Louise Barth12 February 2013

Capital Allowances – An Overview

Today’s objectives

• Basics – Get the correct tax relief • Mechanics of making a claim• Impact of changes introduced in FA 2012

The Basics

• Fixtures• UK Tax relief• Commercial property• Available to all tax payers• Individuals and businesses

Property related allowances

• Investors• Landlords• Owner occupiers • Tenants

• All except residential

Two situations

1. Construction

• New build• Alteration• Refurbishment• Fit out• Landlord’s contributions

2. Second-hand purchases

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

Second-hand purchase claims

Apportionment purchase price – s562

• HMRC stipulates “Just and reasonable”• Formula approach• 3 Components:

1. Land value – bare site 2. Building cost- replacement cost3. Fixtures cost- replacement cost

Three main categories plant & machinery

1. General plant – 18% per annum 2. Integral features – 8% per annum3. Enhanced capital Allowances – 100% FYA

Others to be aware ofLong life assetsShort life assetsBPRA’sIBA’s

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

2. Integral features – 8% per annum

• Electrical systems• Heating• Air-conditioning• Ventilation• Lifts• Cold water• External solar shading

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

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

What are they worth?

£300,000 qualifying expenditure – Corporation tax

General plant 18%

£

Integral features 8%

£

ECA’s 100% FYA

£

Total value

£

Allowances 100,000 100,000 100,000 300,000

Year 1 WDA 18,000 8,000 100,000 126,000

Cash saving @ 21%

3,780 1,680 21,000 26,460

What are they worth?

£300,000 qualifying expenditure – Income tax

General plant 18%

£

Integral features 8%

£

ECA’s 100% FYA

£

Total value

£

Allowances 100,000 100,000 100,000 300,000

Year 1 WDA 18,000 8,000 100,000 126,000

Cash saving @ 45%

8,100 3,600 45,000 56,700

Year 1 additions •Purchase claim•Subsequent fit out core areas

Year 2 additions •Refurbishment first floor•New carpets

Year 3 additions •Refurbishment 5th floor•New CCTV equipment

Pool – plant & machinery allowances

Pooling allowances

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

When the seller /prior owner has made a claim:

•Seller can keep all the allowances or

•Seller can pass all allowances to the Buyeror

•They can share the allowances

• Disposal value can not exceed original cost• Can not claim twice on same fixture

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

S198 Election – draft carefully

Name propertyInterest and TitleDate of completionPurchase price £Name & address sellerName & address buyerUnique tax reference (UTR)Amount fixed by the election £List Integral features £List General plant £

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)

New Fixtures rules introduced FA2012

Introduction of two requirements that must be satisfied before a buyer can make a claim

1. Statutory Election – s1982. Mandatory pooling

From April 2012First condition – statutory election

If a buyer wants to to make a claim Options:1. When the seller has made a claim – use election• If agreement cannot be reached – take the matter

to a Tax Tribunal1. When the seller has not claimed – check if prior

owner has claimed2. In the absence of a signed s198 election a written

statement must be obtained by the buyer which details the disposal value

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

From April 2012Property changing hands

• Purchase• June 2009• Claim £1M

Invest A Ltd

• Purchase• Aug 2012• S198 • £450K

Pension Fund

• Dec 2013• S198 • £450k• Pool £450k

Invest B Ltd

Sells Sells

Purchases completed before April 2012

•Old rules apply•No time limits

1. Owners of fixed plant and machinery should review existing systems and procedures

2. Keep meticulous record of expenditure incurred on fixtures

3. Ability to provide details on disposal

From 1 April 2014Second condition - Pooling requirementIn 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

From April 2014Pooling 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

Summary – FA2012 changes

1. Pre April 2012 transfer - old rules2. April 2012 – 2014 Transitional period

First condition has to be met if seller has claimed

3. From April 2014 – two conditions have to be met in order for the buyer/future owner to be able claim

1) Statutory election2) Mandatory pooling

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 ??

Louise Barth

Louise.barth@altusgroup.com020 7636 734707775 021 1365