Property Capital Allowances
Capital Allowance Tax Claim on Commercial Property and Buildings
Capital Allowances allow commercial property owners to claim qualifying items of capital expenditure as a tax deduction and are a valuable tax relief. The aim of our Property Capital Allowances claims is to recover tax paid and reduce tax liabilities for companies and individuals that have spent capital buying and/or improving commercial property. Property Capital Allowances are also an important factor when buying and selling commercial property. Getting the right advice is crucial in satisfying new legislation and securing tax savings for you and your business.
Property Embedded Fixtures & Fittings
The tax savings from an additional layer of scrutiny by Capital Allowance Review Service highlighting previously unthought of capital allowable items embedded within a commercial property is significant.
Claims handled by Capital Allowance Review Service in the past 12 months have ranged between £59,000 and several million. Nearly all of our cases show businesses typically claim less than 50% of entitlement.
‘Property Embedded Fixtures & Fittings’ (PEFFs) are a specialist element of the well-known subject of ‘Capital Allowances’.
A Capital Allowance being a taxable benefit against expenditure on ‘Plant & Machinery’ for the purpose of the trade. As a matter of course, Accountants identify ‘MOVABLE’ items which qualify for Capital Allowances. These movable items include; desks, chairs, computers, cars, etc.
However, Accountants in most, if not all occasions are unaware of the qualifying Integral Fixtures & Fittings embedded within the property that is essential for a business to carry out its trade.
This leaves an enormous wealth of unclaimed qualifying ‘IMMOVABLE’ items on which Capital Allowances can be claimed, such as lifts, heating systems, security systems, sanitary systems, kitchens, etc., These items which were either inherent within the property at the time of acquisition or that have been subsequently installed.
Why are these items missed?
Until the Accountant, owner or leaseholder instigates the process of identification i.e. a ROOM BY ROOM SURVEY with the appropriate costing of these qualifying items, they will remain unclaimed and a potentially substantial benefit to the Client will remain hidden.
Who can claim the benefit?
The tax benefit is available to the party that incurred the relevant expenditure or purchased the property i.e. an Individual, a Company, Partnership, etc.
How is the benefit claimed?
The claim is used to generate a tax refund where possible and is used as a tax credit to reduce future tax liabilities. Capital Allowance Review Service ensures the tax benefit is incorporated in the most efficient way for the Client’s circumstance.
As part of our comprehensive service, once we have highlighted the unclaimed capital allowances we request any available tax repayments from HMRC. Capital Allowance Review Service submits the request to HMRC on behalf of the Client and provides support for a further 12 months.
If you would like to talk to an expert, please contact us.
Look Further, Look Deeper, find more Capital Allowances
Property Capital Allowance Optimisation - The case for calling in the experts
Good Accountants will have an established routine for assessing Capital Allowances, Property Capital Allowance Experts take the search to a whole new level.
Most businesses are aware that they can claim substantial tax relief on purchases or investments required to run a business, known as Capital Allowances. This tax relief applies to plant & machinery, buildings and Research and Development (R&D) to enable a business to deduct a proportion of these costs from their tax bill.
A good Accountant or other business advisers will have a standard routine for taking companies through an assessment of what they can claim, with the aim of collecting all applicable Capital Allowances and maximising the tax benefit to their Clients.
However, a good Property Capital Allowances Expert will look further, highlighting previously unthought of items of allowable capital, embedded deeper in the business. Uncovering this extra layer of allowable items can add tens or hundreds of thousands of pounds to a business’s total tax savings.
Plant and machinery is not a term defined in law and in practice it covers a wide range of items, extending far beyond just movable items and fixtures & fittings such as machines, cars, tools, equipment, computers, software, furniture, etc., that will appear on routine checklists. It can cover items hidden in the very fabric of a building known as ‘integral fixtures’. For example:
- A good Accountant will diligently count up all the PCs and workstations as allowable items, as these are essential to running the business; but, a Capital Allowance Expert will look further and count the floor boxes embedded in the building structure as well, which provide power sockets, telephone jacks and computer points, all equally essential to running the business.
- Likewise, a good Accountant will know how to value the furniture and furnishings integral to running a hotel business; but a Capital Allowance Expert will know to include items integral to the building, but equally essential to running the business, e.g. items relating to thermal insulation (e.g. radiators) and fire safety. Also, ‘Ambience Issues’ can sometimes be taken into consideration.
