The availability of capital allowances is regularly overlooked by commercial property owners; be it those who own commercial property portfolios as investments, or those who own and occupy their own trading premises.
When a buyer purchases a property, the cost of the building can be separated from the fixed plant and machinery. This fixed plant and machinery qualifies for tax relief in the form of capital allowances.
However in order to benefit from the tax relief on fixtures and fittings, one needs to agree a transfer value with the property seller in circumstances where the seller is entitled to and has claimed capital allowances on the fixtures.
It does seem a little bizarre that the rules apply to restrict your claim for what is essentially qualifying expenditure on qualifying plant to the amount that has been claimed by previous owners. 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.
The items in consideration here are the second-hand fixtures and fittings found within a property, such as light fittings, cold water systems, air-conditioning systems etc. Finance Act 2012 introduced the concepts of fixed value and mandatory pooling.
If the rules are not followed a purchaser will not be able to claim any capital allowances for fixtures and fittings and, in the future, no subsequent purchaser will be able to claim allowances on those fixtures and fittings either. This could affect the marketability of your property.
Fixed value requirement from April 2012
For expenditure on which capital allowances had been claimed, the fixed value requirement was introduced which requires that the seller and the purchaser fix the value of the qualifying fixtures and fittings. This is called a Section 198 election.
The Section 198 election establishes a fixed value for all plant and machinery fixtures. The value should be ‘just and reasonable’ and should not exceed the seller’s disposal value and is effectively restricted to the original value of the claim by the seller.
This option however relies heavily on an agreement between both buyer and seller, with differing objectives. The seller in the main would like to restrict the Section 198 claim. Therefore retaining the ability to claim capital allowances on the plant and machinery they have effectively sold.
The buyer would usually want as high a claim as possible to enable it to be able to claim maximum capital allowances in the future.
Pooling requirement from April 2014
April 2014 bought with it new rules in the form of a pooling requirement. If the seller was entitled to claim capital allowances and irrespective of if they did or not, then the buyer would only be eligible to claim allowances once the seller first pools (claims capital allowances on) the expenditure.
It is therefore essential that, prior to contract exchange, the capital allowance situation is fully investigated. A buyer therefore would need to ensure that any Section 198 election is specific and all of the fixtures and fittings can be traced to a capital allowances pool.
Such an election has a time limit of two years and rejection by HM Revenue & Customs is possible and therefore problematic. With such a short window, any rejection of defective elections is unlikely to leave any time for amendments, meaning that the new rules have not been followed. Therefore the qualifying expenditure is nil.
Elections with generic wording such as ‘all plant and machinery’, or those that merely set out a proforma list of fixtures and fittings, should be avoided as this might call into question the validity of the election.
If a buyer is presented with a suitably detailed validated election then it opens the door for a claim to be made in respect of fixed plant that did not qualify when the seller owned it. Finance 2008 introduced a new class of qualifying plant called integral features. If you are buying a relatively old building it may not have been possible for the seller to claim capital allowances on expenditure incurred prior to April 2008.
Therefore this expenditure will fall outside of the fixed value and pooling requirements thus opening the door for a well advised buyer to make an additional claim.
There are many pitfalls that associated with fixed plant. Getting good professional advice at an early stage is recommended to ensure that any buyer can maximise entitlement to this valuable relief.
Glen Thomas is partner at MHA MacIntyre Hudson.