21 October 2011
HMRC’s recent consultation proposing significant adverse changes to the capital allowances regime for fixtures has been well publicised within the tax “trade” press. Although these changes will affect all business property transactions, this factsheet considers the position of historic spend and the possible action required now by current owners to mitigate the tax effect of the changes.
The proposals relates to fixtures only and not “loose” plant and machinery. A fixture is an asset which is so installed or fixed to the land so as to become in law part of the land/property. Fixtures include water pipes, electrical wiring, air conditioning systems fitted kitchens to name a few.
Of the main proposals the following are relevant to historic spend:
- Mandatory Pooling - the 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 Value - the value of the sales price attributed to fixtures that the purchaser and vendor must now agree and both formally notify HMRC can be no less than the assets’ tax written down value (“TWDV”). Under current law 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. However, once pooled the related allowances should still be “disclaimable” (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).
This time limit will apply to the acquisition of fixtures (both new and second-hand). However, the government has yet to decide whether the time limit will also apply to expenditure incurred before the commencement date (historic spend). And here in lies the problem as taxpayers with older properties are at risk of losing the ability to claim capital allowances forever on the fixtures acquired with those properties if they do nothing. This also means future owners no longer having the right to claim either.
One might hope that either the new rules do not apply to historic spend or a “grace” period is introduced to give the taxpayer time to make the required claims. We would not rely on either especially if you consider the motivation for the changes – HMRC are fed up of with late capital allowance claims to which they simply (as they have admitted) do not have the resources or records to check and investigate the claims being made (we also feel that they perhaps view such activity as some form of tax avoidance). With such motivation it appears logical that that the changes would have immediate effect for historic spend and thus denying altogether the making of retrospective claims for such spend – why give the taxpayer time if the purpose of the law is to prevent “late” claims.
This should be clarified when draft legislation is issued in early December. The Condoc states the changes will be included in Finance Bill 2012 and we expect commencement from April 2012. Although our slight concern here is if HMRC view the mandatory pooling requirement as anti avoidance legislation and wish to cease as soon as possible the practice of late claims it is not wholly inconceivable for the changes to have some effect from 6 December 2011 (when the legislation is released).
In summary this change requires businesses to review their property portfolio and corresponding capital allowances position now to ensure all past qualifying expenditure has been pooled and submit claims (maybe a “protective” one if meeting the 6 December deadline is preferred) for any expenditure that has not.
Under current law the price attributed to fixtures must be on a “just and reasonable” basis and in theory the value allocated by purchaser and vendor must be the same. To remove the uncertainty and practical difficulties of such a basis the parties can elect (a “S198 election”) to fix the price for fixtures to 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 are retained by the vendor. If the change is introduced such planning would no longer be possible.
Additionally the election saves costs as it is not necessary to review and establish the tax value of the fixtures being sold. Comprehensive reviews will now need to be carried out to ensure (at least) the minimum TWDV price requirement is being met.
The TWDV price requirement may also mean the exercise of making late claims is of little benefit, especially where minimal or no allowances are claimed (perhaps because the relief is not currently required by the business) and the property is to be sold in the near future. Here on disposal the minimum price (being TWDV) would reduce the pooled expenditure (for the vendor) to zero and his entitlement to future allowances are transferred to the purchaser. The late claim then becomes a fruitless task if the purchaser has no interest in allowances. Where the purchaser does derive benefit from allowances the value to the vendor will depend upon his negotiation skills to increase the price for the tax relief passing – however in most circumstances it is very unlikely that a purchaser would pay the equivalent tax benefit.
One possible solution for a corporate property owner to retain a substantial amount of allowances is to transfer the property (but not the trade or business) to a subsidiary or another group member prior to commencement of the new rules. Both “vendor” and “purchaser” make a S198 election, possibly as low as £1, so the majority of the TWDV of the fixtures (and therefore future tax relief) is retained by the transferor company. On a subsequent sale the minimum fixtures price is the TWDV for the transferee, i.e. the S198 election amount.
This planning needs careful consideration of the company’s/group’s commercial requirements and tax position. It may also activate certain capital allowances anti avoidance rules. However even applying those rules we consider the planning permits substantially more allowances to be retained than if no transfer occurred at all especially where a late claim has recently been, or about to be, made on old property(ies).
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