What you should consider doing

• If you own commercial property, you should consider bringing forward any retrospective reviews of historic capital expenditure.  It is in your financial interest to claim the tax relief that is due on property that you own.
• Feel free to contact us for a no cost assessment of the capital allowance position on your property to ensure you understand your full entitlement. This is especially important if you are considering selling your current property or buying a new one. Getting this wrong after April 2012 could mean that you or future owners could potentially lose out forever, with a potential negative effect on the capital value of your property asset.
• If you are a professional adviser with clients that own commercial property we would be happy to help you assess a potential claim.  We would manage the process to your requirements to ensure best outcome for your clients.
• If you are a commercial lawyer involved in property transactions, be aware that the S198/199 election within the contract will become much more contentious if not assessed correctly.  We can help you to help the vendor or purchaser ensure the contract wording and election are fair and equitable – and that potential tax savings are not permanently lost.  Proposed changes to legislation will make it even more important for the capital allowances to be dealt with correctly at transaction stage to prevent future loss of capital allowances
• Please ring Ian or Steve to talk through any queries on the issues raised in this update – they’re really friendly and knowledgeable and there is no cost for picking their brains…

 What is changing? 

Between 31^st May and 31^st August 2011, HMRC issued and concluded a consultation process for proposed changes to capital allowances for fixed plant and machinery.

The main thrust of HMRC’s proposal was to ensure that expenditure on a fixture could only be written off once during its economic life.

The changes that have been proposed are welcome and will help formalise existing practices and procedures.

Following the consultation, legislative changes will be included in the Finance Bill 2012. The Changes will impact all commercial property owners and property investors. 

Key proposals: 

• The changes will become effective from 1^st April 2012 for corporation tax purposes and from 6^th April for Income tax.
• The availability of Capital Allowances to a purchaser of fixtures will be conditional upon: -
  • Previous qualifying expenditure on fixtures being pooled before a subsequent transfer to another person; and
  • Seller and purchaser must agree the value of the fixtures transferred within 2 years of the transfer. There are 2 existing methods for this: -
    • the facility, under section 198/199 CAA, for a seller and purchaser to jointly elect for any part of the sale price to be attributed to fixtures (subject always to the cap of the seller’s original cost); or,
    • exceptionally, if the parties are unable to reach an agreement within two years, the facility (under section 563, CAA) to refer the matter to a First Tier Tribunal for an independent determination. The current rules will be amended so that this facility can be invoked by either party to the transaction, if the matter appeared material to the tax affairs of either. If the parties are unable to agree a value, therefore, the purchaser would have to invoke this procedure within two years of the sale, if they wanted to claim allowances. As long as the procedure had been invoked within two years, it would not matter if the Tribunal did not reach its determination until after the second anniversary of the sale.
                                      Source:  http://www.hm-treasury.gov.uk/d/capital_allowances_fixtures.pdf

What does this mean to me?

Currently, and prior to these rules being introduced there is no time limit on when assets must be pooled for capital allowance purposes, this includes assets that are acquired as part of a larger purchase as the case with a property.

For properties acquired prior to 1^st April 2012 there is no time limit on pooling the expenditure incurred. There will continue to be no restriction on making a historic claim, even if you have owned a property for many years. However, qualifying expenditure must now be pooled at an appropriate time before the sale of a property otherwise the allowances will be lost forever.

Assets purchased after the 1^st April 2012 must be pooled prior to any sale or the allowances will be lost to all future owners. Transional arrangements will apply whereby the pooling provision is not mandatory between April 2012 and April 2014.
 
Example 1

Pre Finance Bill 2012

An office building is acquired in 2005 for £1.5m.  It is identified that it contains £400,000 (26.67%) of qualifying plant and machinery.  The building will be sold in March 2012 for £2m and the £400,000 allowances can be included in the general
pool at any time prior to the sale by the current owner.

If the current owner fails to pool the expenditure on the assets fixed to the building prior to sale, the new owner may
base their claim on an apportionment of the price they paid for the property.  This could mean that the pool of allowances might be as much as £534,000 (£2m x 26.67%) for the new owner if the claim was unrestricted due to the failure of the previous owner to make a claim.

The new owner has no time limit in which to make a claim.

Example 2

Post Finance Bill 2012

The same property as in example 1 now changes hands in May 2012

How does this affect the transaction from a capital allowances perspective?

The current owner still has the ability to pool the expenditure prior to sale and make a claim themselves – see previous example.

However, if the seller fails to pool his pre April 2012 expenditure prior to sale and this is not picked up during the sales process, the new owner will be unable to make a claim on those assets.

Post finance bill, the new owners claim will be restricted to the value of unused allowances carried over from the
sellers capital allowance pool.

It is therefore imperative that qualifying expenditure is identified and pooled prior to the sale of a property, otherwise all future claims on the fixtures acquired with that property will be disallowed.

Key proposals: 

• Buyer and seller required to agree a capital allowances transfer value and notify HMRC of all sales within 1-2 years of sale of property. This is likely to replace the existing s198 tax elections which are not always used and only apply where the seller has made a claim.
• Prevent use of s198 tax elections for £1 and require transfers at tax written down value.
• Require all businesses to pool expenditure on fixtures within a short period after acquisition of a property (likely to be two years).
• Require businesses to pool fixtures for all historical expenditure.

 Why change? 

• HMRC considers that taxpayers, aided by some capital allowances providers, have not satisfactorily checked the capital allowances history of the acquired fixtures.
• This is leading to the perception that allowances are being claimed more than once on the same fixtures due to this practical difficulty in tracing the tax history.
• HMRC have acknowledged they do not have adequate records or controls to track the tax history of former owners. They are seeking to correct this by requiring transfer values for all property sales.

What should you do now? 

Commercial property owners should consider bringing forward any retrospective reviews of historic capital expenditure before the time limit is introduced in order to fully secure capital allowances benefits now.

There are some ambiguities in parts of the consultation paper and lobbying will continue to ensure clarity in the final legislation. We will keep you informed of any significant changes during the consultation period.

Contact us for a free assessment of your capital allowance position on your property to ensure you claim your full entitlement before change is introduced or you could potentially lose out forever.

To view the consultation document for ‘Capital allowances for fixtures’ please click the link below.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_031314