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Capital Allowances claimed, but no Election

What happens if a property owner claims PMAs on fixed plant, but does not agree an election at sale?

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I have a client who is looking into the value of the available PMAs on the property they acquired in 2009. The seller has stated that they have already claimed PMAs, however, there was no s198 election agreed at the point of sale.

I understand that, without an election to agree a value of the fixed plant, a disposal value must be determined and that the buyers' qualifying expenditure cannot exceed this value. An assessment (apportionment exercise) must be carried out to determine the disposal value of the fixed plant which, again, is limited to the original cost/valuation.

If WDAs have been claimed over the years there is likely to be a balancing charge incurred by the seller as a result of not agreeing to an election with the buyer.

Is this correct?

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20th Jun 2019 15:04

The current rules did not apply in 2009. Back then, in the absence of a s198 election, all that was required was a reasonable approximation of the disposal value by the vendor and a reasonable approximation of the acquisition value by the purchaser. It was therefore possible for the purchaser to claim allowances on a higher amount than the disposal value brought in by the vendor - which is principally what the new rules seek to prevent.

In your client's case, they can claim whatever they consider to be just and reasonable, so long as it does not exceed the amount of the previous owner's qualifying expenditure. The vendor's disposal value is irrelevant - they may have suffered a balancing charge, there may have been a balancing allowance or they may have considered that market value approximated to tax written down value. But that's of no concern to you or your client.

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20th Jun 2019 16:43

@Wilson Philips

Thank you for your response.

So, say for arguments sake, the Seller had £500k of qualifying expenditure and at the point of sale the TWDV was £100k.

In the absence of an election with a value in between £2 and £100k, to avoid a balancing charge, what disposal value will the Seller have shown in their tax computation? And how would they have arrived at that figure?

Surely, even in 2009, if the Buyer is aware that the Seller has claimed they cannot knowingly make a duplicate claim above the Seller's TWDV?

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to Manthistle
20th Jun 2019 17:02

Since 100 less 100 is nil, I would say that the seller ought to have recognised a disposal value of £100k. How would they have arrived at that? Who knows? Best estimate? Professional report that just happened to coincide with £100k?

You've missed my earlier point, the reason for the new rules was to prevent exactly the scenario that you suggest. It would have been perfectly possible (and acceptable, given that it is not an exact science) for the seller to have estimated the value at £100k and the purchaser at £110k. Equally valid would have been the reverse - the purchaser might have considered the value to be only £95k. What the purchaser could not do back then (nor indeed now) is make a claim for an amount in excess of the seller's original qualifying expenditure (£500k in this case) but for the avoidance of doubt if he had considered the value to be £500k at date of transfer he would have been entitled to make a claim in that amount.

Remember that we're talking about plant that is part of a building, and building values have in general increased. If the value of a property were to increase by, say, 50%, then at first glance it is reasonable to say that the value of fixed plant has also increased. Of course, fixed plant does deterioriate over time so it is unlikely that its value would have increased to the same degree, if at all. Nevertheless, it is quite possible that the value at sale is closer to the original cost than you might think.

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24th Jun 2019 10:58

@ Wilson Philips is correct in relation to the calculation of the disposal value. This could have been as high as £500k for the items actually claimed by the vendor, subject to a just and reasonable apportionment. This is supported by a First Tier Tribunal decision from earlier this year.

However, as your client can only claim allowances in a current or open tax return, it would have to exclude any items that have been replaced since 2009.

Also remember that depending on when the vendor acquired the property, your client may have an unrestricted entitlement on certain integral features e.g. lighting, cold water. These items were ineligible before April 2008. If your client is the first owner since that date, it will have a right to claim these items, with no restriction to the vendors costs.

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24th Jun 2019 11:01

The current rules at CAA 2001, s. 187A and 187B were introduced by FA 2012, and – as Wilson says – did not apply at the time your client acquired the property. So you are not concerned with the pooling requirement and the fixed value requirement.

