The Top 5 Reasons Why Capital Allowances Claims on Commercial Property are not Undertaken (in the UK)

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Curtis Plumstone Associates Director - John Plumridge I would like to say that I never tire of writing about capital allowances claims on commercial property but to be honest that would be a lie. There are only so many ways that you can try and make the same points and maybe persuade accountants and their commercial property owning clients that they really should be assessing the benefits of making a capital allowances claim. Yes it doesn't benefit everybody to the same degree but if the property owner is making profits and paying tax then in my humble opinion their accountant should have it in their potential armoury of pro-active initiatives.

"Number 1" - Capital Gains Tax Position IS NOT affected by making a Capital Allowances Claim

I would be grateful to anybody who can explain to me why they think the capital gains tax position will be affected by making a capital allowances claim on a commercial property. An excellent article published on AccountingWeb in 2007 by Steven Bone of The Capital Allowances Partnership covered this one off as one of the most popular misconceptions among accountants. I have seen this myth debunked many times over by other capital allowances claims specialists but still it persists and is one of the stock questions we are asked before a letter of engagement is signed.      

"Number 2"- There IS NO time limit on Making a Claim.

I have been told by accountants from small and large firms alike that their client purchased the property complete with all those lovely qualifying fixtures too many years ago to now be able to make a claim. This is another misconception. There is no time limit on when a claim may be undertaken although the capital allowances identified must be pooled in the first open tax year and the qualifying assets will still have to be owned in that open tax year. I should caveat this by saying that the new capital allowances rules brought in by the Finance Act 2012 do place some restrictions on properties purchased after April 2012 where capital allowances have already been claimed  by the vendor but these changes are beyond the scope of this blog.

"Number 3" - The tax benefit received DOES NOT have to be surrendered on Sale of the Property

It is a commonly held belief that any tax advantage will have to be surrendered when the property is sold. Accountants often say that making a capital allowances claim merely creates a "timing issue". In reality when a property comes to be sold as long as a S198 election agreement is completed and the level of capital allowances given over to the buyer does not exceed the tax written down value of the fixtures then a balancing charge is avoided. The section 198 election agreement actually allows for the seller to keep any remaining benefit of the capital allowances provided they have an ongoing trade where they may be utilised.

"Number 4" - The Fixtures Figures in the Purchase Contract ARE NOT binding on the Parties

This may seem counter intuitive but the value of fixtures in the original purchase contract is more often than not understated and regularly covers only loose chattels such as furniture, possibly curtains and carpets. These figures are not binding on the parties because under the Capital Allowances Act 2001 Section 562 any allocation of qualifying fixtures and integral features needs to be undertaken using a "just and reasonable apportionment" i.e. a technical exercise carried out by a capital allowances claims specialist that separates out the value of the land, from the qualifying and non-qualifying elements of expenditure. 

"Number 5" - Accountants have their own Agendas too.

Yes I'm afraid that a lot of capital allowances claims do not get made because of a lack of understanding of what may be claimed when a commercial property is either built, purchased, or re-developed. The world of accountancy does seem to be split into those who understand the benefits that a claim can bring and those  that do not (see 1 to 4 above). At the risk of making myself even more unpopular on AccountingWeb there are even those accountants who know the potential benefits of making claims but for various reasons, some of which I am aware of, (and to a certain extent understand) do not wish their clients to engage a third party to provide a service that the accountant cannot provide themselves.

The point of this blog was to try and persuade a few more accountants that this is an area which could benefit some of their commercial property owning clients and dare I say it the accountant could even be seen as being "Pro-Active" by doing so.  

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By MalcolmLoftus
04th Jul 2013 08:44

In number 3 it is not necessary to have an ongoing trade - if the sale of the property coincides with the cessation of trade a balancing allowance can be taken in the last period.

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By blok
04th Jul 2013 11:10

.

John

Number 6 - Because accountants find the rules too complex and don't admit it.