This is just a small example. The list of capital allowable items is vast.
A key difference that a Capital Allowance Expert offers is adding value to the work of a good but non-specialist Accountant. The Accountant’s review normally begins and ends with analysing invoices and following the paper trail.
Our Capital Allowance Expert will visit the property in person and identify items that are invisible within the paperwork.
Illustrative Savings Chart
|Property Purchase Price||Property Embedded Fixtures & Fittings Available (20%)||Savings if liability to tax is 19%||Savings if liability to tax is 20%||Savings if liability to tax is 40%|
|No maximum limit||20% is typical but amounts may vary. The majority of these figures are written down within 5 years|
To identify your personal savings more accurately, please visit our online capital allowances calculator
If you would like to talk to an expert, please contact us.
Information for Accountants
Accountants regularly and comprehensively claim Capital Allowances on moveable items, furniture etc., based on invoices provided by their Clients.
Where a Capital Allowance claim relates to commercial property, invoices are generally not available, and claims methodology frequently entails a certain degree of apportionment of land and property costs.
With the growing awareness of the viability of Property Capital Allowance claims on commercial property, knowledge of the large sums of money available to offset against the investment and the rapid growth in the number of “claims companies” entering the arena, HMRC are closely examining their parameters in allowing a claim.
HMRC requirements already include:
- Due diligence with regard to previous handling of Capital Allowances
- Detailed information of the items included in the claim
- Substantiation that these items are required for the claimant's business
- Details and substantiated costing of the claim
- Just & Reasonable Apportionment
- Contact point for discussions/enquires/challenges etc.
These requirements and more, conform closely with our methodology in the preparation and resolution of numerous claims over the last 15 years.
New legislation means claims will be liable to greater scrutiny and time factors introduced now limit the pooling of Capital Allowances on property transactions.
Our methodology affords the client:
- Our intimate knowledge of Capital Allowances legislation
- Our stringent investigation of the previous handling of Capital Allowances
- Our professional surveying and costing of property
- Individual advice pertaining to each case
- Liaising with professional Advisers and HMRC
- Comprehensive aftercare during the time when HMRC may revisit a claim.
Support available on New Legislation to Accountants & Solicitors. Please get in touch for support manual:
Information for Solicitors
Solicitors regularly act in the matter of conveyancing property between two parties. Where it is a commercial property, the transaction also includes tax considerations which can be to the detriment or advantage of either party.
A lack of understanding in Property Capital Allowances on commercial property can result in a range of outcomes if not documented fully.
What are Property Capital Allowances (PEFFS)?
A simple overview of the new rules affecting all commercial property transactions:
The first change (from April 2012)
The transitional period for Corporation Tax was the 1 April 2012 up to and including 31 March 2014; for Income Tax it was from 6 April 2012 up to and including
5 April 2014.
Where the Seller has made a Capital Allowance claim, the “Fixed Value Requirement” ensures that the Vendor’s disposal value and Purchaser’s acquisition value are one and the same. This is achieved by requiring the Seller and Buyer to enter into a joint s198 or s199 Capital Allowances Act 2001 election within two years of the transfer of the property.
If a figure cannot be jointly agreed, either party may make a unilateral appeal to the First Tier Tax Tribunal for an independent determination.
The second change (from April 2014)
After April 2014, the rules changed again to include a new “Pooling Requirement”. For any property bought on or after the commencement date, in order for the Purchaser to be able to claim Capital Allowances, any Seller who could have claimed Capital Allowances must pool (though not necessarily claim) the allowances, which can then be passed to the Buyer.
The Pooling Requirement extends to all previous owners and not just the current Seller (where the previous owner had sold the property on or after the commencement date).
What the new rules mean
If the 2012 Fixed Value Requirement or the 2014 Pooling Requirements are not met, then the Buyer and any future owners will never be able to claim Capital Allowances on those fixtures.
For the business owner, this means an immediate and irrevocable loss of an important tax benefit and, for some types of commercial property, a reduction in future sales value.
For a Property Adviser, the complexity of the new rules raises the prospect of their advice being called into question, potentially exposing their professional indemnity insurance.
The message is clear for both groups:
- If you, or your Clients, are contemplating the purchase or sale of commercial property then it’s essential to get the best advice you can on capital allowances.