There is no statutory justification, though, for saying that a “reasonable approximation” was acceptable. Valuation is not an exact science but the statutory requirement at s. 562 was (and in some circumstances still is) that a “just and reasonable apportionment” must be made.

The recent Glais House case made it clear that the buyer is not required to restrict the claim by reference to the disposal value brought in by the vendor. To quote from my Capital Allowances book as published by Claritax Books:

"The cap [on the amount the new owner can claim] is set by reference to the amount the previous owner was required to bring into account, even if that was not in fact done. This is clear from the wording of the legislation at s. 562(3), and was confirmed in the Glais House case reported in early 2019. As the Tribunal noted in that case:

'This does of course leave HMRC in a difficult position in that they would undoubtedly wish to see symmetry between the figure for the disposal value which was actually brought into account in the capital allowance computations of [the vendor] and the figure for the acquisition costs in the capital allowance computations of [the appellant / buyer].' ”

The vendor in your case was required to bring in a disposal value that was calculated on a just and reasonable basis. Quite possibly, that disposal value should have been the full amount of £500k on which the original claim was based – producing a huge balancing charge for the vendor. Importantly, this remains the case today – see s. 187B(6) – which is why it is essential for both parties (not just the purchaser) to sign a fixtures election. And yes, in the absence of an election, a professional valuation should be sought where the figures are more than trivial.

As Wilson says, the buyer’s qualifying expenditure is capped at the amount the vendor was required to bring into account (s. 185). The vendor’s disposal value would in turn be capped at the vendor’s qualifying expenditure (s. 62).

It is also likely, however, that the vendor of a property sold in 2009 would have been unable to claim for certain integral features (mainly cold water systems, general lighting, and other general electrical systems). So your client may well be able to make a claim for these based on the just and reasonable value in 2009, without restriction to the vendor's cost. This will require a professional valuation.

You should seriously consider getting professional support on the valuation side. And if you go to a good firm – I work with Six Forward Capital Allowances these days – they will provide all the backup technical support as part of the arrangement, protecting you from the risk of error, and getting the best justifiable claim for your client.

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to raychidell
24th Jun 2019 11:36

Splitting hairs, I would suggest - perhaps lazy wording on my part, but my use of "reasonable approximation" was of course a reference to the "just and reasonable" requirement at section 562.

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to Wilson Philips
24th Jun 2019 11:49

Fair enough. I was not picking a fight (!) but do come across too many cases where a wild guess is thought to be a reasonable approximation.

As someone with a strong tax technical background, rather than a valuation background, I have had to acquire some humility over the years in recognising that a stab at a valuation by someone who does not have the necessary expertise is likely to be miles out.

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to raychidell
24th Jun 2019 14:54

Thank you for your detailed response.

Further to the information you have provided could I get your thought on the below:

Using my previous scenario, if it was established the Seller's qualifying expenditure was £500k, the Buyer is therefore free to make a claim themselves for £500k so long as a just and reasonable apportionment based on the 2009 purchase price (and includes only plant which qualified pre-April 2008) exceeds this value?

If the apportionment generates a valuation below £500k then any claim is restricted to this valuation.

What are the tax implications for the Seller if the Buyer makes a £500k claim and the Seller has a £100k TWDV at the point of sale in 2009? Will they incur a £400k balancing charge if they showed a disposal value of £100k in 2009?

If so, how will this balancing charge be enforced by HMRC to avoid a duplication of claims or is the reality that it won't be enforced?

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to Manthistle
24th Jun 2019 15:34

Unless HMRC were able to demonstrate that the Seller was acting fraudulently etc, there's precious little that they can do now in respect of something that happened some 10 years ago.

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to Manthistle
24th Jun 2019 16:35

Hi again

There is no DIRECT statutory link between the disposal value used by the vendor and the purchase price used by the buyer. So the statutory requirement for the vendor is given by s. 562(3)(a), and the position for the buyer is given by s. 562(3)(b).

