Tax changes in April: A trap for the unwary

From April, the government is making major changes to the capital allowances tax rules for fixtures in buildings that qualify as plant and machinery. This includes not only obvious items of equipment, but also building services and many other assets.

These changes will, in the first instance, affect buyers of second-hand commercial property (eg, for occupation, letting or refurbishment), irrespective of the property type. However, there is a secondary effect on those constructing new buildings, in that if they do not get the tax treatment right when a building is constructed, later purchasers will find it impossible to claim the allowances they should otherwise be entitled to. This may make those buildings less saleable.

Details of the 2012 change

The initial change is that from April, where the seller has claimed capital allowances, a new obstacle is being introduced. The buyer will only be able to claim allowances if within two years of the completion date of the transaction either (i) the parties sign a formal “section 198” tax election to agree the value of fixtures in the building, or (ii) one of them refers the matter to a tax tribunal for resolution. If this is not done, neither the buyer nor any future owner will ever be able to claim allowances on those fixtures. This could be of significant cost to the buyer (typically between 5-10% and as much as 20% of the purchase price). The only beneficiary will be the Treasury, which is likely to collect many millions in taxation that should otherwise legitimately have been relieved.

Buyers will be well advised to commission specialist capital allowances support and a tax-driven valuation to use during election negotiations or at the tribunal.

Further changes in 2014

From April 2014 the scope of the new rules is being widened so that they will apply even where the seller could have claimed capital allowances but has not actually done so. This will result in a somewhat absurd situation.

A business could end up paying up to £100,000 of additional tax if capital allowances are not dealt with properly

Instead of the buyer simply claiming capital allowances by virtue of having met the longstanding basic requirements to do so, the buyer will also need to get the seller to go through most of the motions of claiming capital allowances (ie, notify the capital allowances to HM Revenue in its tax return) and agree to formally pass some or all of the allowances on to the buyer. No doubt the allowances will become a commercial matter with many sellers being tempted to press for a low election amount in an effort to keep most, or all, of the capital allowances despite selling the assets at a profit.

Impact on construction projects

For building projects, it will become increasingly important to accurately identify and record the capital allowances content at the time of building to make sure that this information is readily available in future. Without it a buyer, and any future owner, will never be able to claim allowances on those fixtures. For example, a business acquiring a £500,000 commercial property, but failing to deal with capital allowances properly, could end up paying additional tax of between £25,000 and £100,000 and potentially damage the property’s future sale price.

Not all bad news

It is not all bad news though. The government has scrapped its plans to abolish Land Remediation Relief, which benefits the cleaning up of contaminated and derelict land and buildings. This gives a tax-deduction equal to 150% of the expenditure - or the opportunity to surrender taxable losses, so that a payment can be claimed of £240 for every £1,000 of remediation expenditure.

Also, the government is establishing new enterprise zones in disadvantaged areas. Six of these, where there is a strong focus on manufacturing (in the Black Country, Humberside, Liverpool, North-east, Sheffield, and the Tees Valley), are designated Enhanced Capital Allowances areas. Across these six zones between April 2012 and March 2017 up to £300m investment in plant and machinery will benefit from 100% capital allowances. This will accelerate the tax relief available, compared with conventional 10% or 20% a year writing-down allowances. However, unlike the old eighties’ and nineties’ system of enterprise zones these new zones will not give allowances for the cost of the building itself (ie, the “bricks and mortar”).

Consequently, for new-builds in those areas, it will be vital to obtain specialist input in maximising the expenditure on plant and machinery, which for tax purposes goes far beyond the common definition.

Steven Bone is a director of the Capital Allowances Partnership Ltd