- If you, or your Clients, have bought or sold a commercial property since April 2014 then we would encourage you to revisit transactions.
Matt Sullivan, Head of Business Development,The Law Society, added:
"It's only a matter of months before a seismic shift takes place in the commercial property market, but too few parties have made anywhere near the necessary preparations. Lawyers, especially, need to be fully up-to-speed with their obligations under the new regime, as failure to do so could cost their clients sizeable amounts in lost tax relief."
Many businesses are missing tax allowances and your Clients could be among those who risk losing this benefit. It is estimated that the majority of owners of commercial properties haven't claimed because the dormant tax benefit in embedded fixtures is often overlooked. In addition, changes in the Finance Act from April 2014 also mean that tax allowances for commercial building fixtures could be lost to a new Buyer and all future owners.
You may not have heard about this property relief because it requires a specialist Surveyor and tax expert to review your Client’s buildings and books.
When a property changes hands there was previously no requirement for Sellers and Purchasers to agree a single disposal/acquisition value for “Property Embedded Fixtures and Fittings” (PEFFs) within the overall sales price. What’s more, there was no time limit on when, if ever, PEFFs are highlighted however, this has now changed for transactions post-April 2014.
It is important to understand how these changes have affected entitlement to Capital Allowances for PEFFs.
Support on New Legislation available to Solicitors. Please request support manual:
New Rules 2014
At the point of acquisition or disposal of a commercial property there is a substantial legal point that is hugely understated and if not attended to correctly is a significant time bomb waiting to go off. The importance of understanding the legalities whether a property is bought, sold, built, refurbished, redeveloped and/or extending is crucial. This applies even if you are an occupier or an investor.
Selling a Property
Unclaimed Capital Allowances will be a major contribution to company resource in today’s difficult markets, taking into account any unclaimed Capital Allowances on a building can make a critical difference to the value of any deal on the table. From a Purchaser’s perspective, knowing that a substantial Capital Allowance claim can be made by transfer of ownership alters the “cost” of the purchase substantially and can make an unaffordable deal both affordable and attractive. From a Seller’s perspective, the unclaimed Capital Allowances is a benefit that could be offered to a potential Purchaser as a sweetener, to move a deal along in a low market.
At the point of sale of a building, huge amounts of Capital Allowances change hands without either party being aware they have given them away or inherited the benefit.
Buying a Property
If all eligible allowances were not identified by the vendor at the time of completion, the buyer will have inherited a Capital Allowances “windfall” which can be incorporated into the Purchase Cash Flow projections altering the financial profile of the Project.
This inclusion can make the purchase more acceptable to the financial institution supporting the purchase. In fact, even if they were all identified, there may still be a claim!
Building or Rebuilding Property
You can make a Capital Allowance claim on the building you are demolishing and make a second claim for Capital Allowances within the new structure. If you have recently (within the last 2 years) demolished a building, a smaller virtual claim can probably be made based on the old building.
Selling Plant Fixtures - s198 Elections
When the plant is sold a disposal value must be brought into account. This may be calculated using a “Just and Reasonable Apportionment”, or for fixtures, a Capital Allowances ACT 2001 s198 election.
Sellers should generally seek to agree as low an election amount as possible (e.g, tax written-down value or say £1). However, Buyers should usually avoid elections at less than the full amount of the Seller’s claim. There are various technical conditions necessary to make an election, but the greatest practical difficulty normally arises from providing information sufficient to identify the plant, and quantifying the value of the fixtures.
Case History - What can be lost?
We have seen a client lose in excess of £160,000 from a transaction that was over two years old where all parties thought they had implemented the new rules correctly. Could this be you?
Case History - What can be gained?
When legislation is understood and applied properly, significant tax savings can be secured for both vendor and purchaser and the property advisers involved are not exposed to risks.
For new legislation support, please contact us.
S198 Election Explained
A Section 198 Election of the 2001 act is the document that secures the Property Capital Allowance position for Commercial Property transactions that complete post April 2014. However, there are transactions where the new legislation cannot be applied and therefore do not require a Section 198 Election.
Section 198 Elections must be completed within 2 years of the completion date.
You must include a copy of the election with each person’s tax return for the first period that’s affected by it. This will normally be the period in which the disposal or purchase takes place.
When a partnership makes an election, the election must accompany the partnership tax return.
You must state the amount allocated to the fixture when you make the election.
