Legal Focus, part three: Capital Allowances – reporting change

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9 December 2014


Part three of the Legal Focus guide

Hazlewoods are pleased to announce a six-part series on current topics of financial business interest, entitled Legal Focus. This week, we will be releasing a daily guide produced specifically for the legal sector.

All practices involved in commercial property conveyancing need to be aware of recent changes in tax legislation relating to the claiming of capital allowances on fixtures, and its potential impact on how they should advise clients. Previously, capital allowances were generally the domain of accountants and tax advisers.

Failure to ensure that the new form CPSE 1 is answered correctly in respect of capital allowances could have a significant impact on the viability of commercial property transactions, and leave clients out of pocket, possibly leading to negligence claims.

When advising on property purchases, solicitors should now ensure that the full capital allowances history of the property is obtained prior to the purchase agreement being signed.

What are capital allowances?

Capital allowances provide tax relief to the owner of a property, and can be claimed on ‘integral features’, which include things like electrical and lighting systems, cold water systems, ventilation systems, lifts and escalators. The amounts can often be significant.

For capital allowances purposes, integral features fall within the definition of ‘fixtures’, which means ‘plant or machinery that is so installed or otherwise fixed in or to a building or other description of land as to become, in law, part of that building or other land’. Readers should be aware that this is not the same as the legal definition.

What has changed?

The rationale behind the new rules is to ensure that expenditure on fixtures is only written off once against taxable profits over its economic life. Therefore, when a commercial property is sold, the purchaser’s position regarding the capital allowances that are available needs detailed consideration at the time of the transaction, as the availability will be dependent on what (if any) allowances have previously been claimed by the immediate, and also previous, owners.

From April 2012, a ‘fixed value requirement’ has been introduced. Therefore, a purchaser is only able to claim capital allowances on fixtures within the property if he and the seller have signed a joint election to agree a value for such fixtures on which the seller has previously made a claim.

This is documented through something called a ‘Section 198 election’ (freehold) or ‘Section 199 election’ (leasehold), which must be made within two years of the completion date. Although there is a two year window, to ensure this requirement is not missed, it would clearly be wise for the election to be made at the time of the transaction. There is no requirement that the fixtures disposal value used must be market value, but it cannot exceed the original cost.

Alternatively, an independent determination can be obtained from a tax tribunal if the two parties are unable to arrive at an agreed value. Any application to the tribunal must be within two years of the transaction.

Failure to do one of the above – either make a joint election or make an application to a tax tribunal – not only impacts on the immediate purchaser but also any subsequent purchasers, as the inability to claim capital allowances may reduce the value of a property.

It is also worth noting that if the vendor has never claimed allowances on fixtures, and makes a statement to that effect, the purchaser can still make a capital allowances claim on the acquired fixtures.

However, from April 2014, a ‘pooling requirement’ has been introduced. Therefore, in addition to the fixed value requirement, ‘mandatory pooling’ will be required, which means a buyer will only be permitted to claim capital allowances if the seller has ‘pooled’ all qualifying expenditure that they have incurred, in their tax return.

To sum up the impact of the new rules, if the seller has claimed capital allowances on fixtures, the purchaser will need to confirm that the seller has allocated the expenditure to a pool and then agree a disposal value for the expenditure by way of a Section 198/199 election or by application to the tax tribunal. If these steps are not taken, the purchaser is prevented from claiming capital allowances.

It is therefore important that necessary procedures are taken prior to signing, otherwise capital allowances will be lost forever on the fixtures acquired as part of the building.

Consequently, when involved in the acquisition or sale of a commercial property, careful consideration of the capital allowances position should be undertaken. Solicitors may therefore need to take a more proactive role in the capital allowances process.

This release has been prepared as a guide to topics of current financial business interests. Hazlewoods strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by Hazlewoods.

 



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