Capital allowances should form a significant consideration in most commercial property acquisitions, construction projects and tenant fit-outs.
They allow taxpayers to deduct qualifying expenditure each year as an expense to reduce taxable profit.
The main allowances which may be available on the cost of construction or purchase of property are for plant and machinery and industrial buildings.
The definition of plant and machinery is wide and includes expensive items such as central heating and air conditioning, electrical systems, computer systems and partition walls. They can make up a very significant proportion of construction costs – it is generally thought that up to 40% of expenditure incurred on a new building can qualify for capital allowances.
The expenditure qualifies for relief:
- if it is capital expenditure on the provision of plant or machinery wholly or partly for the purposes of the qualifying activity (a business use) carried on by the person incurring the expenditure; and
- the person incurring the expenditure owns the plant or machinery as a result of incurring it.
Capital allowances are given on plant and machinery at a rate of 25% a year on a reducing balance basis and 6% for long life assets. Enhanced rates are available for small and medium size enterprises which can claim back 100% of the cost of purchasing computers, mobile phones and software.
Capital allowances can be a valuable benefit to property owners but their potential benefits are sometimes overlooked by their advisers. Often it is an issue of lack of communication between the owner, his accountants, surveyors and solicitors and it is important that the owner’s professional team is alive to the benefits available.
We came across such a case recently where a bank purchased an office for its own occupation and then carried out a fit-out of the property. A review showed that the capital allowances claim was made by the internal surveyors for the fit-out expenditure. The claim made by the surveyors did not include the irrecoverable VAT which was not picked up by the tax advisers and in addition no claim had been made for plant and machinery on the purchase. They missed out on capital allowances of over £3.5 million.
It is important to keep good records of expenditure and avoid lumping together all expenditure on a building without separating out those elements which attract capital allowances. Failure by solicitors acting on acquisitions to fully investigate qualifying expenditure can result in muddle at best and loss at worst.
Even in cases where property owners pay no or little tax against which to set off any benefits they may still benefit from the allowances by selling the equipment to a bank which can use them to reduce its tax liability. The bank then leases the equipment back and the benefit is shared between the through reduced rental payments.
Special anti avoidance rules apply to fixtures. The amount of the purchase price which a buyer can allocate to fixtures is limited to the amount which the last person to claim capital allowances was treated as having spent on the fixtures for capital allowances purposes.
The buyer and seller can agree on an alternative book value but it cannot exceed the lesser of the amount which the seller paid for the fixtures or the amount which the buyer paid for them. A different price may be allocated in the contract to fixtures than may be used to claim allowances and it is vital to investigate the figures thoroughly.
In summary it is important to get the right advice to avoid opportunities being lost and make sure that record keeping on acquisition costs and subsequent expenditure is user friendly for capital allowance purposes.
We have an experienced commercial property team who work closely with property owners and users and their team of advisers.