In order for a S198 Election to be valid it must contain:
- The amount fixed by the election
The amount fixed is the value of Capital Allowances being transferred from Vendor to Purchaser. If the fixed value is £1 for both General & Integral Features Pools (if both apply), this means the Purchaser is being passed the minimum value and may not agree to receiving no tax savings for the property embedded plant & machinery the Purchaser is acquiring.
- The name of each person making the election
This simple requires the Vendors & Purchasers details.
- Enough information to identify the fixtures and the relevant land
This is where the validity of a Section 198 Election hinges. Where the information describing the plant & machinery is simply too vague and does not clearly set out what items have been attributed to the fixed amount (noted above), this invalids the Election. An example being: “all Plant & Machinery”.
When completing a s198 Election, we attach a list (inventory) listing all the property embedded fixtures & fittings that the Vendor has/is able to claim. It’s important to understand that the Vendor may not have been able to claim items that the Purchaser now can so its crucial items are clearly set out.
- Details of the interest gained by (or the lease granted to) the buyer
An example could be “Freehold”.
- The tax district references of each person making the election
If you need to complete a S198 election or would like a S198 reviewing, please contact us.
Guidance on Commercial Property Standard Enquiries (CPSE.1)
Commercial Property Standard Enquiries (CPSE) is a document passed from Purchaser to Vendor. There are numerous sections that look to extract information from the Vendor regarding important aspects of the property and transaction.
Within the CPSE, section 32 specifically pinpoints the area of Property Capital Allowances. This section looks to gain an understanding of the Vendors Capital Allowance position for the embedded fixtures and fittings, not the moveable furniture & equipment.
Below is version 3.8 of the CPSE.1 Section 32 with guidance notes for each question:
32 CAPITAL ALLOWANCES
NOTE: In this enquiry, "32 plant and machinery fixtures" means plant and machinery fixtures at the Property
32.1 Do you hold the Property on capital account as an investor/ owner-occupier, or on revenue account as a developer/ property trader as part of your trading stock? Please specify which.
A yes or no answer is not appropriate.
State: Investor, owner- occupier or stock.
- If the Seller is holding the Property as a trader as part of the trading stock, because, for example, the Seller is a developer or dealer, it will not have been able to claim capital allowances as any expenditure incurred will not have been on capital account.
- However, the remaining enquiries in section 32 should still be answered as there may be relevant information relating to an earlier owner of the Property.
32.2 Have you claimed capital allowances on plant or machinery fixtures or allocated any expenditure on such fixtures to a capital allowances pool? If so, please answer the supplementary questions in enquiry 32.9 in respect of that expenditure.
- This requires only a yes or no answer and is in respect of property inherent fixtures only, not moveable plant & machinery e.g. chattels.
32.3 Is there any expenditure on plant and machinery fixtures that you have not pooled:
(a) Will you do so if the Buyer asks you to?
(b) If so, by when?
(c) If not, why not?
- If the Seller could, but does not pool the fixtures, no capital allowances can be claimed by the Purchaser or any future owners of the property in respect of those items that could have been pooled by the seller. They will be lost forever.
32.4 If you bought the Property and cannot pool any expenditure on plant and machinery fixtures:
(a) Please provide the name and contact details of everyone who has owned the Property since April 2014;
(b) Please provide evidence that the most recent previous owner who was entitled to claim allowances pooled any expenditure on plant and machinery fixtures? Please answer the supplementary questions in enquiry 32.9 in respect of that previous owner's expenditure.
- Some property owners may be unable to pool the fixtures, for example they may be non UK taxpayers. If so, the first owner of the property after April 2014 may claim for the unclaimed fixtures then the new rules apply from then on.
32.5 Please provide details of any plant and machinery fixtures which were paid for by a tenant, including any contributions made by you towards their cost.
- This ensures future owners of the investment property do not claim capital allowances on fixtures installed and paid for by the tenant.
32.6 Please provide details of any plant and machinery fixtures which are leased to you by an equipment lessor
- This ensures capital allowances are not claimed for leased fixtures for which title remains with the lessor.
32.7 If the transaction is the grant of a new lease at a premium, and you are entitled to do so and the Buyer asks you to, will you enter into a Capital Allowances Act 2001 section 183 election for the Buyer to be treated as the owner of the plant and machinery fixtures for capital allowances purposes?
