Capital Allowances - New Rules in Practice - Oops!!
Capital Allowances - The New Rules - A Mistake in Point!
Well there was no fanfare or parade but the new capital allowances rules for "fixtures" in commercial property came into affect on 1st April 2014.
Without going into a huge amount of detail as I have covered this in more depth in previous blogs where a commercial property is sold and both parties are taxpayers in the UK then:-
i) The capital allowances available on fixtures should be "pooled" within the vendors accounts in an accounting period which starts before the date of completion (The Pooling Requirement). In practical terms this means the vendor has a maximum of two years to comply. However from a realistic standpoint if the level of allowances to be pooled have not been established before "completion" then the vendor's interest in co-operating with the purchaser to do so may be limited unless of course there is something in it for them. I would hazard a guess and say that having sold the property their interest in co-operating with the buyer will be limited.
ii) The division of these capital allowances between the parties needs to be agreed within a section 198 election agreement (Section 199 for leases) (The Fixed Value Requirement)
The above is a gross simplification but what it highlights is that if the "vendor" has not claimed capital allowances a review needs to be undertaken based on the vendors expenditure. It is therefore evident that the "vendor" is the one that has the power to create or destroy value as far as the capital allowances situation is concerned. It also highlights the fact that if the "buyer's" solicitor is not on the ball their client will potentially lose the right to any capital allowances for fixtures. The Law Society issued guidance to solicitors on the subject on 18th March 2014 to ensure they were aware of the issues and what they SHOULD do which is basically make sure their client realises the need to get advice from a capital allowances professional.
A Case in Point
An accountant contacted me this week seeking advice because one of his clients had just agreed a completion date on a hotel. His client's solicitor (from a a large international firm) was advising that the accountant was now able to agree the division of capital allowances upon the sale?! The accountant because he knew about the changes to the law had phoned me to seek advice and what he needed to do.
To cut a long story short the accountant was in no position to help. Although the property will not complete until May 2014 the damage has been done. His client's solicitor has failed to understand the new rules and with the contracts exchanged and a completion date agreed there is no motivation for the vendor to agree to a capital allowances review based on their own expenditure!!
I have agreed to speak to the accountant's client and his solicitor (if they agree) to see whether anything can be resurrected from the ashes but it will probably have to involve a financial incentive to the vendor for them to even contemplate doing a capital allowances review at this late stage.
If your an accountant and know that your client is in the process of buying a commercial property then do not assume that they will be getting proper advice from their solicitor. Try to advise them as early in the process as possible and advise them to speak to a capital allowances specialist if necessary. Also if you are an accountant who has clients with commercial property then investigate the benefits of them undertaking a capital allowances claim for "fixtures" (fixtures as defined in CAA2001 Chapter 14). It would be better for them to get the tax relief benefit of the property while they own it rather than having to pass the benefit onto a potential buyer should they choose to sell it at some later stage.
The above story will not be an isolated incident and it may take a solicitors firm being publicly sued before the message and the legislation changes really hit home across the board.
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After failing at and early age to make a living by playing guitar, I started a career helping clients to save money and become more efficient. In 2009 I set up Curtis Plumstone Associates to concentrate on undertaking Capital Allowances Claims on Commercial Property. My business partner is a Deloittes trained expert in this field and my job is...