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istock_Dean Mitchell

Capital allowances: HMRC applied wrong version of the law

15th Feb 2019
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In a case involving plant embedded in a commercial building, HMRC tried to apply the new capital allowances rules to a transaction which pre-dated their introduction.

As a result of changes to the capital allowances legislation from 1 April 2014, there is a pooling requirement that must take place before a buyer of a commercial property can take over the capital allowances on a property.

The seller of the building must capture the available capital allowances within the property and show them in the general pool, or in special rate pool if the buyer is to benefit from any of these allowances post-sale.


In Glais House Care Limited v HMRC (TC06945), HMRC argued the company could not claim capital allowances embedded in the care home property which had been identified to be £318,792, following a specialist report being obtained.

The vendor had shown in their disposal proceeds only £1 for fixed items of plant within the building, (and £35,000 for loose items of plant). Had this transaction taken place on or after 1 April 2014, you would expect an election (under CAA 2001 s 198) to have been completed. In that case if £1 was included as the value, this would be the value that Glais House Care Limited could take into its Capital Allowance pool. But the transaction took place in May 2011.

HMRC tried to argue that Glais House Care Limited could only pool £1.

Detail of the claim

The previous owner of the building had claimed capital allowances on the cold water system, although this addition pre-dated the integral features category which, for the first time, allowed such items to qualify for capital allowances. HMRC had incorrectly allowed the capital allowance claim at the time.

The previous owner of the building had also tried to claim for capital allowances on the electrical system, before the integral features rules took effect, and HMRC had denied this claim. The tribunal found that Glais House Care Limited could claim for both the cold water and electrical systems based upon the valuation in the capital allowance report they had obtained.

It was established that the original cost of the embedded items was £205,912. Despite HMRC trying to argue £1 as the buyers’ capital allowance valuation, the buyer was also incorrect in trying to claim £318,792. Section 62 of CAA 2001 restricts the disposal proceeds to be brought into account to the original cost. Therefore, the maximum that Glais House Care Limited was allowed to pool was £205,912.

Why did this happen?

Whilst it is entirely understandable that HMRC wants to see symmetry between disposal proceeds and acquisition costs for capital allowance purposes, and it has achieved this with the 2014 pooling requirement, the tribunal found for Glais House Care Limited after suitable adjustment to restrict the allowances to original cost.

The tribunal ruled that £1 for fixed assets was not a just and reasonable apportionment as per s562 CAA 2001, and subsequently determined that the expenditure incurred by the buyer to be a just and reasonable disposal value (subject to the restriction imposed by CAA 2001 s62). Interestingly, there is no mention of a CAA 2001 s198 election which would usually supersede CAA 2001 s 562.

Learning points

For accountants with clients who own commercial property held prior to April 2014. These clients can still carry out an embedded capital allowance review and claim their entitlement to capital allowances to offset against trading or rental profits.

For the owners of commercial property who are about to sell, or transfer the property into a pension fund, it is vital that a capital allowance review is carried out pre-sale in order to maximise the relief whether passed on to the buyer or retained by the seller. It is also vitally important that the legal documentation and any CAA 2001 s198 election are entered into by the seller and buyer reflects this.

Replies (4)

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Steven Bone
By Steven Bone
16th Feb 2019 08:42

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.

Thanks (1)
By Trethi Teg
16th Feb 2019 12:16

If an individual sought to procure moneys by knowingly distorting the truth or ingoring what it new to be the true position they would be banged up for fraud. Does this not apply to the HMTRC officer who sought to do the same?

Not only do they not get punished but they get a fat indexed linked pension for doing this sort of thing.

Thanks (1)
Replying to Trethi Teg:
By Piltdown Man
08th Mar 2019 17:45

HMRC trying to limit the claim to £1 when that is not what the law says, was wrong.
Taxpayer seeking to ignore the seller's cost restriction was wrong.
Neither the taxpayer or HMRC come out of this one smelling of roses.

Thanks (1)
By Piltdown Man
08th Mar 2019 13:28

"HMRC applied The wrong version of the Law"?? really? Seems to me that the taxpayer chose not to understand the law that applied, and then selectively applied its own version because the result was likely to be better! This case highlights perfectly why HMRC introduced CAA 2001 s187A and if fewer advisers had prepared claims without proper reference to the applicable law, s187A might never have been necessary.

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