Capital Allowances. The latest thing
Capital allowances have forced themselves onto the agenda in recent years.
Here Jake Iles and Ray Chidell explain why
When we attended the ICPA conference in Manchester in September, someone commented to us “capital allowances are the latest thing?” Having worked with these allowances for many years it struck us as a surprising perception, but on reflection it is easy to see what lies behind the comment.
Capital allowances in general are nothing new to any of us; every accountant routinely claims them for (for example) cars and office equipment. But in relation to fixtures in property, where these allowances really come into their own, many changes over the past eight years or so have brought them to the forefront and may well have created the impression that they are now somehow in vogue.
Big developments
For capital allowances purposes, the term ‘fixtures’ does not include moveable items of plant or machinery, but instead encompasses those items of plant and machinery that are fixed into place in the property. So in a hotel, for example, the bath is a fixture but the bed is not.
The first of the big developments was in 2008. This change hugely expanded the proportion of commercial building costs that can qualify for allowances, permitting claims for such items as general electrical wiring, ordinary lighting, and cold water systems. In most circumstances, these items – which can together account for a significant part of the overall expenditure on a property – did not previously qualify for allowances. Today, they usually constitute an important part of the claim.
The next key changes were introduced by FA 2012 but came into effect partly from April 2012 and partly from two years later. These changes were far less benign as they cause the valuable tax relief to be lost permanently to the Chancellor if certain steps are not taken at the right time. It is above all these changes that have forced allowances onto the agenda in recent years. The effect can be seen by comparing a “before and after April 2014” scenario.
Example
Two identical offices – A and B – were built next to each other in 2009. Bill bought Office A for £700,000 in March 2014. His brother Ben bought office B for the same price in May 2014. No allowances had been claimed by the previous owners and neither brother gave much thought to capital allowances at the time of purchase, even though they are both paying tax at 40%.
Bill became aware in November 2016 that allowances were potentially of great value. He was able to claim for £200,000 of fixtures in the property, generating a potential tax saving of £80,000. If he comes to sell the property, he can negotiate with the buyer as to how much of the tax saving is retained and how much (if any) is passed to the new owner.
Ben wishes to make a similar claim. As a result of the rule changes, however, he cannot claim any allowances at all for the fixtures in the property, so the whole of the tax saving of £80,000 is lost and it is too late to rectify the matter. Furthermore, if he comes to sell the property he cannot even pass any of the lost allowances to a new owner.
So what changed? In a nutshell, it was the introduction from April 2014 of the “pooling requirement” which means that allowances can only be claimed by the new owner if the previous owner has first captured the value of the allowances in his or her tax computations. It is also necessary for the two parties to the property transaction to sign a fixtures election (under s198 of the Capital Allowances Act 2001) to set the value at which the allowances are transferred from vendor to purchaser.
In the past, it was usually possible to capture any missed allowances at a later stage. As there are strict time limits, it is no longer possible to do this some years down the line. What this means in practice is that the issues need to be considered at the time of the purchase – as part of the purchase negotiations – if the interests of the parties are to be protected. It is possible, under the new rules, for both parties to lose out.
These risks are quite new but very real. If capital allowances have the appearance of being especially topical at the moment, it is probably because of a growing recognition of the value of a claim and because of an increased awareness of how easily that value may be lost.
• Jake Iles and Ray Chidell are directors of Six Forward Capital Allowances and can be contacted on 0800 0787 964 or by email at
This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.