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Capital allowances and integral fixtures: A case study of lost allowances. By Nichola Ross Martin

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18th Jun 2007
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Fixtures that are integral to commercial buildings are often overlooked for tax purposes; in short they get “lost” when property changes hands. They are worth finding again, as they may amount to up to 35% of the actual cost of a building (and much more in some extreme cases). This case study shows that property owners and their advisors should take a closer look at this area of tax when buying or selling commercial property or they may lose valuable tax relief

Background
The topic of “lost allowances” seems to either be totally ignored or regarded by many practitioners as some highly specialist topic that does not affect them on a day to day basis. It is not “rocket science” the key to finding missing allowances for your clients is:

  • understanding the basics of the fixtures legislation,
  • having a knowledge of what fixtures do what and are hidden within a client’s building, and
  • being able to make a decent approximation of what they are worth.

This is even less tricky than it seems because you can just sub-contract the last points to a decent building surveyor

The basics
There are special rules for certain fixtures which are covered in Chapter 14 of the 2001 Capital Allowances Act (CAA 2001). These rules apply to persons who are treated as owning fixtures which qualify for plant and machinery allowances in a building. The type of building could be any sort, but it must be commercial (you cannot claim allowances in a dwelling house) and will typically comprise of hotels, pubs, doctors and dentist’s surgeries, hospitals, nursing homes, sports centres and shops.

Case study: Take the example of the Dodgy Duck pub, it is owned by “Cute Country Pubs Ltd” (Cute Country’).

Cute Country’ is the freeholder and apart from owning the bricks and mortar and land is also is the owner of the fixtures which are integral to the pub and its working outbuildings. These fixtures are all around the property, they may include the elaborate bar and its shelving, the boiler, the walk in cold store, the air vent fans and systems in the kitchen and cellar, they include the electricals, wiring, radiators and the sanitary ware. The list goes on and on, if the pub had solar panels, these might be on the list, water pumps, street lights in the car park, the beer cellar. Cute Country’ actively manages its pubs and a bloke called Dave manages this one.

Aside from the fixtures which are integral to the building is what is described as “the trade inventory”. This motley collection of “assets” is also plant and machinery and contains all the unpleasant ornaments and metalwork that adorn the bar, as well as all the loose furniture, flooring, carpets lamps, shades, hand dryers etc. A long list of several hundred battered items that creates the ”ambience” of the Dodgy Duck together with all the tools for the trade such as kitchen equipment, pumps and glasses.

“Losing your allowances”
When Cute Country decides to move out of the pubs and into casinos, it approaches an agent to value the Duck. It has the building valued and also the trade inventory and stock. Apportioning a sales price between the elements is vital, and this is where “lost allowances” come in. Jim looks round and likes the pub, putting in an offer, he agrees that the pub is worth £750,000, and a professional stock taker values the trade inventory at £50,000. Dry and wet stock is agreed separately. Jim thinks that he is going to buy a pub for £750,000 and is looking forward to claiming capital allowances on the £50,000 of plant (the trade inventory) that comes with it. Most of the “Jim’s” starting out with their first pub might do and probably does exactly that, he will run the pub totally oblivious to £x of integral fixtures within the pub as no one pointed them out when the building was valued, and they are not mentioned in the sale contract. In fact, from this point on, they could be lost, and this is exactly how allowances do get lost.

“Finding them again”
Jim’s accountant realises that some allowances are missing and so he suggests re-apportioning the £750,000, so that it is £600,000 (80%) for land and buildings and £150,000 (20%) for integral fixtures (leaving the £50,000 trade inventory unchanged). He discloses this on Jim’s tax return, however, HMRC are entitled to make a just and reasonable apportionment under the circumstances if they do not agree with the figures. As it turns out that are happy with 20%, it is not a huge sum. The trade inventory is not adjusted and so we will ignore it from now on.

All well and good for Jim he has "found" £150K of missing fixtures, what a bonus (and he can do this at any time in the future too if he did not realise immediately) but this is very bad news for Cute Country. It had been laughing all the way to the tax office, its fixtures originally cost £300,000 and had a written down value of £100,000, it had sold them for “nil” and it was looking forward to a nice balancing allowance in its capital allowances computation. Now it finds that idea to be severely curtailed, HMRC substitutes in the new agreed figures and the balancing allowances clawed back, and a balancing charge inserted in its place.

However, Cute Country’s solicitor did not really allow this as he knew what he was doing. He recommended that both vendor and purchaser sign an election to prevented any claw back of earlier allowances claimed and set “in stone” the allocation of the purchase consideration. This is also what Cute Country did when it purchased the place originally; so no allowances were lost or found in the Duck!