- The s183 election passes the right to the capital allowances on fixtures embedded within the property from the lessor to the lessee. It must be entered into within 2 years from the grant of lease.
32.8 Please provide details of any expenditure on plant and machinery that you have treated as long-life assets, or any expenditure upon which you have claimed another type of capital allowances (for example, industrial buildings allowances, research and development allowances, business premises renovation allowances and so on).
- A list is required of assets which have had tax relief under any other type of capital allowance regime, so that the Purchaser can ensure assets are treated accordingly in future, with no duplication of claims.
32.9 For each plant and machinery fixture for which a claim has been made or expenditure has been pooled, please:
(a) Provide a description of that fixture;
(b) State when that fixture was acquired;
(c) State whether that fixture was installed by you, or already installed by a previous owner (please specify which);
(d) State the amount of expenditure pooled in respect of that fixture; and
(e) (where enquiry 32.2 applies) confirm that you will enter into a Capital Allowances Act 2001 section 198 election in that amount (or another appropriate amount, to be agreed) if asked to do so by the Buyer.
(f) (where enquiry 32.4 applies) confirm whether the most recent previous owner who was entitled to claim allowances entered into a Capital Allowances Act 2001 section 198 election and, if so, in what amount.
- This enquiry is only to be answered where expenditure on plant and machinery fixtures has been pooled by the seller (see enquiry 32.2) or a previous owner (see enquiry 32.4).
32.10 In relation to capital allowances on structures and buildings (SBAs):
(a) Does the property qualify for SBAs?
(b) If the answer to (a) is yes, then please state: the total qualifying expenditure for SBAs; the dates when such expenditure was incurred and by whom; the amounts of SBAs that have been claimed to date, by whom and when; the current residue of qualifying expenditure; together with all supporting evidence as required by the relevant legislation; and please provide an "allowance statement" as mentioned in section 270IA Capital Allowances Act 2001.
Structures & Buildings Allowance (SBA) only applies to property build projects that started after October 2018.
32.11 Please provide the name and contact details of your capital allowances adviser. Please confirm that we may make contact with him/her in order to obtain information about the matters dealt with in this enquiry 32.
It is advisable to include an expert:
- Capital Allowance Review Service
- 01782 749842
- [email protected]
If you need to complete a CPSE or would like us to review responses you have received please contact us.
Furnished Holiday Lets (FHL)
There are special tax rules for rental income from properties that qualify as Furnished Holiday Lettings (FHLs).
If you let properties that qualify as FHLs you are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures.
Accommodation that qualifies as a FHL
To qualify as a FHL your property must be:
- in the UK or in the European Economic Area (EEA) - the EEA includes Iceland, Liechtenstein and Norway
- furnished - there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture
The property must be commercially let (you must intend to make a profit). If you let the property out of season to cover costs but did not make a profit, the letting will still be treated as commercial.
Accommodation can only qualify as a FHL if it passes all 3 occupancy conditions.
How to use the occupancy conditions
- for a continuing let, apply the tests to the tax year - that is from 6 April one year to the 5 April the next
- for a new let, apply the tests to the first 12 months from when the letting began
- when your letting stops, apply the tests to the 12 months up to when the letting finished
The pattern of occupation condition
If the total of all lettings that exceed 31 continuous days is more than 155 days during the year, this condition is not met so your property will not be an FHL for that year.
The availability condition
Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year (140 days for the tax year 2011 to 2012 and earlier).
Do not count any days when you are staying in the property. HM Revenue and Customs (HMRC) do not consider the property to be available for letting while you are staying there.
The letting condition
You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year (70 days for the tax year 2011 to 2012 and earlier).
Do not count any days when you let the property to friends or relatives at zero or reduced rates as this is not a commercial let.
Do not count longer-term lets of more than 31 days, unless the 31 days is exceeded because something unforeseen happens. For example, if the holidaymaker either:
- falls ill or has an accident, and can’t leave on time
- has to extend their holiday due to a delayed flight
If you don’t let your property for at least 105 days, you have 2 options (known as elections) that can help you reach the occupancy threshold:
- the averaging election - if you have more than one property
- a period of grace election - if your property reaches the occupancy threshold in some years but not in others
If you let more than one property as a FHL, and one or more of these properties does not meet the letting condition of 105 days, you can elect to apply the letting condition to the average rate of occupancy for all the properties you let as FHLs. This is called an averaging election.
