number of claims which may be made in the future thus helping the Government’s financial position over time.

John Plumridge

John Plumridge

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This blog

 

This blog brings me back to a favourite topic of accountants and their reluctance to engage with specialist capital allowances firms for the benefit of their clients who own commercial property.  Having now worked with some of the top specialist capital allowances professionals for the past year and spoken or corresponded with accountants working at all levels.  Here are my conclusions (in no particular order).

1) "I can't admit that I haven't picked up on this"

Some accountants are fully aware of the potential for making a capital allowances claims for their clients but have only come to this realisation in recent years. They are now in that awkward position where they have had a client for a number of years who owns commercial property but they have not advised them to make a capital allowances claim. Result they keep quiet and hope that the client either never talks to a specialist of if they do will not believe them over their accountant.

2) "I'm not letting a third party anywhere near one of my clients"

Accountants are worried that if they advise a client to use a third party capital allowances specialist that there is a real reputational risk. The accountant perceives that if the capital allowances company makes a mistake this will reflect badly on them and their practice and that they could lose their client. This is a tangible concern and there are some capital allowances claims companies where you an accountant could run this risk. However my advice would be that like any other organisation that relies on an outside provider if you do your homework thoroughly it does not take long to realise who are the experts and who are not.

3) "Any advantage the client gets now will just be clawed back at a later date by the tax man"

There are so many misconceptions about capital allowances claims that it is not possible to list them in this short piece. One of the most widely held is that undertaking a capital allowances claim devalues the property and therefore when it is sold it will be subject to a higher level of Capital Gains Tax. The first statement is untrue and therefore so is the second. If anybody wants to know the legislation that explains this in more detail please let me know and I'll e-mail the evidence.

4) "There is not enough in it for me"

Although it may be in their clients interest accountants point out that the time they have to spend devoted to dealing with a capital allowances claim could be better spent making more money for themselves elsewhere. Even though most capital allowances specialists are happy to pay over commissions to accountants they look at in terms of the value they will gain rather than their clients.

5) "I look after my clients capital allowances claims already"

This can be born out of a lack of understanding of the full scope of the Capital Allowances Act 2001 and the full interpretation of "plant and machinery" and "integral features" as they relate to commercial property. Accountants are very conversant with the claiming of things such as furniture, carpets and other loose chattels but remain blissfully unaware of the inherent fixtures within commercial property which may also be claimed if the work is undertaken by a specialist surveyor preferably with tax qualifications.

6) "I can do this myself"

Lastly and this is always well intentioned, we know of accountants who make the effort and do undertake a capital allowances exercise themselves especially where the nature of the expenditure on a property or refurbishment has been fully broken down in a schedule of rates or bills of quantity. In these cases accountants have shown that where they make the effort they have been able to identify a relatively high percentage of the capital allowances that were allowable.  Unfortunately we also know of cases where they have claimed a very low percentage of the total capital allowances available or claimed for things which were not allowable at all.

A good example of this is where an accountant had a client with a large hotel costing £5m. The accountancy firm calculated that the capital allowances available to be claimed were in the region of £1m but when they commissioned a capital allowances expert to carry out the work found out there were over £2m of capital allowances which were claimable.

I hope that the above does not come across as being too cynical as we speak to accountants on a weekly basis who are busy trying to extract as much value for their clients as possible.  However with the HMRCs latest consultation on capital allowances legislation likely to limit what can be achieved in the future in terms of retrospective claims, many owners of commercial property will have missed the capital allowances boat and I believe the blame for this will lie firmly with their professional advisers.

 

John Plumridge

Curtis Plumstone Associates

02392 696815

jplumridge@curtisplumstone.com

www.curtisplumstone.com