Capital Allowances Claims Section 198 Tax Election Agreements - A Case Study

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Case Study - The Importance of Correctly Completing Section 198 Tax Election Agreements in Commercial Property Transactions

Purchase of Doctors Surgery for £1m

I was recently contacted by a potential capital allowances claims client who was purchasing a Doctors Surgery in London for a figure of £1m. They were then proposing to spend a further £150,000 on converting the premises into a day nursery. They had been advised by their accountant (bless them) to contact a specialist to help advise them on the issue before completion. For those interested in what details a Section 198 Election should contain I have previously written on the subject on our main website's blog

In this particular case the draft purchase contract did indeed contain a Section 198 Tax Election Agreement but it contained very little detail merely stating that all fixtures were valued at £0 whether in the Main Pool or the Special Rates Pool. If accepted into the final contract it is my opinion that the HMRC could have interpreted this as meaning the the "Buyer" had agreed to these valuations and therefore a claim for further capital allowances would either be unlikely to succeed or at the very least limited to "Integral Features" only.

Inadequacy of Draft Section 198 Tax Election

To cut a long story short I was engaged to get involved in speaking with the "Vendor's" accountant and after some prolonged questioning it transpired that there had only been a limited claim on the "Fixtures" (see Chapter 14 of CAA2001 for a definition of Fixtures) within the property. The Section 198 Agreement was duly amended to show those "Fixtures" which had been subject to a capital allowances claim together with their Tax Written Down Value (TWDV). 

This upshot of this is that our client is now free to claim for the majority of the "Fixtures" they have purchased within the building which in our estimation are likely to be valued at £250k plus and provide a tax saving over time of at least £50k at a 20% corporation tax rate. Under the rules which were introduce under the Finance Act 2012, and took effect from April 2012, if the parties to the contract had been unable to agree the figures within the Section 198 Election Agreement they would have had two alternatives:-

  1. continue to negotiate with each other to reach a point where a S198 Election could have been signed (this has to be completed within two years of completion.)
  2. where they could not agree the S198 Election Figures either party could have referred the matter within the two years time-scale to the First Tier Tax Tribunal for their determination.

April 2014 - Onwards 

If completion on the above property had taken place on April 1st 2014 (onwards) for a Corparation Tax Payer (April 6th 2014 for Income Tax Payer) then all capital allowances would need to have been pooled within the "Sellers" accounts before the S198 election was agreed. In this case this would have meant a S562 "Just and Reasonable Apportionment" exercise by a capital allowances claims specialist before completion.

However it is incorrect to say, as have some commentators, that a Capital Allowances Claim will become mandatory as part of any commercial property transaction post April 2014. What is true is that both parties need to be professionally advised by their "solicitors" (in conjunction with a capital allowances claims professional?) on the position with regard to capital allowances in the transaction. The point being the failure to pool any available capital allowances within the "Vendors" accounts before completion will invariably lead to the "Purchaser" never being able to claim capital allowances on the "Fixtures" purchased regardless of whether the "Vendor" claimed for them or not.  

What's more any future "Purchaser" would find themselves in the same boat i.e. not being able to claim for those "Fixtures" and this may well de-value the property in the eyes of any future purchaser. A claim is not however mandatory because both parties could be well informed about the capital allowances implications of not making a claim but still choose to go ahead with the sale and purchase without making such a claim.

 

Conclusions for Solicitors & Accountants

In the writers humble opinion it is "Conveyancing Solicitors" who will find themselves being left vulnerable to litigation if they do not advises their clients correctly when it comes to capital allowances in commercial property transactions. Whether they believe they can side step the issue or not the new legislations intention is that the matter needs bo be dealt with as part of the conveyancing process which falls firmly within their area of operation.  However where an accountant's client goes to sell their property and then becomes aware that there were capital allowances which could have claimed by them but hadn't the accountant might find themselves on the end of some very difficult questions too! 

John Plumridge

www.curtisplumstone.com

[email protected]

07779 756213

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By Old Greying Accountant
26th Jan 2014 22:57

What idiot ...

... put this as s198?

For years I have dealt with s198 claims, but those were under ICTA 1988, which are now ITEPA 2003 s336 claims!

Tax is taxing enough anyway without using the same section numbers for different things, albeit not concurrently.

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