If you would like to discuss Furnished Holiday Lets, please contact us.
Structures and Buildings Allowance (SBA)
Allowances and tax credits help a business to survive by claiming the tax breaks the government makes available. An example being the investments you’ve made in building commercial or business-related structures, with structures and buildings allowance (SBA), you get tax relief against your cost to grow and expand your business.
Here we explain more about Structural & Building Allowance (SBA).
What Qualifies for SBA
The structures and buildings allowance (SBA) is one of the most significant changes in capital allowances in recent years. Since the end of the Industrial Buildings Allowance (IBA), there has not been anything significant that could replace that allowance.
New construction on non-residential buildings is the primary qualifier for this kind of allowance. The allowance is calculated over 33 and third years and the rate is currently 3% per annum. It’s available for new properties that meet a specific kind of criteria, with the land element being ineligible for this allowance.
Assets such as plant, machinery, fixtures and fittings are not eligible for SBA, nor are integral features. These items continue to qualify for capital allowances, including the Annual Investment Allowance (AIA), and will continue to be calculated separately.
Be aware that new commercial structures and buildings can fall under the terms of this relief as well as creating a new conversion or renovation works.
The UK construction industry is seeing some huge changes. If you’re building in the UK or overseas, you can still potentially make a claim as long as you pay UK taxes.
Your 3% over a 33-year period will be limited to what it costs you to actually build the structure of the building. However, these costs could extend to demolition, land alterations, and any direct costs that create an asset in the first place.
July 2021 Update
An HMRC amendment states that if further assets are purchased upon which SBA is being claimed, then the date of purchase of the new assets should be shown on the Allowance Statement.
This relief and allowance program has come into effect for projects that commence after the end of October 2018. Take the time to research the measure because the provisions for commencement are complex and unique. There are anti-avoidance measures that keep taxpayers from manipulating the relief.
If you entered into your contract before 29 October 2018, including any preparatory work, you might be disqualified. The physical construction works need to be agreed upon after that date if you want to ensure that you can qualify for this relief.
The relief becomes available from when the building or structure is bought into use. There are further rules to consider if the building ceases to be used for a period of time.
|1 April 2020 onwards||3%||33 years|
|29 October 2018 to 31 March 2020||2%||50 years|
|6 April 2020 onwards||3%||33 years|
|29 October 2018 to 5 April 2020||2%||50 years|
Limitations of SBA
When you want to make your claims, you need to be aware that there are some limitations to this relief.
A claim begins when the building or structure is bought into use.
The rights over your land or any land costs aren’t eligible for relief.
Residential dwellings do not qualify for this relief. Even if you’re holding a mixed-use property where most of the structure is used as commercial, the part that is residential is prohibited and apportionment will apply.
Renovating or converting a structure or building makes things complicated. If you’re doing so to make it a qualifying asset under these terms, you may end up qualifying for a separate relief.
If you’re unsure about the kind of relief that you’re going to qualify for, speak to us!
To see an example, click here.
Enhanced Capital Allowances (ECA's) on Energy Saving Spend
Capital Allowance Review Service specialises in helping commercial property owners claim thousands of pounds of tax refunds and relief that they didn't realise they had.
The Enhanced Capital Allowance (ECA) schemes are a key part of the Government’s programme to manage climate change and are designed to encourage businesses to invest in energy-saving and water-efficient equipment.
It is important to note that the budget in October 2018 introduced measures to end the 100% first-year allowance for Enhanced Capital Allowances in April 2020. However, in the March 2020 budget, it was announced that designated assisted areas of Enterprise Zones will remain available for a year longer than planned on expenditure incurred until at least 31 March 2021.
The Energy Saving ECA schemes allow businesses of all sizes investing in designated technologies that reduce energy consumption to write off 100 percent of the cost against the taxable profits of the period during which the investment was made.
The key features of the two schemes are described below:
Energy Saving Equipment Scheme
Enhanced Capital Allowances (ECAs) can only be claimed on energy-saving products that meet the relevant criteria for their particular technology group, as detailed on the Energy Technology Criteria List (ETCL). The list of qualifying products within each technology is updated each month to include any new or modified products that meet the criteria.
Which technologies and products qualify for ECAs?
