Jackie Anderson summarises the changes made to the tax rules for fixtures in recent years, and provides a timely reminder of the new rules which came into play from April 2014.
What is a fixture?
By way of a reminder, a ‘fixture’ is an asset that is installed or fixed in or to land or a building so as to become legally part of it (as opposed to a ‘chattel’ which is tangible and moveable).
Fixtures might include, for example, lifts, shop fittings, central heating systems (including boilers and radiators), air conditioning systems, fire alarm systems, CCTV and burglar alarm systems.
What tax relief is available for the cost of fixtures?
Capital allowances provide tax relief for fixtures through plant and machinery allowances, which may be claimed through the Annual Investment Allowance (100% relief), or through writing-down allowances (WDAs). The rate of WDAs will normally be 18% per annum, or 8% if the fixtures are classed as ‘integral features’ for capital allowances purposes. The ‘integral features’ of a building or structure are defined to include electrical systems, cold water systems, water heating systems, lifts and escalators.
Capital allowances will potentially be available for the person incurring expenditure on fixtures whether: (i) as a property owner (or landlord), (ii) as a tenant, or (iii) as a purchaser of a building or structure which already incorporates fixtures.
And it is in relation to the last of these purchasers, of a building or structure which already incorporates fixtures that the tax rules have been changing most significantly in recent years.
What were the rules?
The tax rules limit the expenditure on which the purchaser of a building incorporating fixtures can claim capital allowances to the lower of: (i) the original cost of the fixture, or (ii) the last disposal value brought into account by any previous owner of the fixture.
And the purchaser of such a building could choose to allocate the total expenditure incurred between the building and its fixtures under a ‘just and reasonable apportionment’ (under Capital Allowances Act 2001 (CAA 2001), s 562), up to a maximum of the vendor’s original cost (or that of the previous owner). (Note that even where the seller and buyer stated an apportionment of expenditure between the building and its fixtures in their sale and purchase contract, they would not be bound by this apportionment for CAA 2001, s 562 purposes.)
Alternatively, the vendor and purchaser had the option to make an election (under CAA 2001, s 198, a ‘s 198 election’) to fix for once and for all the apportionment of building expenditure on fixtures. The maximum value which can be apportioned to fixtures is limited by the vendor’s original cost (or that of the previous owner), but there is no minimum value.
The s 198 election should split the fixtures expenditure between integral features and other plant and machinery, and has to be submitted to HMRC within two years of the date of the transaction.
Why did the rules have to change?
If no ‘s 198 election’ was made on the purchase of a building incorporating fixtures, and in relation to any fixtures not covered by an election that was made, then there was effectively no time limit to determine when a purchaser and seller of a building incorporating fixtures had to determine the sales price attributed to fixtures. This meant that ‘late’ claims, potentially dating back many years, could be made by current owners, even in cases where the sale value could no longer be brought into account by the last seller of the fixtures.
The situation was exacerbated by the changes made to the capital allowances rules in 2008 which introduced ‘integral features’. The scope for claims being made under CAA 2011, s 562 increased with these new provisions, as the main electrical and waters supply services were specifically included as ‘integral features’, having previously not qualified for capital allowances.
And an increase in the number of these ‘late’ enhanced claims, encouraged by a growing number of specialist capital allowance consultancy providers, and more particularly the potential cost to the Treasury of the additional tax relief claimed, led to the Finance Act 2012 changes.
What are the Finance Act 2012 changes?
For fixtures claims on building purchases from 1/6 April 2012, the seller and purchaser must either agree a value for fixtures expenditure and enter into a ‘s 198 election’, or they must settle the apportionment of expenditure with the First-Tier Tribunal, in either case within two years of the transaction date. This is the ‘fixed value requirement’ (in CAA 2001, s 187A(5)).
And from 1/6 April 2014, there is a further requirement that for the purchaser to be able to claim capital allowances on fixtures, the seller must have ‘pooled’ that expenditure (ie allocated it to a pool for capital allowances purposes) if they were able to when it was acquired. This is the ‘pooling requirement’ (in CAA 2001, s 187A(4)).
And, where relevant, there is also a requirement for the vendor to provide the purchaser with a ‘disposal value statement’ – being a written statement confirming the disposal value of the fixtures which has been previously brought into account (for example, on the cessation of a trade) - within two years of the later sale (in CAA 2001, s 187A(10)).
In the event that these requirements are not met, tax relief on that fixtures expenditure will be lost for the purchaser (and for all successive purchasers).
What action is required?
Action is potentially required in the following cases:
Current property owners need to:
- ensure that they have made the full claims in relation to their past fixtures expenditure;
- ensure that fixtures expenditure is ‘pooled’ ahead of any potential future sale of the property; and
- property purchasers (and vendors) need to ensure that they fully understand the capital allowances position of the vendor, and factor it into their purchase and sale negotiations. They will also need to ensure that the completion of the ‘s 198 election’ is factored into the purchase process (as the vendor may be less willing to co-operate once the purchase is complete).
With regard to point 1. a. above, the Finance Act 2012 changes do not prevent a taxpayer from making a ‘just and reasonable’ apportionment under CAA 2001, s 562 of expenditure on assets which have not already been subject to a capital allowances claim, even many years after the purchase of their property, including ‘integral features’ which might not have qualified for capital allowances when they were acquired, provided that they still own the fixtures when the claim is made.
A professional valuation would normally be required to support such an apportionment. Typically this would involve a capital allowance specialist being engaged to physically inspect and survey the building and identify and value any fixtures (and integral features).
Practical Tip:
Tax advisors may need to consider the risk management implications of not advising their clients on maximizing any potential capital allowances they could otherwise make. This is particularly the case where the capital allowances claims may simply fall within the scope of their compliance activities, forming part of their tax returns, which may be covered by their engagement letter with their tax advisors.
