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Capital Allowances on Property

What are capital allowances?

Capital allowances are a commonly used and valuable form of tax relief that permit the costs of tangible capital assets to be written off against taxable profits. Businesses often overlook their eligibility and lose out on valuable tax refunds that could have been invested back into their business.

Whilst most businesses will be familiar with claiming such allowances for plant and machinery, many will be unaware of the entitlement to claim for certain “fixtures” or “fixed plant” – items integral to the fabric of a building. The building is effectively a machine providing various services to the business, including heating, lighting, security, air conditioning and so on. The relief applies to any property-owning business, whether carrying on a trade or earning rental income and even if the property was built or acquired many years ago, allowances can still be claimed.

Capital allowance claims on commercial property is a very specialist area of tax and is rarely undertaken by small to medium sized accountancy firms, this is largely because of the requirement for both a detailed prior tax history and survey of the property.  

Small and large businesses alike claimed approximately £90bn in capital allowances in 2016-17 but there remain thousands of businesses who are completely unaware they can become part of this statistic.

The capital allowance claims process can be complex, but working with Cost Care Tax, you can be confident that each asset will be scrutinised against HMRC criteria before being submitted as part of your tax return. The capital allowance legislation is subject to continual review by central government and Cost Care Tax’s team of tax specialists work hard to remain up to date with the latest guidelines – so you’re in safe hands.

Benefits of claiming capital allowances

  • Reduction in tax liability and tax refunds from historic expenditure.
  • In most cases allowances can be offset against taxable income from other sources.
  • Base build/acquisition cost for CGT purposes unaffected by capital allowance claim.
  • Take advantage of current annual investment allowances; £1,000,000 until December 2020.
  • Investment in the local area – for example, you can claim a 100% tax allowance if you set up and renovate your premises in a disadvantaged part of your town.
  • If you haven’t claimed already, you’re possibly missing out on several years of tax refunds against capital expenditure that could benefit your business, but the good news is that it may not be too late to claim.

Capital allowances and buying/selling property

Changes in the capital allowances legislation during 2012 and 2014 had a dramatic impact on standard practice when dealing with fixtures on the sale of commercial property.

Since April 2012, the buyer of a commercial property has had to satisfy the “fixed value requirement” before they can claim capital allowances against fixtures purchased as part of the acquisition. In essence, this requires that the seller and the buyer agree on the disposal value of fixtures (i.e. how much eligible expenditure can be passed to the buyer) via a S.198 election within 2 years of the date of completion.

The subsequent introduction of the “mandatory pooling requirement” (introduced in 2014) requires that the seller identify and “pool” ALL qualifying expenditure prior to the sale (the capital allowance “pool” is a mechanism through which capital allowances can be claimed). Where the seller of the property was eligible to have claimed allowances but didn’t, the mandatory pooling requirement dictates that the buyer will lose any entitlement to capital allowances on fixtures included within the acquisition cost.

These changes have introduced important considerations for both parties in any commercial property transaction and specialist advice is recommended to ensure that the matter of capital allowances on property sale is handled efficiently and effectively. Cost Care Tax have over 20 years of experience of handling such claims and are able to liaise with solicitors who are unfamiliar with the correct procedures to follow in order to protect the allowances, be that in the interest of the seller or the buyer.

How much can you claim?

This is a difficult question to answer with a variety of different factors to consider, including the nature of the property, timing of the expenditure and the eligibility criteria. The apportionment of acquisition or build cost attributable to fixed plant & machinery will largely depend on the type of property and trade being carried on and can typically range from 5% – 50%. Properties in the hospitality or health care sector are likely to be at the higher end of such apportionment whereas warehouse and factory buildings are likely to be at the lower level.

Annual Investment Allowances (AIAs)
AIAs were introduced following the Finance Act 2008 and allows business to write off the cost of most items of plant and machinery in full against profits in the year in which the expenditure is incurred. Available for most items of capital expenditure, the AIA limit changes from year to year, currently sitting at £1m up to 31st December 2020.

Visit the Gov.uk website for the latest rates.

The AIA provides a welcome acceleration in the realisation of tax relief but is only claimable in the accounting period in which the expenditure is incurred. Retrospective claims utilising the AIA are possible but are restricted to recent accounting periods that are still open to amendment. It is important to act quickly in order to secure your entitlement to claim against the AIA.

Writing Down Allowances (WDAs)
Most eligible business assets can be claimed for using the annual investment allowance (AIA) but, in circumstances where this is not possible, tax relief for capital allowances is realised through the capital allowance “pools” and WDAs. Such circumstances include:

  • When the AIA limit has already been fully utilised.
  • When the claim is being made for historical expenditure from an accounting period that cannot be opened up for amendment.

WDAs allow businesses to claim a percentage of eligible expenditure each year on a reducing balance basis. The percentage depends on the item in question, with certain items claimable at 18% per year and others claimable at 6% per year depending on whether they fall under the categories of General or Special Rate/Integral features expenditure.

What costs are eligible?

In order to claim capital allowances, two basic requirements must be satisfied:

  • Capital expenditure must have been incurred on the provision of plant or machinery for the purpose of a qualifying activity – this covers most commercial business activities.
  • The person incurring the expenditure must own the plant or machinery as a result of incurring the expenditure

What plant and machinery costs can you claim?

  • Fixed plant, including integral systems such as heating, electrical and lighting installations.
  • Fixtures, for example fitted kitchens, bathroom suites and fire/CCTV systems.
  • Alterations to a building to install plant and machinery but not including repairs.

The process

Our capital allowances claim process has been designed to save you time, maximise your claim amount and accurately value your assets where standard accountancy procedures can’t.

  1. Contact the Business Development Dept at team@costcare.co.uk or by telephone on 0330 128 0044 to discuss claim qualification and contract terms.
  2. Once the contract is agreed, a dedicated Account Manager will be assigned to your case and an initial assessment will be made.
  3. We will request documentation to research the tax history of the property.
  4. Our Technical Team will review all documentary evidence and carry out a full assessment of qualifying activity and expenditure.
  5. A highly skilled surveyor will carry out a full site survey of the land, buildings, plant and machinery which typically takes 2-3 hours to complete. Assets are valued using HMRC approved methods.
  6. The Technical Team will combine the site survey with documentary evidence to prepare a comprehensive report that outlines all entitlements and claim sums.
  7. The report is sent to the client or accountant for onward submission to HMRC.

Why use Cost Care Tax for your capital allowance claim?

At Cost Care Tax, we have made thousands of successful capital allowance claims, utilising years of accumulated experience to diligently assess and review capital expenditure. We ensure that no stone is left unturned in order to maximise your capital allowance entitlement.

  • Your claim managed from start to finish by our team of tax specialists.
  • Knowledge and expertise that meets the evolving demands of HMRC legislation.
  • A loyal client base in excess of 20,000.
  • Maximise the value of your capital allowance claim by combining experience with robust surveys.
  • We manage all interaction with HMRC so you don’t have to.
  • Claim the value of immovable items which are often missed.
  • We have never had a claim overturned by HMRC.
  • Our average claim size across all property sectors is £99,000.
  • £216,463,576 of capital allowances claimed and still counting….

Are you an accountant seeking a tax specialist to manage your clients’ capital allowance claims? If so, please visit our accountants’ section for more information.