So yes, as you say in the example you given, the claim for the buyer is based on the valuation that you obtain from that "just and reasonable" exercise. I would just say that it is more accurate to see this as the starting point for a claim, rather than thinking in terms of the claim being "restricted to" this valuation. Having taken this starting point, then there is indeed a restriction to (broadly) the disposal value that the vendor was required to bring into account (per s. 185).

So if the valuation comes out at £700k, the claim is then restricted to the £500k that the seller is required to bring into account as a disposal value for the fixtures in question (with a separate claim, as appropriate, for integral features on which the seller could not claim). But if the valuation is only £450k then that is the starting point, and there is no further restriction under s. 185.

The tax implications for the seller are not dictated by whatever claim the buyer may make. The seller should be bringing in a just and reasonable disposal value anyway, whatever claim (if any) the buyer may make.

If the £100k figure is the pool value for all of the assets the seller owns, then a £500k disposal value will indeed trigger a balancing charge of £400k, which is in principle taxable as additional income. So under the rules as they applied then, and as they still apply since FA 2012, the only protection for the seller is to sign a fixtures election with a figure that is low enough to avoid a balancing charge.

Can HMRC in practice pursue the vendor? This depends on normal self-assessment principles, including the possibility of a discovery assessment. In practice, it may possibly (but not certainly) be too late for HMRC to re-open the seller's tax computations. Hence the FA 2012 changes.

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to raychidell
24th Jun 2019 16:58

It does raise an interesting, if theoretical, question. Although 562(3)(a) and (b) apply separately to the vendor and buyer, who determines what the just and reasonable apportionment is? For example, using the £500k original expenditure:

Vendor engages specialist to carry out the survey, who determines that apportionment should be £450k. Vendor brings that into his pool so has brought in the amount that he was statutorily required to do. Buyer instructs his own specialist, who determines that a just and reasonable apportionment is £480k. Question:

Is the buyer restricted to £450k - under section 185 - or can the buyer say "The just and reasonable apportionment is £480k therefore that is the amount that the vendor was required to account for"?

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to Wilson Philips
24th Jun 2019 17:08

It then becomes a question of negotiating with HMRC. Each professional valuer will try to convince HMRC that its valuation is correct, using the well established guidelines and proper valuation principles.

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24th Jun 2019 17:42

In practice, back in 2009, the vendor would have taken its disposal value as the £100k, hoping that it was never challenged by a subsequent owner or HMRC.

Of course, if it had proper advice it would have agreed a s198 election for at most it's TWDV.

Most vendors who forgot to use a s198 election would almost certainly never consider that its disposal value would be subject to a just and reasonable s562 apportionment and a clawback of the allowances previously claimed.

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25th Jun 2019 11:49

The Glais House case did indeed confirm the restriction is by reference to the amount "required" to be brought into account. But I am not aware that anyone (except perhaps someone in hmrc) didn't understand that before. It is after all what the legislation says.
Where HMRC lost the case was in accepting that the valuation used was the "correct" figure (so inevitably they lost the case).
What the act refers to is a "just and reasonable" apportionment. What everyone seems to assume is that some mathematical computation based on valuation is what gives that apportionment. But there is really no statutory support for that. Yes it is (apparently) a widely accepted way of achieving what statute requires, but it is not universally correct and certainly not the only answer.
A just and reasonable apportionment can only be arrived at by taking all relevant factors into account. So, for example, if buyer and seller agree a price of £1, that may be "just and reasonable" depending on the negotiations. There could be many reasons why existing fixtures are of little value to either party, especially if they are old and likely to need replacing very soon.
The fact the parties reached such agreement is certainly significant and should not be ignored in favour of some theoretical calculation based on replacement values. As with a number of other issues, HMRC again made a mess of its case and in consequence this more important aspect of the legislation remains untested.
That said, there are no doubt many reasons why both sides would prefer to follow the valuation method and avoid the complications that could arise.

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