10 November 2017
Capital allowances are the sums of money UK businesses can deduct from the overall Corporate or Income Tax payable on profits. Allowances on buildings can be a complex area but they remain one of the most fruitful ways for a company to save tax, without resorting to tax avoidance and aggressive planning.
The main crux is the legislation within Section 198 of the Capital Allowances Act 2001. The issue is primarily seen where a company buys or sells a commercial property (ie. offices, a factory or shop – but specifically not a residential dwelling).
In order to successfully claim capital allowances, it is paramount that buyers ensure that:
- there is scope for capital allowances claims at the outset of negotiations with the vendor;
- your solicitor is aware of the importance of the section 198 election and covers them fully in the CPSE enquiries; and
- wording is included in the contract to allow the potential tax relief to be quantified after the event and agreed between both parties.
Crucially where a contract is silent, the entitlement to claim capital allowances by the buyer in future and indeed any subsequent owner can be lost forever.
Furthermore, to be valid, a formal election signed by both parties must be submitted to HMRC within two years of purchase, not the end of accounting period in which purchase made.
You will need the expert services of a surveyor and capital allowances tax specialist to quantify the potential but UHY can introduce these intermediaries, who will tend to work on a value added, no win/no fee basis.
For a seller, the aim is not to seek to maximise the claims but to retain what you may already have, so the focus should be to:
- agree as low a value as possible with the buyer;
- leave it to the buyer and his solicitor to make the first move; and
- most importantly, make sure you have claimed during your ownership of the asset.
Where a property is bought at auction, no agreement can be included in the contract (as the deal is done for tax purposes on the sound of the hammer). However, subject to agreement by both parties there can still be scope to claim – so all is not lost.
Opportunities can also be missed for both the buyer and seller where there is a non-UK tax payer such as a charity, local authority, pension scheme or offshore entity involved. Whilst these bodies may not have claimed or may not claim in future, it is still worth looking at capital allowances to see if there is any benefit to be obtained if both parties are happy to cooperate.
Another point often overlooked in commercial property transactions from the buyer’s perspective, is a major rule change in 2008 which widened the scope of capital allowances claims considerably. If the seller owned the property prior to that date, there will be items that they were unable to claim on. However, a new owner should still be able to claim and enjoy tax savings on those items.
A major opportunity also frequently missed is for private landlords owning commercial property, eg. the business premises from which a company trades.
Capital allowance claims are just as achievable for costs incurred by the owner of a building and with Income Tax rates payable at up to 45% on rents, savings can be even more noteworthy. The above Section 198 rules apply equally to purchases and disposals, but for existing buildings it is still possible to look back at purchases made many years ago and make a claim for the last two years to get a tax repayment and enjoy future ongoing benefits.
In the current tax environment it is getting harder to save tax so please make sure you aren’t missing out on the valuable savings available from capital allowances. If you have any queries or would like to find out more please speak to your usual UHY adviser or fill out our contact form here and one of our tax experts will get back to you.