Capital allowances in relation to fixtures in commercial property offer one of the most valuable forms of tax relief, but are often under-claimed and sometimes missed altogether. Changes introduced in 2012, which only came fully into effect from April 2014, raised the stakes and have created the risk that this valuable tax relief can be permanently surrendered to the Treasury.
A defining problem
A good starting point is to be clear what is meant by ‘fixtures’ in property. The word has its own tax definition, which differs fundamentally from the way the term is used in an accounting context. For capital allowances purposes, a fixture is an item of plant or machinery that is so fixed in a building as to become, in law, part of that building. So in a hotel, for example, the baths are fixtures, but the chairs are not, though both are examples of plant and machinery. Confusion can arise from the fact that items constituting fixtures for capital allowances purposes are almost certainly not shown in the accounts as ‘fixtures and fittings’ or even ‘plant or machinery’ but will rather be part of the freehold or leasehold property.
Key conditions
In essence, the changes introduced by Finance Act 2012 – which mainly concern the allowances available to a person buying commercial property – are straightforward. If a company (‘B Ltd’) is buying a property from a seller (‘S Ltd’), the rules lay down certain conditions that must be met if B Ltd is to claim capital allowances for the value of the property fixtures.
If B Ltd is to be able to claim, the rules state that (as far as permitted by the tax rules) S Ltd must capture the value of the fixtures in the property and include that value as additions in its capital allowances computations (the ‘pooling requirement’). The two parties must then agree a tax value at which the fixtures will be passed across and must submit a ‘fixtures election’ (or ‘section 198 election’) to set that value in stone (the ‘fixed value requirement’).
The value in the election does not have to represent market value, but can be anything between (say) £1 and the cost incurred by S Ltd on the fixtures in question.
Example 1 - Fixtures election
S Ltd is selling an office building to B Ltd for £600,000. S Ltd must first include the cost of all of the fixtures in its capital allowances computations. Let’s say that that figure (part of the £600,000) comes out at £120,000.
If S Ltd is paying corporation tax, it will wish to retain as much of that value as possible. Perhaps the parties will agree to transfer at a tax value of £50,000, allowing S Ltd to retain tax relief on £70,000.
On the other hand, if S Ltd has unused trading losses, it may be willing to pass the entire value to B Ltd, in which case the fixtures election could include a value of £120,000.
Getting the right advice
Against that background, the first key step is to ensure that everybody knows who is taking responsibility for protecting the valuable tax relief.
The solicitor will typically raise a series of capital allowances questions (as part of the much broader Commercial Property Standard Enquiries, or CPSEs) but most solicitors will make it clear that they are not responsible for the overall approach to capital allowances. The business accountant may or may not be confident to deal with the specialised field of allowances for property fixtures, but should almost certainly have at least an overview role. He or she may want to involve one of the specialist capital allowances firms (choosing carefully, as some of these firms are very much better than others!).
Protecting the relief
It is often the case that the person selling the property will have claimed allowances for some of the fixtures but not for others.
To the extent that the vendor could capture the value of any fixtures in the property, but fails to do so, that value will be permanently lost. The buyer therefore needs to ask some probing questions to ensure that his own right to claim is protected. The CPSEs referred to above do go some of the way to covering the ground, but often – indeed usually – fall short of gleaning all the of information that the buyer needs.
There may well be uncertainty about how the capital allowances rules worked when the person now selling the property bought it from a third party some years previously. If a fixtures election was signed on that previous transaction, it will be relatively straightforward, but if not then it will usually be necessary to review the legal paperwork from the time. What, if anything, did the sale and purchase agreement say about capital allowances? Even if the paperwork did purportedly make the position clear, was that outcome compatible with what the tax legislation required? In these circumstances, the input of a specialist capital allowances valuer may be needed, who may be able to substantiate a valuable claim in relation to the original purchase, even if it was 10 or 20 years (or more) ago.
If the seller has incurred capital expenditure on the property since its original acquisition, the buyer will again need to know if the valuable allowances have been reflected in the business tax computations.
Example 2 - How much was spent on fixtures?
Beth is buying a care home from Sandra. Sandra built an extension in late 2012, paying the main contractor £150,000 and spending a further £30,000 on fitting it out. She claimed allowances for the £30,000, but no claim was made for any part of the £150,000.
Beth’s advisers show that £40,000 of the £150,000 relates to fixtures. Beth can ask Sandra to add the £40,000 to her computations, and then sign an election passing some or all of the value on to Beth.
There is a third tranche of possible expenditure for the buyer to consider. As a result of other legal changes back in 2008, a vendor who has owned the property since before April of that year will not have been able to claim allowances for certain types of expenditure: typically the costs of general lighting, electrical wiring and cold water systems. As the vendor is barred from claiming, this means that the pooling and fixed value requirements referred to above do not apply to these items. Nevertheless, the buyer can claim separately for these items, but will need a valuer to quantify the claim.
In summary, the buyer of the commercial property needs to check that – as far as possible – the vendor has added the maximum value of fixtures to his tax computations, whether these were part of the original purchase or added subsequently. But the purchaser also needs to make a separate claim if there are fixtures on which the outgoing owner was not allowed to claim.
Practical Tip:
To protect the value of the allowances, and also to protect the vendor from an unexpected tax hit, it is essential for both parties to ensure that a valid fixtures election is submitted within the two-year time limit.
Ray Chidell is a capital allowances consultant and is lead author of Capital Allowances and of the A-Z of Plant & Machinery, both available from Claritax Books.
