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No CAA 2001 S198 election

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My clients sold commercial premises (which they had built in 2008) for over £4m in July 2019.  It was rented (to the purchaser) up to the date of sale and income tax relief claimed on capital allowances for plant and machinery integral features and general pool items (for which I have detailed schedules of the original cost).

I was expecting a CAA 2001 S198 election to be done at time of sale for the plant and machinery.  I had provided details of the tax written down values at 5 April 2018 (£128,000) when the premises were going to be sold to another purchaser but that fell through and I was not aware of the subsequent sale until after it was done.  I have just asked the vender’s solicitor for a copy of the election so I can calculate the balancing charge / allowance but was told that the new purchaser didn’t seek any election regarding the transfer of capital allowances and no specific provision was made within the sale agreement.

Does my client need to submit a CAA 2001 S198 election before July 2021 to obtain a disposal value?  Can the disposal value of the plant and machinery be say £1 so my client can claim a large balancing allowance or does the new owner need to agree to the value? 

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Psycho
By Wilson Philips
01st Oct 2020 19:36

Do you think that £1 would be a reasonable apportionment?

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RLI
By lionofludesch
01st Oct 2020 19:41

I'm thinking £0 might be what the vendor has put on his return.

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By Piltdown Man
02nd Oct 2020 11:40

A s198 election is a joint election, so both parties need to agree to it.

Yes you will need to enter into a CAA 2001 s198 election with the buyer if you want to prevent your client from being required to bring in a disposal value in accordance with CAA 2001 s562. s562 would almost certainly result in a figure that is bigger than your clients TWDV. Given that without a s198 election the buyer will obtain £0 allowances, unless it applies to the tax tribunal, there is the opportunity here for both parties to benefit if you can now negotiate and enter into a s198 election in time.

Given that your client missed the opportunity to protect itself when it sold the property, asking the buyer for a £1 (but this should in fact be £2 to work!) might be viewed as a little cheeky!

After all, in the absence of a s198 election, the buyer can apply to the tax tribunal and will be awarded an apportionment of the £4m sale price, which, for it's tax purposes, will only be reduced if your clients P&M costs are less than that amount (CAA 2001 s185).

pm me if you want further advice.

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By plummy1
05th Oct 2020 13:13

I think I am in disagreement with Piltdown Man on this one.

The changes to the Capital Allowances Allowances Act 2001 in April 2014 moved the goal posts from the buyer having the upper hand to the seller having the upper hand. There is no absolute requirement for both parties to enter into a S198 election and if the buyer chooses not to do so the opportunity to claim the historic allowances is lost forever. This is unless the buyer can get the seller to co-operate within two years post completion and both parties do sign a S198 election.

Yes the seller could have entered into an S198 election for £2 and this would have been to their advantage if they had an ongoing business where the remaining balance of allowances could have been utilised. However in the circumstances I suggest that you bring into account the TWDV of £128k as the disposal value. It is not your responsibility to inform the buyer they have missed an opportunity.

My understanding is that the Tax Tribunal only looks at cases where the two parties cannot agree on the value of the allowances to be included in the S198 and in this case the buyer has shown no interest in their value. Also for the record any S562 reasonable apportionment would not have been based on the selling price of £4m but on the sellers original costs for those "embedded fixtures" still in situ at the time of sale. This was to a large extent the purpose of the changes to the Capital Allowances Act because unscrupulous claims companies in the past would have put in a S562 claim based on £4m without having conducted any due diligence on the capital allowances claims history of the property.

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Replying to plummy1:
Psycho
By Wilson Philips
05th Oct 2020 15:40

I disagree - sort of. S187A allows either course of action - in fact the reference to the Tribunal precedes that to the joint election. In practice, of course, it would make little sense to approach the Tribunal without first trying to agree a figure with the other party.

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Replying to Wilson Philips:
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By Piltdown Man
06th Oct 2020 11:38

Agreed.

The OP acts for the Seller. The Seller claimed allowances based on its £4m of expenditure in 2008. I expect that as TWDV was £128k in 2018, the amount pooled by the Seller in 2008, and perhaps since, is far greater than £128k.

The Seller ought to try to get the Buyer to agree a s198 election for whatever it thinks it can negotiate.

