Capital Allowances Claims - The Forgotten Tax Relief?
I have added a question mark to the title of this article because more and more commercial property owners have become aware of the tax advantages of making a capital allowances claim.
However there are still tens of thousands who have not made a claim because they have never been made aware that they can. This article is therefore written for their benefit and contains basic information which will hopefully encourage them to investigate the potential for a claim.
The Legal Perspective
When one is presented by a tax saving initiative it is natural to want to know whether what is being proposed is legal. The answer to this, for capital allowance claims is a definite yes. Capital allowances legislation dates back to the 1870’s but the current legislation is The Capital Allowances Act 2001 which is usually amended annually by the Government of the time. Therefore capital allowances are a tax relief enshrined in statute.
What are Capital Allowances ?
Capital Allowances can be claimed on any expenditure which brings into existence (or improves) an asset with an enduring benefit for the trade. The purpose of capital allowances is to protect the owner’s profits from taxation and therefore reduce their tax bill. If the property has been owned for more than one financial year then a tax rebate may well be due and less tax will be paid for many years to come.
How does this apply to commercial property?
When you bought your property you probably weren’t aware that the fixtures / integral features within the property could be valued for capital allowances purposes. This may include electrical systems, heating systems, hot & cold water systems, kitchen equipment and other items which support the trade in question. Your accountant may have valued what are termed the loose chattels such as furniture and carpets but these may represent a small percentage of what may be claimed. The good news however is there is no time limit for making a claim so you haven’t missed the boat even if you bought the property some years ago.
A useful example
Let us take a guest house purchased in 2005 for £500,000 excluding goodwill and loose chattels claimed by the accountant. 10% of the property is used for the owner’s private accommodation. This effectively reduces the value of the property used for commercial purposes to £450,000.
With this type of property it would not be uncommon to find that 25% of the purchase value may be claimed as capital allowances so £450,000 x 25% = £112,500. At the time of writing in March 2012 this would produce a tax rebate for 2010/11 of approximately £4,500 for a 20% tax payer or £9,000 for 40% taxpayers.
The reduced tax bill for 2011/12 would be in the region of £3,600 for a 20% tax payer and £7,200 for a 40% taxpayer. Additionally there would be further tax reductions for many years to come, with the majority of benefit being received in the first six or seven years.
Why hasn’t my accountant informed me about this?
This is the most common question asked and there is no one answer to this question. There are many misconceptions held by accountants which include i) making a capital allowances claim affects the amount of capital gains tax which may be payable. This is untrue as they are governed by two separate pieces of tax legislation which do not interact ii) the purchase contract contains values for fixtures and fittings which are binding. This is not true because they are not binding on the HMRC as capital allowances claims are governed by statute and not by the purchase contract iii) any tax advantages are clawed back on sale of the property. Again this is not normally the case as long as the seller is given the correct advice either by their current professional advisers or by contacting a specialist capital allowances claims company.
Lastly an accountant does not normally have the skills required to undertake the valuation of the fixtures and integral features which requires surveying skills and taxation knowledge. It’s a case of knowing exactly what may be claimed and how to value it based on the HMRCs approved methods.
What should I do if I want to investigate further?
If you contact a reputable capital allowances claims company they will be able to give you a high level review (an estimate) of the likely result of undertaking a claim together with the basis of their fees. This allows you to make a judgement as to whether you want to make a claim or not. It is also worth asking the company whether the person who will undertake the work is both a qualified surveyor and tax qualified i.e. a member of the Association of Tax Technicians or the Chartered Institute of Taxation.
If your accountant has reservations the capital allowances claims company will speak to them to answer any questions they may have. There is no downside to making a claim and large companies who own commercial property commission this work as a matter of course.
John Plumridge BA (Hons) MCIPS
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Author: John Plumridge
Posted: Tuesday, May 29, 2012 | 10:41:50 PM