In the property sector, identifying and maximising tax relief on capital expenditure can often be a difficult exercise. This is particularly true when acquiring second-hand property which requires a 'just and reasonable apportionment'. With the tax relief spread over a longer period from April 2012, it is clearly beneficial for companies to ensure they maximise the relief they claim now.
We have recently started working with the specialist capital allowances advisor Lovell Consulting, who has been advising clients for over 12 years. Lovells has considerable experience in the sector, dealing with the complex rules and potential HMRC restrictions.
From April 2008, plant and machinery allowances (PMA) were broadly split in two - General Pool Plant and Integral Features. General pool plant includes items such as sanitary ware, carpets, loose fixtures and fittings and signage. This attracts tax relief of 20% (18% from April 2012) per year on a declining balance basis. Integral features include electrical installations, hot and cold water systems, heating, air-conditioning and lifts. The tax relief is at a lower annual reducing rate of 10% (8% from April 2012).
This change has created a number of opportunities to identify additional tax relief. For example, electrical and cold water systems did not typically qualify before April 2008. Therefore if you have acquired a second hand property from a third party since then, additional PMA claims may be possible. This may apply even where all allowances appear to have been retained by the vendor by using a CAA2001 s198 tax election.
Case study 1: property purchase
A client purchased an office building in January 2010 for £480,000. The vendors built the property in 2005, indicated they had claimed capital allowances and agreed a s198 election of £1. Due to a drafting error, the purchase agreement was silent on this matter. We calculated the PMA on the additional integrated features at £35,000. Through detailed due diligence, we also identified a further £50,000 of plant that the vendor had not protected. The client was delighted as they only expected £1 of PMA.
We can often review contract documentation prior to completion to determine the availability of PMA.
Case study 2: unclaimed allowances
Within a draft contract, the vendor’s solicitor had included a s198 election for £1. Our due diligence work identified that the vendor had not claimed PMA. The election was not therefore valid and was deleted from the contract. We were then able to prepare a full and unrestricted apportionment claim which resulted in tax savings of over £250,000.
Other, more generous, allowances are available; such as 100% Enhanced Capital Allowances for certain energy-efficient items including lighting and air conditioning, and 150% Land Remediation Relief. Both of these have the added advantage of allowing cash repayment if you are making tax losses.
It is important to obtain professional advice to avoid opportunities being missed, so please call us to discuss how we can assist you and save you tax.