Capital Allowances - Are you entitled to claim?
By Michael Hunt
Before making a claim for capital allowances, it is necessary to ensure that there is an entitlement to a valid claim. If the entitlement conditions for the specific allowance is not satisfied at the beginning, substantial analysis of capital expenditure may be carried out only to establish that no claim can be made.
The basic entitlement to claim capital allowances for plant and machinery is set out in CAA2001 s11. The conditions that have to be met include that a person is carrying on a qualifying activity, capital expenditure is incurred on the provision of plant and machinery wholly or partly for the purposes of the qualifying activity carried on and the person owns the plant and machinery as a result of incurring the qualifying expenditure.
Whilst ownership of "loose plant and machinery" generally passes once expenditure has been incurred, the situation is more complicated if the asset becomes a fixture within a building, (e.g. heating installation, lifts, lighting systems etc.). In this case, ownership must be considered in accordance with CAA2001 Chapter 14, which determines entitlement to allowances for expenditure on fixtures. Generally, to be entitled to claim plant and machinery allowances for fixtures, a claimant will be required to hold a qualifying interest in the land at the time the plant and machinery becomes a fixture or acquire an existing qualifying interest in the land to which a fixture is attached.
Where a person owns a freehold interest in land or enters into a lease of a building with a third party landlord, then they will generally hold a qualifying interest in a building and be entitled to claim capital allowances for any capital expenditure subsequently incurred on fixtures. However, there can be issues in a group situation where, for example, one company (“Company A”) occupies and fits out a property owned or leased by another company (“Company B”) without a formal interest in land being exchanged between the two companies. In this situation, capital allowances on fixtures may not be available to Company A, as the basic entitlement requirements are not fulfilled. This is because Company A, the party incurring the expenditure, does not hold a qualifying interest in the land and, therefore, the fixtures are not treated as belonging to the company. In addition, Company B, the company holding a relevant interest in the land, has not incurred any expenditure and, therefore, would also not be entitled to claim capital allowances.
In this situation, even if Company B incurred the expenditure, there would still be a question over an entitlement to claim without a formal lease being in place. This is because without a lease there would be a question as to whether the expenditure was incurred for the purposes of Company B's qualifying activity. It is, therefore, important that in group situations, any interest in land is formally documented at the outset to ensure that capital allowances will be available.
Another area where issues can also potentially arise is in respect of Research and Development Allowances (RDAs) CAA2001 Part 6. In this part, “qualifying expenditure” is defined as capital expenditure incurred by a person for carrying out research and development (R&D) or providing facilities for carrying out R&D and the R&D is directly undertaken by him or on his behalf so long as:
a) A person is carrying on a trade when the expenditure is incurred and the R&D relates to that trade; or
b) After incurring the expenditure, a person sets up and commences a trade connected with the R&D.
Therefore, R&D allowances can only be claimed for qualifying expenditure incurred by a company that is undertaking qualifying R&D. This can potentially create an issue in a group situation if the R&D company is not responsible for incurring expenditure on facilities for carrying out R&D.
For example, in the XYZ Group, Company X, the group property company, is responsible for the holding, constructing and leasing of all corporate buildings. Company Z, a member of the group, carries out qualifying R&D.
If Company Z requires new laboratory facilities for carrying out qualifying R&D, then RDAs will only be available to the group if Company Z incurs capital expenditure on constructing or acquiring the laboratory facilities. If Company X were to construct or acquire the laboratory and then grant an occupational lease to Company Z, RDAs will not be available as Company X does not undertake qualifying R&D but has incurred expenditure for an ordinary property business. Therefore, Company X would only be entitled to claim plant and machinery allowances on any qualifying expenditure rather than RDAs.
As outlined above, it is essential that entitlement to claim capital allowances is considered to ensure that valuable tax allowances are not lost. Specific intra-group arrangements should also be taken into account to ensure that entitlement to allowances are available and that situations do not arise where neither party is entitled to claim or the ability to claim enhanced allowances are not available. If entitlement requirements are not considered until after expenditure has been incurred, it may be too late and capital allowances may be lost.
Bourne Business Consulting LLP is an independent business consultancy specialising in asset taxation and related matters. We work with many firms of accountants providing specialist input, including technical advice and asset compliance services. We are always delighted to assist with any asset taxation issues and please do not hesitate to contact us if you have any questions.
Michael is a senior consultant at Bourne Business Consulting LLP. He specialises in asset taxation, advising clients in the retail sector, real estate, utility and leisure and hospitality sectors.