I agree with Plummy that £128k is perhaps not an unrealistic or unreasonable starting point. If the Seller doesnt obtain a s198 election, then the disposal value it is required to bring into account is an apportionment of the sales price (restricted if necessary by s185). This must occur even if the Buyer does not apply to the Tax Tribunal.

The application to the Tax Tribunal will only benefit the Buyer in this case so there would be no sense in the Seller making an application.

If the Seller cannot obtain an election, then I think it is pretty much screwed and perhaps ought to look at the culpability of its solicitor. Not providing for a s198 election because the Buyer didn't ask for one is not the excuse I would want to use if a negligence claim was coming my way!

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By plummy1
05th Oct 2020 13:13

I think I am in disagreement with Piltdown Man on this one.

The changes to the Capital Allowances Allowances Act 2001 in April 2014 moved the goal posts from the buyer having the upper hand to the seller having the upper hand. There is no absolute requirement for both parties to enter into a S198 election and if the buyer chooses not to do so the opportunity to claim the historic allowances is lost forever. This is unless the buyer can get the seller to co-operate within two years post completion and both parties do sign a S198 election.

Yes the seller could have entered into an S198 election for £2 and this would have been to their advantage if they had an ongoing business where the remaining balance of allowances could have been utilised. However in the circumstances I suggest that you bring into account the TWDV of £128k as the disposal value. It is not your responsibility to inform the buyer they have missed an opportunity.

My understanding is that the Tax Tribunal only looks at cases where the two parties cannot agree on the value of the allowances to be included in the S198 and in this case the buyer has shown no interest in their value. Also for the record any S562 reasonable apportionment would not have been based on the selling price of £4m but on the sellers original costs for those "embedded fixtures" still in situ at the time of sale. This was to a large extent the purpose of the changes to the Capital Allowances Act because unscrupulous claims companies in the past would have put in a S562 claim based on £4m without having conducted any due diligence on the capital allowances claims history of the property.

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Replying to plummy1:
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By Piltdown Man
06th Oct 2020 12:30

Hi Plummy,

Whilst we may disagree about the balance of power, we ought not to disagree about the application of the law.

I don't believe that the April 2014 changes altered the balance of power at all.

If a Seller which has claimed allowances sells without a s198 election it will, in most cases suffer a clawback of allowances if the law is properly applied. This is because UK property does not tend to depreciate in value at the same rate as capital allowance writing-down allowances are given. This situation applies to Sellers for calculating pre or post April 2014 disposal values.

The only real change that the April 2014 rules introduced were the additional requirements for a Buyer to comply with in order to inherit allowances to which a Seller had become entitled.

A Seller does not necessarily need to have an ongoing business to be able to gain value from the allowances. For example, if the Seller's qualifying activity ceases, a balancing allowance created by a £2 fixtures disposal might be of value in reducing the chargeable gain (if made) when the property is sold.

You say it is not the Seller's responsibility to tell the Buyer it has missed an opportunity. It is however the OP's responsibility to explain to its client the risks of not obtaining a s198 election and perhaps even trying to protect against those risks.

I would suggest that the Seller seeks to obtain a s198 election in the sum of £128k (or whatever number reflects TWDV now that the 2019 period has and 2020 period may have passed) so as to protect the client from the results of the Buyer applying to the Tax Tribunal.

The Tax Tribunal will provide the part of the apportionable sum which constitutes the disposal value on an application by one of the parties. There is no requirement for the parties to have tried but failed to agree an election.

A s562 apportionment (and, incidentally the calculation for the part of the apportionable sum by the Tax Tribunal) IS based upon the selling price. It is not based on the Seller's original cost. This is set out in CAA 2001.

I see what you are trying to explain, but the application of the Seller cost restrictions at s185 and s186 is usually complied with by the Tax Tribunal joining HMRC into the proceedings so that HMRC can seek to apply any restrictions that those clauses produce.

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Replying to Piltdown Man:
Psycho
By Wilson Philips
14th Oct 2020 17:04

Can you clarify how you think a £2 election could reduce the chargeable gain?

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By marcia.bowers
14th Oct 2020 15:53

As a follow up to my original question, I have just discovered that one of the six original owners (who I did not act for and was not on the title deed) has not in fact sold his share of the property so remains an owner. Does this affect if a CAA2001 S198 election is required or how the tax written down value of the plant and machinery is treated?

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