Capital Allowances – An Overview

1. Capital Allowances – An Overview Louise Barth12 February 2013

2. Today’s objectives • Basics – Get the correct tax relief • Mechanics of making a claim • Impact of changes introduced in FA 2012

3. The Basics • Fixtures • UK Tax relief • Commercial property • Available to all tax payers • Individuals and businesses

4. Property related allowances • Investors • Landlords • Owner occupiers • Tenants • All except residential

5. Two situations • Construction • New build • Alteration • Refurbishment • Fit out • Landlord’s contributions • Second-hand purchases

6. New construction claims • Based on actual costs – quote or final account • Drawings - before and after construction • Specification – scope of works • Variations – adds and omits • Survey • Identify builders work in connection • Base cost asset plus prelims and fees • Total value each fixture

7. Second-hand purchase claims • Apportionment purchase price – s562 • HMRC stipulates “Just and reasonable” • Formula approach • 3 Components: • Land value – bare site • Building cost- replacement cost • Fixtures cost- replacement cost

8. Three main categories plant & machinery • General plant – 18% per annum • Integral features – 8% per annum • Enhanced capital Allowances – 100% FYA • Others to be aware of • Long life assets • Short life assets • BPRA’s • IBA’s

9. 1. General plant – 18% per annum • Carpets • Signage • Sanitary ware • Demountable partitions • Fire Alarms • BMS • UPS • FF&E • Racking • Dock levellers

10. 2. Integral features – 8% per annum • Electrical systems • Heating • Air-conditioning • Ventilation • Lifts • Cold water • External solar shading

11. 3. Enhanced Capital Allowances(ECA’s) • 100% tax relief in year of expenditure • Encourage green investment • Energy efficient equipment • Water saving technologies • Source equipment from Government list • Energy technology list ( ETL) • Tax credit available 19% if loss making • Boiler controls, lighting, air-con, insulation, rain water harvesting, low flush WC’s

12. How do we go about claiming once we have ascertained the value of the fixtures? • Allowances are pooled according to type • Claimed annually • In a Tax return – not an automatic allowance • Historic claims possible • Allowances not lost

13. What are they worth? £300,000 qualifying expenditure – Corporation tax

14. What are they worth? £300,000 qualifying expenditure – Income tax

15. Pooling allowances Pool – plant & machinery allowances

16. What happens on sale of the property? • When property changes hands the fixtures are transferred too • A system has been is place since 1990’s which enables us to agree the transfer value, known as the disposal value of the fixtures • Joint election – s198 CAA2001

17. When the seller /prior owner has made a claim: • Seller can keep all the allowances • or • Seller can pass all allowances to the Buyer • or • They can share the allowances • Disposal value can not exceed original cost • Can not claim twice on same fixture

18. Joint Elections – s198 • Established mechanism – transfer values • Stating values in sale agreement is inadequate • s198 legally binding on both parties, inc HMRC • 2 year time limit from date of completion • Must be executed to be valid • Both parties must submit to their Tax Inspector • Excludes contribution allowances • Excludes Chattels

19. S198 Election – draft carefully • Name property • Interest and Title • Date of completion • Purchase price £ • Name & address seller • Name & address buyer • Unique tax reference (UTR) • Amount fixed by the election £ • List Integral features £ • List General plant £

20. When there is no prior claim • The buyer is free to make an apportionment claim based upon their purchase price • A joint election can only be entered into if a seller has brought a disposal value into account ( made a claim)

21. New Fixtures rules introduced FA2012 • Introduction of two requirements that must be satisfied before a buyer can make a claim • Statutory Election – s198 • Mandatory pooling

22. From April 2012 • First condition – statutory election • If a buyer wants to to make a claim Options: • When the seller has made a claim – use election • If agreement cannot be reached – take the matter to a Tax Tribunal • When the seller has not claimed – check if prior owner has claimed • In the absence of a signed s198 election a written statement must be obtained by the buyer which details the disposal value

23. From April 2012 (continued) • If buyer has no use for the allowances, e.g. o/s company or a pension fund, the buyer is advised to take the necessary steps to identify the allowances and establish a disposal value. This will preserve the allowances for a future buyer • Failure to do so will preclude all future buyers from claiming on these allowances

24. From April 2012 Property changing hands Sells Sells

25. Purchases completed before April 2012 • Old rules apply • No time limits • Owners of fixed plant and machinery should review existing systems and procedures • Keep meticulous record of expenditure incurred on fixtures • Ability to provide details on disposal

26. From 1 April 2014 • Second condition - Pooling requirement • In order for a buyer to claim: • Applies to Fixtures purchased on 1 April 2014 onwards • All sellers will be required to pool their expenditure upon disposal • Burden of proof lies with buyer

27. From April 2014 • Pooling requirement – Warning! • When a seller has not claimed and is not interested in the allowances: • No expenditure has been pooled • S198 not possible • Buyer will not be able to claim • Allowances are lost forever to all future owners • Buyer can not refer the matter to the Tax tribunal – no disposal value to discuss

28. Summary – FA2012 changes • Pre April 2012 transfer - old rules • April 2012 – 2014 Transitional periodFirst condition has to be met if seller has claimed • From April 2014 – two conditions have to be met in order for the buyer/future owner to be able claim • Statutory election • Mandatory pooling

29. What should we be doing now? • Early involvement – correct tax relief • Correct paperwork • Post 2008 unclaimed allowances- unlock • Timing • Pre – contract DD • Buyer can determine seller’s disposal value • Tax tribunal ??

30. Louise Barth Louise.barth@altusgroup.com 020 7636 7347 07775 021 1365