What is a fixture as opposed to general plant? What difference dows it make?  How does fixtures interact with the Integral Features legislation?  How does the new election process work?  What values to use?  What is qualifying plant? What about Goodwill in trade related property? 

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Replying to movie apps:
By plummy1
05th Jul 2013 18:30

You may say that but I couldn't possibly comment.

As you've said it I would have to agree. Yes the legislation is complex but accountants need to accept in many cases it requires specialist input. Nobody would / should expect an accountant to have the same skills as a tax trained surveyor. I'll have a go at trying to make sense of your other questions as follows and hope I don't make matters worse:-

i) Firstly Plant & Machinery (P&M) is the umbrella term for things which may, in the right circumstances, be claimed for capital allowances purposes. By right circumstances I mean a qualifying trade which is liable to pay tax on its profits and the P&M supports the clients activity etc.

Machinery more or less follows the dictionary definition whereas plant can be anything which supports the trade which isn't stock or the premises in which the business operates. This also includes anything deemed to be an improvement to a piece of qualifying P&M rather than just maintenance or repair of it which of course would qualify as a revenue expense.

ii) Fixtures - so under the umbrella P&M term comes among other things Fixtures. The way I think of this is anything in a building which is affixed to it which you would not take with you if you were you to sell the property. The introduction of Integral Features from April 2008 has confused the issue slightly because this was the first time specific items of plant were named. If these items are purchased or fitted within a property after April 2008 they are called "integral features" but the purpose of this was to ensure they were included in the Special Rates Pool if they were claimable rather than Main Pool. For all expenditure after April 2008 the Integral Features legislation was therefore introduced to differentiate the tax treatment of certain items from other Fixtures. 

Sometimes it is easier to say what would (in most circumstances) be outside of a capital allowances claim which are the walls, floors, ceilings, doors, windows, stairways and the roof.   

iii) How does the new election process work?  If you mean the changes brought in by FA2012 this would need another blog or at least a very long telephone conversation. The onus is slowly being shifted over to the conveyancing solicitor to take responsibility for advising the client on sale or purchase of the property which will take full effect in April 2014. In terms of which values to use when we undertake a capital allowances claims report we group the expenditure down into broad categories within the relevant pools such as "heating" & "electrical systems" etc. The legislation indicates that the Section 198 /199 tax election agreements should go down to the individual item levels but this would be totally impractical for one property let alone where a landlord has a large portfolio.  

iv) I apologise but I am ignorant on the tax treatment of "Goodwill" other than we exclude it from any of our calculations in respect of calculating the value of capital allowances when it includes the purchase of a commercial property.

We are always happy to provide help and guidance on technical issues associated with legislation and do not charge unless we actually prepare a claim on behalf of an accountant's client.

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By DILBERT11
07th Jul 2013 16:45

Free CPD training for both accountants and solicitors

No one has yet suggested getting professional advice on the subject of capital allowances in relation to Finance Act 2012.  I am just one of the many CPD trainers who work on behalf of Portal Tax who handle the whole process of tax claims on behalf of the accountant and solicitor.  We offer FREE 3 hours of CPD training to accountants and solicitors who can then better advise their clients.  They then have the option of using Portal's tax services to take away the pressure of any consequences of getting the claim wrong.  for further details contact either [email protected] or www.portaltax.com

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Replying to mrme89:
By plummy1
07th Jul 2013 18:36

CPD Training

Interestingly enough I'm seeing a Portal Tax Claims client this week. It doesn't sound like PTC spoke to their accountant let alone gave them CPD training.

That is according to the client so will have to check the facts when I meet them.   

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Replying to Habib Rahman:
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By DILBERT11
07th Jul 2013 20:28

CPD Training

It is company policy that Portal does not take on a client without getting their accountant and solicitor name and address.  The CPD training is quite separate and is requested by the accountant/solicitor independently.