An up-to-date list of the technologies that qualify for the allowance can be found on the Energy Technology Product List (ETPL). The groups currently on it are:
- Air-to-air energy recovery
- Automatic monitoring and targeting (AMT)
- Boiler equipment
- Combined heat and power (CHP)
- Compressed air equipment
- Heat pumps for space heating
- Heating ventilation and air-con equipment
- Motors and drives
- Pipework insulation
- Radiant and warm air heaters
- Refrigeration equipment
- Solar thermal systems
- Uninterruptible Power Supplies (UPS)
- Loss-making companies investing in Energy Saving Equipment
Where a Company is in a loss-making position they may be able to surrender their ECA’s in exchange for a cash payment from the Government. This is particularly beneficial where the Company’s tax losses cannot be relieved for a number of years because they have insufficient profits to absorb the losses.
The first-year Tax Credit will be in the form of 19% of the surrenderable loss, but the amount of the payable credit cannot be more than the greater of the Company’s total PAYE and NIC liabilities for periods ending in the chargeable period and £250,000.
A Company may claim a payable first-year Tax Credit for a chargeable period if:
- it incurs relevant first-year expenditure for a qualifying activity and has received a First Year Allowance (FYA) in respect of that expenditure.
- it makes a loss in carrying on the qualifying activity and that loss, or part of that loss, is surrenderable,
- it is within the charge to Corporation Tax on the profits from that qualifying activity, and
- it is not an excluded Company in that chargeable period.
Companies may surrender all or part of its surrenderable loss. Once a loss has been surrendered for a Tax Credit payment it is not available for relief in any other way. Any losses carried forward to future accounting periods are reduced by the amount of loss surrendered for a first-year tax credit. A Tax Credit is not treated as taxable income.
Financing your equipment
Through the ‘Carbon Trust’, a government-backed scheme, there are interest-free loans available to purchase energy-saving equipment. This is applicable to all small and medium-sized enterprises trading for at least 12 months. The loans available range from £3,000 - £100,000.
As with all government-funded loans, there are several of the criteria to meet in order to be eligible. There are many projects that will be considered for a loan, including renewables. Each project will be assessed on its potential to deliver real energy savings.
If you have questions regarding ECA's, please contact us.
The Annual Investment Allowance (AIA)
The AIA was introduced in 2008 and can be used to deduct the full value of qualifying plant & machinery i.e achieve the full tax savings in the year you incur the cost.
From April 2008 and January 2022 the AIA amount has changed several times.
See the table below:
|Sole Traders/Partners||Limited Companies||AIA|
|Extended for one year until to 31 December 2021||Extended for one year until to 31 December 2021||£1,000,000|
|1 January 2019 to 31 December 2020||1 January 2019 to 31 December 2020||£1,000,000|
|1 January 2016 - 31 December 2018||1 January 2016 - 31 December 2018||£200,000|
|6 April 2014 - 31 December 2015||6 April 2014 - 31 December 2015||£500,000|
|1 January 2013 - 5 April 2014||1 January 2013 - 31 March 2014||£250,000|
|6 April 2012 - 31 December 2012||1 April 2012 - 31 December 2012||£25,000|
|6 April 2010 - 5 April 2012||1 April 2010 - 31 March 2012||£100,000|
|6 April 2008 - 5 April 2010||1 April 2008 - 31 March 2010||£50,000|
AIA is an important consideration when purchasing a commercial property in order to maximise tax savings and should form part of the decision process. An expert can confirm what plant & machinery attracts the best treatment. It also highlights the importance of establishing the capital allowances position prior to completion on a property. For example, if two properties are being considered it may well be the case that a fixtures claim is possible on one property but not the other. This knowledge could be a deciding factor in purchasing a property that will afford the maximum tax relief in the future.
If you have a question regarding the Annual Investment Allowance, please contact us.
The government has offered unprecedented support for businesses during Covid. The new introduction of the Super Deduction will give companies a strong incentive to make additional investments in plant and machinery to lower their tax liabilities and help them grow.
For expenditure incurred from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery investments.
• Under the super-deduction, for every pound a company invests, their taxes are cut by up to 25p.
The new Capital Allowances offer
As a result of measures announced at this Budget, businesses will now benefit from four significant capital allowance measures:
• The super-deduction – which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies
• The 50% first-year allowance (FYA) for special rate (including long life) assets until 31 March 2023 for companies
• Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million thresholds, until 31 December 2021
• Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA), and companies, individuals, and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA) for investments until 30 September 2026.
