Capital Allowance changes April 2014

New rules have been introduced to tighten the availability of capital allowances on fixtures. From April 2014 there is a risk that no allowances will be available if due diligence has not been carried out correctly.

There is now a much greater onus on buyers to understand a seller’s position, obtain evidence, agree values and where appropriate enter into election agreements.

When a company or individual buys a commercial property, it is common practice for it to value and claim capital allowance on the plant and machinery within the property. Capital allowances are an income or corporation tax deduction in place of accounts depreciation.

Tax law currently requires the purchaser of an asset to check whether any former owners, (since 24 July 1996), have claimed capital allowances. If they have, the new owner may be restricted to the amount they can claim. HMRC have found some taxpayers paying lip service to the above due diligence and have changed the legislation to place a more onerous obligation on the purchaser.

What do the changes mean?

The changes will not just affect those buying a property, but also property owners who are unable to benefit from the allowances directly, and want to ensure that the allowances are transferred on sale.

Review legal documentation

Buyers should ideally obtain written confirmation from sellers on their entitlement to claim allowances, and if relevant, details of any claims made. Staying silent is no longer an option and contract clauses along with pre-contract enquiries will need to be updated accordingly.

Ensure election agreements are completed

Although not mandatory, where the seller has made a claim for plant and machinery allowances, there is an onus on the buyer, to ensure that a joint capital allowances election agreement is entered into by the parties, to fix the disposal value and by doing so establish the correct amount for an on-going claim. Where parties cannot agree there is an option to make an application to a Tribunal for an independent determination of the amount.

Plan and ensure your claims are optimised

From April 2014, if a seller has been entitled to make a claim for allowances but failed for whatever reason, to do so, then the buyer will be unable to make a plant and machinery claim. This means that the allowances are lost to all future owners as well and could potentially impact on an assets value.

Non-taxpayers are affected

Where the buyer acquires an asset from a non-taxpayer (for example a charity) who in turn acquired it from a past owner who was entitled to claim allowances, then a disposal value statement will be required to confirm the amount and nature of any disposal value brought into account by the past owner.

Time limits

The new rules are contained in Schedule 10 of the Finance Act 2012, and will be incorporated into the Capital Allowances Act 2001 as section 187A. They are effective from 1 April 2014 for corporation tax purposes and 6 April 2014 for income tax purposes.

Savills Capital Allowances

This is a complex area. Savills multi-skilled capital allowances team comprises surveyors, tax professionals and accountants with specific experience in delivering large scale and complex capital allowances assignments.

Drawing upon these specialist resources and working in partnership with your project team, Savills will apply their knowledge and experience of capital allowances and related taxes to ensure that your capital allowances claims are technically robust, withstand HMRC’s scrutiny and generate significant tax relief.

If you are involved in or planning any property transactions prior to the change it may be highly beneficial to discuss your circumstances with us now.

If you would like further information on capital allowances please feel free to contact me;