Steven Bone is a tax-qualified chartered surveyor and director of The Capital Allowances Partnership Limited.
I have long considered that the FTT’s analysis is the correct legal one. It is an interesting decision, but neverthelesss only persuasive. Regrettably, experience has shown that HMRC tends to ignore aspects of non-binding FTT decisions that it does not like.
The UT will soon be hearing a number of appeals relating to recent FTT capital allowances decisions. It will be interesting to see whether Glais House Care is added to this list. I suspect not, as the issue of symmetry has already been addressed by FA 2012.
One important point not mentioned in the article relates to moveable equipment (chattels). The FTT was not asked to rule on the capital allowances treatment of chattels, but ventured an opinion anyway (without submissions from Counsel) and got it completely wrong. There is no legal basis to restrict a buyer’s claim to a seller’s qualifying expenditure. A buyer’s claim for chattels is simply based on what it pays to buy the loose equipment (as long as that amount is fair and reasonable).
Incidentally, the shorthand of ‘embedded’ plant or machinery/ capital allowances, has no statutory or other official meaning. It was made up to sell capital allowances projects and is unecessary and ambiguous.
That is helpful clarification from Mr Doodney (thank you), but difficult to reconcile aspects with how it was reported by the FTT (at para 37):
"Mr Doodney worked for HMRC as a capital allowances technical specialist until 2015. While working with HMRC he was asked to provide technical advice on the basis of the Appellant’s capital allowances claim. Internally within HMRC he expressed the view that there was merit to the Appellant’s claim, but he produced a report stating that the expenditure did not qualify because he was told that it was HMRC policy to “hold the line” that such structures did not qualify. In 2016, while working as a tax consultant, he was asked to assist with the present case."
Definition of legality
It's an interesting debate about avoidance being 'legal'. This came up on 31st January when the Big 4 tax bosses were grilled by the Public Accounts Committee. It seems to depend upon what definition of 'legal' (or lawful) you are using.
Tax avoidance is not criminal conduct (unlike evasion, such as fraud), even if the planning proves to be unsuccessful. In that sense it is 'legal'.
However, if a QC approved avoidance scheme proves to be ineffective (that is, as David Winch puts it above - the interpretation of the legislation is found to be wrong, and the higher court then states the true position) then although there is no suggestion that the planning is criminal (therefore, it is 'legal'), it was nevertheless contrary to the law (therefore, is not 'legal' in a tax/ civil law sense).
As the PAC transcript puts it:
Richard Bacon MP to Deloitte's Bill Dodwell (Q69) "... at the point at which you lose in the courts, the courts have found that what you were doing was unlawful. Yes or no?". Mr Dodwell replied "Yes".
Mr Bacon continued (Q 71) "If you tried to do it again, it would be struck down by the courts again. You cannot do it, and you advise your clients that they cannot do it because it is unlawful, don’t you?". Mr Dodwell replied "Sure. Of course."
Mr Bacon concluded "So it is unlawful" ...
For those of you with a Blackberry there is a really good to-do application called ToDoMatrix by RexWireless (see www.rexwireless.com). This is specially designed to facilitate David Allen's Getting Things Done method and allows you to do what Steve describes without using a spreadsheet. This means you always have your tasks with you (you're not always at your desk) and you can't lose your data because it's backed-up to the internet (wirelessly and encrypted). It is very flexible and key features include for example, allowing you to store tasks by bespoke folders/sub-folders and search for them (so tasks can easily be found), prioritise by importance ('wish list' to crucial), assign visual/audible reminders for when things must happen, track tasks that have been delegated to others and specify where tasks should best be done so you can choose appropriate things to do depending on where you are at any time (i.e. in the office, your car, at home, your local shops etc.). Like Steve's spreadsheet, this is a productivity tool that allows you to focus on what is really important, means nothing gets forgotten and puts you firmly in control.
Part 2 was published on 8 November 2007 (see https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=175114&d=1032&h=1019&f=1026&dateformat=%25o%20%25B%20%25Y)
Am I correct in assuming that this is a live case you are dealing with? If so it might be better to discuss it. My contact details are listed on our website (see address at the bottom of this article).
s198 Election Only Possible for Fixtures
In response to Ian's question, a CAA 2001 section 198 election to agree the disposal value of plant and machinery is only possible for fixtures, so would not be possible for a horse.
On the first point, it is a fact that the calculation of a capital gain is entirely unaffected by whether or not capital allowances have been claimed. Proceeds and base cost remain unaltered. See TCGA 1992, ss37 and 41, where this is explicitly stated.
On the second point, the sale of plant and machinery rarely results in a balancing charge for a number of reasons the main ones being (1) because plant and machinery is normally pooled, a disposal will generally result merely in a reduction of allowances going forward, and (2) any such impact can easily be avoided using a low CAA 2001 s198 election. Besides which, any deferral of tax is always valuable and many properties are held for a long time, resulting in a significant real-time erosion of tax through inflation. Few taxpayers, when asked if they want to pay tax now or in twenty years' time, will choose the former!
The issue is also, of course, only relevant if the plant and machinery is actually sold. Many properties are owned until the point has been reached that it makes economic sense to strip out the plant or even demolish the building, and in those circumstances there is no capital allowances clawback (or only a nominal adjustment, such as scrap value). Similarly, if plant remains in-situ when a company is sold then the buyer simply steps into the seller’s shoes for capital allowances and no balancing adjustment is required.
FYAs & SDLT comments
In response to Simmy, first year allowances (FYAs) are not available for retrospective claims because a FYA is available for the chargeable period when the qualifying expenditure is incurred, which is when the obligation to pay it becomes unconditional, not the later period when the catch-up claim is made. It is also worth clarifying that FYAs are not available for plant and machinery that is leased, so they cannot be claimed by property landlords. Writing down allowances are currently available for retrospective claims at the conventional 25% rate for plant. From April 2008 the tax relief is expected to be available at either the proposed 20% rate for plant (if claimed before April, or the assets are not ‘integral fixtures’) or 10% (if the assets are integral fixtures).
In response to Paul, both SDLT and capital allowances require an apportionment, but the relevant totals for each will be different. The chargeable amount for SDLT will include the land and all fixtures, irrespective of whether they qualify for capital allowances (and the exempt amount will comprise chattels and certain types of goodwill etc.). The amount qualifying for capital allowances will comprise any plant and machinery, irrespective of whether it is a fixture or chattel (and will exclude land, goodwill and any non-plant fixtures and chattels). From experience, it is rare for all fixtures and chattels in a building to qualify for capital allowances. And because of their often arbitrary and imprecise nature, ‘F&F’ contract allocations intended for SDLT purposes normally miss the majority of plant fixtures and sometimes include assets that do not qualify for capital allowances.
Remedying Missed Claims
In response to Anon's question about remedying missed claims, the full answer is a complicated one, revolving around the precise wording of the capital allowances legislation, and in particular the definition of "qualifying expenditure". However, the essence is that qualifying expenditure for a year includes not only additions for that year, but also additions which have not been treated as qualifying expenditure in an earlier year. Consequently, earlier "missed" expenditure can be included in any later period's tax return (effectively by treating the expenditure as additions in the later period). However, the assets must still be owned at some time during the period in which the claim is made (that is, they cannot have been sold or stripped out by then). This is routine accepted practice, and in no way controversial.