Like R&D tax relief, capital allowances can be misunderstood and often underclaimed. Here, Alan Cadden of Cavetta Consulting outlines his top 5 tips for maximising capital allowances on property.
Claiming capital allowances on vehicles, computers, and furniture and equipment is relatively straightforward, much of the detail being outlined on the purchase invoice.
However, things become a bit more complex when claiming the generous tax deductions available for commercial property, as the tax relief needs to be valued rather than reproduced from an invoice.
When it comes to dealing with expenditure on the purchase, construction, fit-out, refurbishment, or extension of buildings a different set of skills is required to value the fixtures and fittings comprising of a combination of law, surveying, property, and tax. Indeed, accountants often consult capital allowances surveyors when they need to value tax-deductible items for properties purchased by their clients, or where they receive single line quotes from builders, electricians, or plumbers.
Also, the legislation has become increasingly complex with the additional restrictions on what can be claimed, new forms of capital allowances, and the removal or amendment of other allowances.
So, here are our top five tips for maximising capital allowances claims.
1) Look at all your expenditure
The availability of capital allowances is regularly overlooked by commercial property owners, be it those who own commercial property as an investment, or by those who own and occupy their premises as it is deemed too difficult or costly, but this need not be the case.
Asking the question “Has a claim been made?” is our first tip, whether it is the accountant asking your client or the client asking your accountant. It is surprising what those simple words can find a vast amount of tax relief.
2) Don’t rule out buildings that you have bought second-hand
Capital allowances are also available on the acquisition of an existing property, so it is important not to ignore claims here because you believe the building, and thus qualifying assets too old. Provided that no previous vendor has made and retained the right to claim the capital allowances, a new owner of a property will be entitled to claim the value of the tax-deductible fixtures and fittings based on the reconstruction cost around the time of acquisition. However, care must be taken when doing the legal due diligence to buy the property not exclude your right to claim via clauses in the contract.
3) Have A Survey Done And Understand The Nature of the Business
Understanding what is and what is not plant, can depend on the asset’s context, and not knowing that context can mean any tax relief is not maximised.
Viewing any asset in its location can help understand its function, i.e. whether it forms part of the premises or is the asset used in your business to conduct your business on. A viewing can also be useful to assess if where the asset is being installed in an existing building whether any expenditure associated with installing that plant can qualify, for example, cutting holes or floor strengthening works.
4) Plan Expenditure
Sometimes there can be no planning for when expenditure is to be incurred – needs must, but when it can it will enable a claimant to maximise the tax relief they can achieve.
There are generous allowances at this point in March 2021 but this is not always the case. Every government likes to tinker with the rates applicable to capital allowances so, cognisance to rates and their likelihood to change will ensure tax relief is maximised.
If for example, you take the Annual Investment Allowance, which currently gives a 100% relief on the first £1million of expenditure each tax year, you can see why planning is important. If you can incur expenditure between April to December 2020, you would have an effective allowance of up to £800,000. However, if you spend the same amount between January 1 and March 31 2021, then you receive, only £200,000 of relief.
So you can see where the AIA rate changes businesses ready to spend early and consistently will make the most of the limit. Those who need to gather capital to make the purchases could miss out by spending too late.
Where an operating property is being refurbished, it can be more tax-efficient replacing fixtures with like-for-like replacement or if the asset is no longer available, with its modern equivalent. For example, if you replace a carpet with a similar carpet then it could be argued that is giving the opportunity to claim a 100% revenue deduction as a repair. However, if the taxpayer decides instead to install say ceramic tiles instead of carpet, the opportunity to claim a revenue deduction is lost.
5) Buying Due Diligence
Since April 2014 changes to the capital allowances legislation make it crucial that capital allowances are raised at an early stage during the purchase or sale of a property, not to do so could result in a loss of capital allowances for either the seller or the buyer.
The question of capital allowances must be raised during the preliminary negotiations. You should guide your advisors as to whether you want to claim capital allowances. In particular, you must take care that you do not exclude your right to claim via clauses in the purchase contract. The contract must be clear about how the previous owner has treated allowances (have they claimed them or not and if not, why not). If the previous owner wished to retain the allowances they will still need to agree on this with you.
If you have the opportunity to claim allowances, the contract should state that the vendor will provide the information you require, promptly and that they will sign the appropriate paperwork (S198 CAA 2001 election) and submit it to HMRC within two years of the sale of the property.
When purchasing a property, to benefit from the tax relief on fixtures and fittings, one needs to agree on a transfer value with the property seller in circumstances where the seller is entitled to and has claimed capital allowances on the fixtures. Therefore, any purchaser of second-hand property should make themselves aware of the rules or have good and timely professional advice when making a commercial property purchase.
Alan will also be joining us as a guest speaker at our webinar on 27th April – book here!
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