The purpose of the capital allowances legislation is to provide a deduction for tax purposes for the cost of an asset over its useful life and in this way it is the tax equivalent of depreciation.
As far as plant and machinery are concerned relief is given by means of either the Annual Investment Allowance (AIA) or by means of a writing-down allowance (WDA). The AIA provides full relief against profits for expenditure on plant and machinery up to the AIA limit, which is £25,000 per year from April 2012. Any expenditure that does not qualify for the AIA (or in respect of which the AIA though available is not claimed) instead qualifies for a writing-down allowance (WDA).
Fixtures
Plant and machinery capital allowance are available in respect of certain fixtures. A fixture for these purposes means plant and machinery that is installed or otherwise fixed in or to a building so as to become part of that land, and specifically includes any boiler or water-filled radiator installed in a building as part of a space or water heating system. Examples of fixtures include water pipes, electrical wiring, air conditioning, lifts, washbasins, fitted kitchens and suchlike.
Capital allowances on fixtures are available to the person who incurs the expenditure on the fixture. This will not necessarily be the same person who owns the building in which the fixture is installed. Fixtures qualify for the AIA, which means that the cost may be written off in full in the year of purchase, as long as the AIA limit remains available. If the AIA limit has already been used or the purchaser does not wish to claim the AIA, WDAs are given instead. In the majority of cases, fixtures qualify for WDAs at the special rate (8% from April 2012 and 10% previously). This is because they fall into the category of assets known as ‘integral features’ or they are long life assets with an expected useful economic life of at least 25 years. The following are integral features:
- an electrical system, including a lighting system;
- a cold water space;
- a space or water heating system, a powered system of ventilation, air cooling or purification and any floor or ceiling comprised in such a system;
- a lift, escalator or moving walkway, and
- external solar shading.
However, it should be noted capital allowances are not available for fixtures installed in dwelling houses which are let out. However, they are given for fixtures in common areas, such as a lift in a block of flats.
Expenditure to be written off only once
The policy objective underlying the capital allowances legislation is to write off the cost of the asset once over its economic useful life. Provisions exist to ensure that allowances are not given for more than the cost of the asset. Balancing allowances and balancing charges ensure that when an asset is disposed the allowance given match the net cost of the asset, after taking into account proceeds of disposal.
Fixtures included within a sale of a property
By their very nature fixtures become part of the property in which they are installed. Consequently, when a property is sold, the fixtures forming part of that property are sold with it. While capital allowances are not available on the building they are available on the fixtures and the new owner will be able to claim allowances for fixtures that are purchased as part of the property. However, as a price is paid for the property in its entirety the amount paid for a particular fixture may not be easily apparent.
To ensure that the policy object of providing a deduction for the cost of the asset once during its useful economic life and to prevent double allowances being given in respect of an item of plant and machinery, the capital allowances legislation contains a number of safeguards. Firstly, the disposal value is limited to the amount of qualifying expenditure incurred on the asset and secondly, where a fixture is acquired from a past owner who is required to bring a disposal value into account, the qualifying expenditure on which the new owner can claim capital allowances cannot exceed the previous owner’s disposal value. Effectively, this means that for the legislation to work as intended the purchaser’s acquisition cost should equal the vendor’s disposal value.
In practice, there is something of a conflict of interest in attributing a proportion of the purchase price of the property to the fixtures included within it. It is in the vendor’s interest for the price attributed to the fixtures to be as low as possible to maximise the allowances available to him. By contrast, it is in the purchaser’s interest for the price attributable to the fixtures to be as high as possible to maximise the allowances available to him. The capital allowances legislation will only work as intended if both agree a price. Where agreement is reached a joint election can be made fix the amount attributed to the fixtures. However, prior to 6 April 2012 this was not compulsory. Where no election was made, the purchaser made an apportionment on a ‘just a reasonable’ basis.
A further problem arises in relation to ‘pooling’. Expenditure on fixtures can be pooled at any time provided that the fixture is still owned and used in the business. As a result of a lack of time limit on pooling HMRC have seen a number of fixture claims from business such as nursing homes, hotels and pubs that are ‘fixture heavy’, a number of years after the building was purchased. The new owners argue that they are not bound by the original value pooled or claim that there was significant expenditure on fixtures which have not been pooled at all. The delay means that in many cases it is not possible to ascertain the extent to which the seller claimed allowances, as the seller may have gone out of business or it is no longer possible to establish the portion of the original cost of the fixture for which relief has already been given. Consequently the symmetry between the seller’s disposal value and purchaser’s acquisition value is lost with the result that allowances may be given on more than the original expenditure.
New rules
At the time of the 2011 Budget the Government announced that it would consult on proposals to ensure that the capital allowances rules for second-hand fixtures secured their original policy goal of limiting overall allowances to the fixture’s original cost. After a period of consultation new rules are introduce in the 2012 Finance Bill.
Where expenditure is incurred by a new owner on or after 6 April 2012 (1 April 2012 for companies) capital allowances will not be available to the new owner of fixture unless the vendor and the purchasers have formally fixed the value allocated to the fixtures within two years of the sale. This is done by means of a joint election. Alternatively the value may be fixed by the tribunal following an application by one of the parties.
A further change is introduced from April 2014 which concerns ‘mandatory pooling’. From April 2014 for the buyer to be able to claim capital allowances in respect of second-hand fixtures, the seller must have pooled its expenditure on fixtures prior to the sale of the building. Records should be kept to show this requirement has been met.
Practical Tip
To ensure compliance with the new rules, both parties should agree the price attributable to the fixtures as part of the negotiations for the property and make a joint election to fix the value.
Sarah Bradford
