Support for claiming capital allowances
Legislative changes affecting your standard accounting capital allowance routines and what to look for.
The subject of property capital allowances continues to deliver significant tax savings to those who spend capital buying and improving commercial property.
The team at Capital Allowance Review Service has seen a high level of difficulties and confusion surrounding CAA 2001 Section 198 Elections (S198) on the purchase and disposal of commercial property. Their main observations are:
- Most sellers haven’t claimed their full entitlement which has a confusing knock-on effect on S198 Elections.
- Confusion as to what items a Section 198 Election relates to.
- A lack of detail describing the property-embedded fixtures and fittings (not chattels).
- The value attributed to property-embedded items is poorly or incorrectly advised for the parties involved in the transaction.
So, where are the problems?
Too often, buyers agree a Section 198 Election for £1 which restricts their ability to claim. This is one of many reasons why there has been an increased focus on supporting the legal and accounting professions.
The number of completed elections for £1 with a template nature appears to highlight that, in most cases, this part of a commercial property transaction is completed with little attention – more of an afterthought. This stresses the importance of proactive and early advice when in the process of purchasing a property. It may need only a few questions with minimal effort to establish the facts that, potentially, may result in significant tax savings.
The requirements to support both the legal and accounting sectors are still evident in ensuring the correct legislation is applied, the best advice is provided, and the client’s wishes are protected.
When does this apply?
A Section 198 (or 199) Election can affect UK taxpayers that spend capital buying, selling, or leasing commercial property. Property acquisition expenditure can be divided into proportions, one of which is qualifying embedded fixtures and fittings (this is over and above chattels). A breakdown of the qualifying embedded fixtures and fittings is often missing information from the property’s purchase/sale agreement, and the rules governing it can be highly complicated.
Property-embedded fixtures and fittings of different kinds are covered by varying legislation and often governed by time limits for making claims. There is a two-year window to submit a completed Section 198 Election to HMRC from the final date of the property transaction. Failure to do so will mean that any available capital allowances that should be transferred via an S198 Election, would be lost forever.
However, there are exceptions, and in certain circumstances, a claim could be available even if a Section 198 Election hasn’t been submitted. For example, if a property was purchased by the vendor before April 2008, capital allowances may still be available. Another example is if the property was previously residential, or purchased from an entity that was unable to claim capital allowances. These are all good reasons for seeking specialist advice.
Note: If improvements are carried out to a property after purchase, these capital allowances are not affected by a Section 198 Election, and allowances will be available on that expenditure in the normal way.
Items that qualify for capital allowances include relatively small fittings, such as door fittings, which may be easy to overlook, but in total may have a significant value. Door fittings, for example, could come under the category of plant and machinery because of their function.
Note: Those that do not own property are also able to claim capital allowances through leasehold improvements that are carried out and used by themselves for the purpose of their trade.
Why should this be considered?
On average, 25% of a property purchase cost will have unclaimed embedded fixtures and fittings that qualify for tax relief.
This can vary according to the type of property and its use. For instance, a care home may contain up to 35%, while an industrial building used for warehousing is likely to be at the lower end of the scale.
A claim on property improvements can be as much as 50% or more, depending on the type of improvements carried out.
Capital Allowance Review Service has acted for properties of all types, from a chain of karaoke bars for which capital allowance savings of £412,791 were made, to a property that a landlord rented out, on which unclaimed capital allowances were identified to the value of 22% of the property cost. Significant savings were identified for one client in unclaimed capital allowances on a London-based property that was leased, despite a common misconception that it is only possible to claim for property that is owned rather than rented.
Here are a few observations Capital Allowance Review Service has collated together that form part of their property expenditure reviews...
Observations
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Introduction of Investment Zones
These Investments Zones will have tax reliefs and other benefits that will encourage rapid development and business investment. To initiate this, there will be a 100% first-year enhanced capital allowance relief for plants and machinery used within specific sites. This will be accompanied by Enhanced Structures and Buildings Allowance relief that will allow businesses to reduce their tax liabilities by 20% per year. Further details on these are still to be announced.
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Annual Investment Allowance (AIA)
The current year allowance which became £1,000,000 on 1 January is now set at that rate for the foreseeable future, as confirmed in the Chancellor’s Autumn Statement on 17 November 2022. As a result, property expenditure must be reviewed in a timely manner to avoid the full AIA being lost, and good planning on the timing of expenditure can ensure that AIA is used to its maximum advantage. For example, a capital project in one year costing £1.5m can be spread over two financial periods to maximise the £1m AIA available in each period.
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Structural Buildings Allowances (SBA)
SBA aims to relieve the costs of physically constructing new structures and buildings that are intended for commercial use. This includes the necessary work to bring them into existence and the improvement of existing structures and buildings. SBA often applies to expenditures where no other allowances are available.
SBA has been available for expenditure incurred on or after 29th October 2018 with a current rate flat rate of 3% over 33 and 1/3 years.
It should be noted that SBA does not affect Annual Investment Allowance, and it should be pointed out that if you own the property SBA works as an acceleration of tax savings, but may potentially be claimed back via the corporation tax/capital gains tax computations should the property be sold.
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Research and Development Allowances (RDA)
RDAs are often confused with Research and Development Tax Credits, but are very different and provide additional tax savings to those that carry out research and development. RDA is a tax relief for businesses in the UK and provides a generous 100% first-year tax relief for fixed asset capital expenditure carried out by trading companies, individuals, and partnerships. Although it does have the time restrictions of a first-year allowance that can only be claimed in an open year, it can be a great alternative to SBAs. It can also be used as an alternative to AIA removing the limitations of the AIA threshold.
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Special Rate Pool First-Year Allowances
This applies to expenditure on electrical and heating systems, for example. The allowance is 50% of the cost, but should only be claimed if you have exceeded the Annual Investment Allowance limit of £1,000,000.
How the process works
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Step one
Capital Allowance Review Service has been a trusted capital allowances consultancy firm for accountants for over 20 years. With their support & guidance, accountants across the UK can identify clients that can benefit from a property capital allowance review. This is typically those that have spent capital buying or improving commercial property.
Your clients’ plans are important – if they have paid tax or are expecting to pay tax, if they have spent capital buying or improving commercial property, or are in the process of selling, then a review should be considered.
They work in conjunction with you, your client, or both to establish if a claim is available and worth pursuing. Using their experience, they will produce a proposal showing the approach and potential value of capital allowances their process would achieve. Crucially, they also indicate how a client’s tax profile will benefit and set out the fees.
If their team of experts secures unclaimed capital allowances, the client will typically be charged a percentage of the secured claim, but if nothing is found, there are no fees.
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Step two
Once the potential for a claim has been established, the process of calculating the claim is started. Capital Allowance Review Service will carry out a survey of the property and take an inventory of everything in, on, and around the premises. Their team of chartered accountants, tax specialists, qualified surveyors, valuers, and property experts will assess every aspect of the claim.
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Step three
The claim is now applied to the client’s tax profile. If applicable, Capital Allowance Review Service will amend any previous tax returns and apply to HMRC for any relevant refund. Alternatively, the claim can be passed to your accountant for inclusion in tax returns. The team will also liaise with the accountant in corresponding with HMRC if required.
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Step four
Once they are happy that the claim has been processed in the manner expected, which may include waiting to see that HMRC has processed any amended tax returns as expected, Capital Allowance Review Service will then produce a final report, which shows how the figures have been calculated and include copies of any amended tax returns. Frequently, the client recovers enough tax to cover their fees immediately. If this is not possible, this is made clear at step one before the claim process starts.
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