What are Plant and Machinery?
Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances.
There are different types of Capital Allowances for different types of investments which are set out in the table below.
|Category||Plant & Machinery||Structures & Buildings|
|Purchased New||Purchased 2nd Hand||Assets held for leasing||Main Rate Assets||Special Rate Assets||New Disposal Rules|
|Super Deduction (130% FYA)||✓||✓||✓||n/a|
|Special Rate (50% FYA)||✓||✓||✓||n/a|
|Annual Investment Allowance (100% up to £1m)||✓||✓||✓||✓||✓||n/a|
|Writing Down Allowances (18%)||✓||✓||✓||✓||n/a|
|Writing Down Allowances (6%)||✓||✓||✓||✓||n/a|
|Freeports (100% ECA uncapped)||✓||✓||✓||n/a|
|Structures & Buildings Allowance (3% pa)||n/a||✓|
|Freeports (SBA 10% pa)||n/a||✓|
Examples of the super-deduction in practice
• A company incurring £1m of qualifying expenditure decides to claim the super-deduction
• Spending £1m on qualifying investments will mean the company can deduct £1.3m
(130% of the initial investment) in computing its taxable profits
• Deducting £1.3m from taxable profits will save the company up to 19% of that – or
£247,000 – on its corporation tax bill.
|Previous System||With Super-Deduction|
|The company spends £10m on qualifying assets||The same company spends £10m on qualifying assets|
|Deducts £1m using the AIA in first year, leaving £9m||Deducts £13m using the super-deduction in first year|
|Deducts £1.62 using WDAs at 18%|
|Deductions total £2.62m and a tax saving of 19% x £2.62m||Receives a tax saving of 19% x £13m|
|equals £497,800||equals £2,470,000|
Full guidance can be found on the Gov.uk website
Misconceptions about Property Capital Allowance claims
If you acquired a property prior to April 2014 there is no time bar for retrospective claims, meaning a claim started today could take into account years of investment in ‘plant & machinery’, reeling in tax savings on each and every item that may have been hidden from view at the time past claims were made. This creates a significant opportunity for a boost to the business’s financial position in the present day.
Capital Gains Tax:
Probably the most commonly heard misconception is the view that any savings achieved by claiming Capital Allowances will be cancelled out later by an increased chargeable gain (if, of course, the property is ever sold). That this is not true is made clear by s41(1) Taxation of Chargeable Gains Act 1992 (TCGA 1992), which says “Section 39 shall not require the exclusion from the sums allowable as a deduction in the computation of the gain of any expenditure as being expenditure in respect of which a Capital Allowance or renewals allowance is made” (s39 TCGA says "any expenditure that would be an allowable deduction when calculating an income or corporation tax liability may not be deducted when computing a capital gain").
Section 41 TCGA 1992 therefore specifically provides that it is not necessary to deduct any Capital Allowances from the cost of an asset for capital gains purposes, so it is not possible for a Capital Allowance's claim to create or increase a chargeable gain. Furthermore, claiming Capital Allowances also has no effect on the calculation of any Capital Gains Indexation Allowance that may be claimed.
Capital Allowance claims on Land and Buildings do not reduce their Balance Sheet value. This means when you sell the property Capital Gains are based on the original cost shown in the Balance Sheet.
- This does not mean Property Capital Allowances no longer exist.
- The new rules have simply ensured plant and machinery are claimed only once.
- The legislation also ensures that available claims take place within two years of a commercial property changing ownership.
- Put simply, property Capital Allowances should now be documented in every commercial property transaction post-April 2014.
The fact invoices may not be available does not create a problem.
If you would like to talk to an expert, please contact us.
Property TV Interview
Property TV invited us to discuss the intricacies of Property Embedded Fixtures & Features and the significant tax savings available within commercial property.
Legislation has increased the importance of commercial property owners and advisers understanding the potential risks to them and their clients. Property TV was keen to broadcast the interview to their audience which was very well received.
If you have any questions as a result of watching Paul's interview please contact us.
Pebble Properties Interview (Confined to the Study During Lockdown!)
We were honored to be invited by Pebble Properties to discuss the concept of Capital Allowances and how common a considerable amount of embedded capital allowances is found to be sitting in the Balance Sheet and remain unclaimed.
Learn how to use Capital Allowances when you're buying/selling commercial property.
If you have any questions regarding this interview, please contact us.