So what are Embedded Capital Allowances?
These are items of Plant and Machinery that also qualify for CA’s but might be considered to be part of the building; for example toilets, baths, sinks air conditioning.
Who can claim?
Capital allowances are available on commercial property*:
- Owner-occupiers (i.e. tax payers, trade premises including tenants)
- Investors (i.e. landlords)
- Furnished holiday lets
Can you claim?
You/your business is eligible to claim if you can answer yes to all the following questions
- I am an owner of a freehold/leasehold commercial property.
- The property is being used for commercial use only
- I am a UK tax payer
Key qualifying questions to ask before referring.
- When did you purchase the property?
- How much did you pay for the property?
MANY BUSINESSES are missing out on millions of pounds of tax allowances.
It’s estimated that the majority of owners of commercial properties have failed to claim because the dormant tax benefit in embedded fixtures and fittings is often overlooked.
In addition, changes in the Finance Act from April 2014 meant that tax allowances for commercial building fixtures could be lost to a new buyer and all future owners.
When a property changes hands, there was previously no requirement for sellers and purchasers to agree a single disposal / acquisition value for the so-called Embedded Capital Allowances (ECAs) within the overall sales price.
This now has to be addressed at time of sale by way of the CPSE32 enquiries and apart from identifying the potential allowances unclaimed, we can also advise Solicitors on how to complete these enquiries.
What’s more – there is currently no time limit on when, if ever, ECAs are added to the capital allowance pool.
However, all that is about to change and it is important to understand how these changes will affect entitlement to capital allowances for ECAs.
The scenarios below highlight where these new rules do and do not apply:
- No property transaction – owner simply claiming allowances:
New rules do not apply and there is no time limit restriction.
- Property transaction takes place between 2012 and 2014:
A transitional period fixed value requirement applies if the vendor has claimed, with a time limit of two years. If the vendor has not claimed previously, new rules do not apply.
- Property transactions from 2014:
New rules apply – mandatory pooling and fixed value requirement within a two-year time limit.
The transitional period for Corporation Tax will be from 1 April 2012 up to and including 31 March 2014; for income tax it will be from 6 April 2012 up to and including 5 April 2014.
Where the seller has made a capital allowance claim, the fixed value requirement ensures that the vendor’s disposal value and purchaser’s acquisition value are one and the same.
This is achieved by requiring the seller and buyer to enter into a joint s198 or s199 Capital Allowances Act 2001 election within two years of the transfer of the property. If a figure cannot be agreed, either party may make a unilateral appeal to the first-tier tax tribunal for an independent determination.
After April 2014, the rules will change again to include a new so-called pooling requirement. For any property bought on or after the commencement date, in order for the purchaser to be able to claim capital allowances, any seller who could have claimed capital allowances must pool (though not necessarily claim) the allowances, which can then be passed to the buyer. The pooling requirement extends to all previous owners and not just the current seller (where the previous owner had sold the property on or after the commencement date).
If the 2012 fixed value requirement or the 2014 pooling requirements are not met, then the buyer and any future owners will never be able to claim capital allowances on those fixtures. For the business owner, this means an immediate and irrevocable loss of an important tax benefit and, for some types of commercial property, a reduction in future sales value.
Discovering allowable assets embedded in the very fabric of a building means that tax savings are made in the “land and buildings” column of the balance sheet and not just in the “fixtures and fittings” column.
This gives rise to a common misconception, even among qualified finance professionals. They mistakenly believe that any benefit gained by claiming capital allowances in this way will be cancelled out by a proportionate increase in the chargeable gain for capital gains tax purposes, if and when the property is sold.
In fact, the capital gains tax legislation makes it clear that there is no requirement to exclude from the sums allowable for deductions in CGT calculations sums that have already attracted relief as capital allowances (s41(1) Taxation of Chargeable Gains Act 1992). Arguably, this is the only example in business where the same line of expenditure can attract tax relief twice over.
The tax savings that a capital allowance expert can uncover are significant.
The figures are quite alarming in that only approx. 30% of claims for ECAs have been made on existing commercial properties and out of that 30% only approx. 7% have had the maximum allowances claimed.
Subject to the new pooling requirement coming in 2014, there is no time limit for retrospective claims so a claim started today could take into account years of investment in plant and machinery, generating tax savings on every item that was neglected when past claims were made.
This historic entitlement creates a major opportunity for boosting a business’s present-day finances so unclaimed capital allowances can be a key contributor to a company’s resources.
*All commercial premises contain “embedded” plant and machinery. These include fixtures such as electrical, water, heating and sanitary systems and many other assets. When valued correctly, the money spent on these assets may be written off for tax purposes, sheltering the owners business or rental profits from taxation.