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Replying to Ruddles:
By plummy1
07th Jul 2013 20:50

CPD

It is one thing to get a name and address but if you don't talk to their accountant and fully understand the clients tax position how do you know if making a claim is going to be right for them?

 

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Replying to lionofludesch:
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By DILBERT11
08th Jul 2013 19:50

CA Tax claims

When a client is signed up with Portal, the first thing that happens is the claim is validated with HMRC.  There would be little point contacting the accountant until then.  As has been stated in previous posts, if the accountant has not been on the ball and not claimed for all his client is entitled to it would not be helpful if they gave out wrong information.  So it is checked with HMRC first then we work with the accountant and or the solicitor.  The CPD training is mainly to educate the accountant and solicitor and is quite separate from any claim.  All it does is to make them aware of the complexities of capital allowance legislation and if they wish to use our services in the future by passing on clients, they are welcome to do so.  The one advantage Portal has is the technical team leader was on HMRC's advisory panel when the legislation for the Finance Bill 2012 was being drafted.

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Replying to Chris.Mann:
By plummy1
09th Jul 2013 11:19

Could you Explain?

Dilbert,

Thanks for taking the time to respond to my comment and it's good to have a debate.

Could you advise how you validate a claim with HMRC? I was unaware that HMRC could provide this service directly to somebody who wasn't their registered tax adviser so would be interested to know how this is achieved. This could well be a gap in my knowledge that needs filling. We talk to the accountant in the first instance because we have come across cases where the client has undertaken refurbishment work where the accountant was aware they could claim for integral features but didn't realise a retrospective claim was also possible for the original fixtures purchased within the property. Hence in this instance the accountant has made a partial claim and we want to be careful we do not duplicate anything previously claimed. Also we want to satisfy ourselves that the clients tax position is going to be such that the capital allowances claim will have a positive benefit within a reasonable time-scale. What we don't want to do is create a long term cash-flow issue for the client.    

Also we come across other instances where an accountant has made a claim on a refurbishment or development of a property but may have not fully claimed due to the complexities of CAA001 so in this instance again there is a need to work closely with the accountant. We would much rather feel we are supporting the accountant for the benefit of the client because we want the accountant to feel confident they could refer future business to us.

John

  

 

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Replying to tljenkin007:
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By DILBERT11
09th Jul 2013 18:59

Tax Claims

Actually, I have no idea how to validate a claim which is why I leave such matters to the experts - Portal Tax.  Once a client has been signed up and all the details of the commercial property has been obtained from the client the completed application is sent to Portal in Rochester who deal with HMRC directly.  Once the claim has been validated they send in a tax qualified quantity surveyor to visit the property/ies and compile a list of assets.  They then take the claim forward and make a claim for all assets not previously assessed.  In essence, they take the hassle and the complexities away from the accountant and solicitor by providing a complete service but always keeping them informed and giving them the final say on each claim.  For more information on Portal visit www.portaltax.com

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Replying to Ruddles:
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By Beejay Alex
16th Jul 2013 17:57

Portal
Is there any point at all in obtaining the name of the accountant or solicitor if you are not going to liaise with them
There's no point in incurring expenditure with Portal unless you ard going to save tax already paid or on the subsequent year of two after engaging them

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By plummy1
10th Jul 2013 08:53

Tax Claims

Dilbert

With the greatest respect you are talking through your hat. You are highlighting the very reasons why I am seeing a potential client today whose accountant was not consulted and the matter is probably going to wind up in court. You cannot validate a claim with HMRC in the way you have described. You need to establish the clients tax position before undertaking a claim because otherwise you risk undertaking a claim when there is either no tax advantage what so ever to the client or any benefit received is greatly delayed creating a cash-flow issue.

Before promoting a company's services (which your not really supposed to do on accountingweb anyway) you should be aware of how the capital allowances claims system works in relation to a clients tax affairs.

John.

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Replying to Accountant A:
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By Beejay Alex
16th Jul 2013 17:58

Tax claims
I concur with plummy and dilbert is living up to his name

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