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Nov

capital allowances - time to fix your fixtures PUBLISHED IN tax

HMRC’s recent consultation proposing significant (and mainly adverse) changes to the capital allowances regime for fixtures seem certain to be implemented. These changes, particularly as they affect the position of historic spend, are of concern-----and action will need to be taken now by property owners to mitigate their effect.

The proposals relevant to historic spend include:

Mandatory Pooling - a requirement for businesses to pool expenditure on fixtures within a short period after acquisition in order to qualify for allowances. (The current position allows expenditure on fixtures in a building to be claimed at any time, as long as the fixture is still owned by the taxpayer); and

Minimum Transfer Values – a requirement that the value attributed to fixtures as agreed by the purchaser and vendor must be no less than the assets’ tax written down value (“TWDV”) and must be formally notified to HMRC. (Under current rules agreeing a fixtures’ value is optional and can be as low as £1).

Mandatory pooling
The mandatory pooling proposal is intended to prevent late claims by introducing a statutory time limit of either one or two years from the date of acquisition during which businesses must pool their expenditure on fixtures---although, once pooled the related allowances may still be disclaimed (i.e. the changes are not forcing the taxpayer to claim allowances only requiring the taxpayer to identify such assets on which capital allowances may be claimed).

Mandatory pooling will apply to the acquisition of fixtures (both new and second-hand). However, the government has yet to decide whether it will also apply to expenditure incurred before the commencement date (historic spend). And here in lies the problem. If taxpayers do nothing they are at risk of completely losing the ability to claim capital allowances on the fixtures in their existing property portfolio.  

One might hope that, either, the new rules will not apply to historic spend or a “grace” period is introduced to give the taxpayer time to make the required claims. Clearly this cannot be relied upon, especially if you consider the motivation for the changes – HMRC are fed up with late capital allowance claims to which they simply (as they have frankly admitted) do not have the resources or records to check or investigate.  There is also a sense that HMRC view such claims as some form of tax avoidance. With such a mind set it is logical to assume that that the changes will have immediate effect for properties held not just future properties acquired: after all, why “grandfather properties” if the purpose of these changes is to prevent “late” claims.

The Consultative document states the changes will be included in Finance Bill 2012 and we expect the new rules to commence from April 2012. A concern here is, however, if HMRC view the mandatory pooling requirement as anti avoidance legislation (and wish the practice of “late” claims to cease as soon as possible)  it is not wholly inconceivable that the changes may have effect from 6 December 2011 (when the legislation is expected to be released).

Businesses need to review their property portfolio and corresponding capital allowances position now to ensure all past qualifying expenditure has been pooled and to submit claims where necessary  (possibly on a “protective” basis , in order to meet  the threat of a 6 December deadline ).

Minimum Transfer values
The proposal to set a minimum price for fixtures at no less than their TWDV is particularly unwelcome.
Under current law the value attributed to fixtures must be a “just and reasonable” apportionment of the purchase price and, in theory, the value allocated by purchaser and vendor must be the same. Currently, and in order to remove the uncertainty and practical difficulties of such an apportionment, the parties can elect (a “S198 election”) to agree the price for fixtures, and as low as £1.

This is a useful planning tool as allowances can be allocated to the party that would benefit from them most. A “£1 election” is particularly beneficial where the purchaser does not benefit from allowances (i.e. Charity, pension fund, property developer) as all allowances may effectively be retained by the vendor. If the change is introduced such planning would no longer be possible. 

A possible solution to enable a corporate property owner at least to retain the allowances with respect to properties currently held, might be to transfer the property(ies) (but not the trade or business) to a subsidiary or other group member prior to commencement of the new rules. Both “vendor” and “purchaser” might then make a S198 election, possibly a” £1 election”, so the TWDV of the fixtures (and therefore future tax relief) is retained by the vendor/transferor company. On any subsequent sale the minimum fixtures price is the TWDV for the transferee, i.e. the S198 election amount!

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