The election
The election that is so vital, and should be considered by everyone buying or selling a used commercial property which contains fixtures and it is found in s198 CAA 2001. It is irrevocable, made by vendor and purchaser and apportions the sale price where there are fixtures. Cute Country gets its building properly surveyed and then looks at its capital allowance pool. It cannot agree to sell for more than cost, but it may want to keep the proceeds low to ensure a balancing allowance. Jim of course wants the opposite, and so this is where the parties negotiate and finally agree, we hope a sensible price.

S 198 as you can see protects the exchequer protects the vendor’s and really seems good for the purchaser too – he possibly ends up with a much better valuation of what he is buying.

End note
This can apply to any commercial property, if you purchased one without an election, you can still go back and “find” integral fixtures, as owner of the property they are yours to claim allowances on. I have seen two hotels in the last two years change hands without any elections, owners, solicitors and accountants all apparently oblivious to capital allowances, and so it is something to alert clients to if you can get to them (in time) when they are at the negotiation stage of a potential purchase. The added bonus is that it will also cut down on stamp duty land tax if resolved at the point of sale.

Many people were taken by surprise when the chancellor announced some major changes to the capital allowances regime in the 2007 budget. One of these which has not had the press coverage to date that it probably deserves is the news that from 2008, fixtures, which are integral to a building will no longer be treated as normal plant and machinery but will instead effectively become a new variation of long life asset, with a restricted annual allowance of 10%. We have no idea of the transitional provisions, but there is still time to go and search for some missing allowances find them this year and you will still be able to claim a 25% allowance.

Further reading
My favourite book on Capital Allowances is by Ray Chidell with Jex Sutton Associates, published by CCH. The section on buying and selling and s 198 gives a really good overview, and worth putting under the nose of your solicitor when you have read it. It also features an A to Z section of plant and machinery which is also fully referenced to HMRC’s manuals, great for answering “Any Answers”.

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Replies (6)

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By pricompany
18th Jun 2007 15:53

Reduction in base land building cost upon disposal
If a client bought a building say two years earlierfor £600K, then made a claim for the element estimated as relating to FF at say 25% WDA on £100K, would this reduce the base cost of the building on disposal to £500k?

K Price

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By andy.white.crosherjames
18th Jun 2007 16:30

Two points
The answer to the question on base cost is no. You do not adjust the base cost for capital allowances claimed or kept (they can be kept by entering into a s198 election for £1 with the purchaser), meaning that when you sell at a profit there is no interaction between CGT and capital allowances. This is a common misconception.

Secondly, on the article above, in nearly all cases it is beneficial for there to be no mention of capital allowances in the contract from the purchaser’s viewpoint. Section 198 elections generally safeguard the vendor’s position and are often detrimental to the claim a purchaser would be able to make. This is particularly true in a rising property market. It can be better to leave these considerations to a specialist in this area to avoid issues with the client with regard to loss in value.

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By colin.abbeytax.co.uk
18th Jun 2007 17:09

Good Article
Congratulations to Nicki an a good article on a much over looked 'legitimate' tax planning opportunity. A S198 election can provide an arbitrage between buyer and seller to 'donate' CAs to the higher rate taxpayer in the transaction, particularly if there has been a survey of the property that has identified further f & f's embedded within the building.

S41TCGA1992 is the piece of legislation which supports Andy White's comment that the base cost is not adjusted for CGT purposes. Hence the apparent 'double tax relief'.

My colleague, Nick Tovagliari, is a bit of a guru on embedded CAs and the opportunities it presents (0870 167 0790).

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By padwick1964
18th Jun 2007 18:12

Be wary of s198 elections!
I certainly agree with the comment of Andy White that purchasers should generally avoid signing up to a s198 election - very often, raising the possibility of an election simply alerts vendors to the fact that they are giving up a valuable tax asset. Purchasers are generally better off avoiding s198 elections and making a claim based on an apportionment of the purchase price under s562 CAA 2001.

Secondly, perhaps the main reason why inadequate claims are made by purchasers is that they do not take specialist advice. The capital allowances legislation is weighty and complex, and valuation issues should not be left to a general building surveyor, however 'decent', who does not understand the tax aspects of the work he is being asked to do. Don't forget, for example, that an apportionment of the purchase price of a property requires not only a valuation of the plant itself, but also of the 'bricks and mortar' and of the land, something which is not routinely carried out by building surveyors. It is not simply a question of giving a surveyor a list of plant and asking him to give a 'decent approximation' of what they are worth.

To maximise the capital allowances, it is best to use advisers with both surveying and tax qualifications. There are very few of these about, but my colleagues Steven Bone, Adam Garrad and Julie Gill do have those qualifications, and can be contacted on 0121 355 1955.

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By User deleted
18th Jun 2007 21:53

Fair comment, Martin,
"Decent" is a bit of a woolly adjective! Yes of course, subcontract to an experienced commerical surveyor who understands the tax issues.

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By andy.white.crosherjames
19th Jun 2007 10:58

Marketing issue?
It is definitely a pertinent issue with the current proposed changes. It certainly brings us specialists out to comment in force!

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