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A review of capital allowances changes on commercial property transactions

7th August 2015

We are now a couple of years removed from the large changes to capital allowances and how these affect businesses, so it seemed an appropriate time to revisit the rules and examine how they have been implemented.

Capital Allowances had been a lucrative business for many accountants who submitted ‘historical claims’ for large amounts of old properties.  In this scenario accountants were spotting opportunities where claims had not been made on the purchase of commercial property; often for such things as the fixed plant and machinery in commercial properties that was integral to the building, e.g. heating and electrical systems.  These claims were perfectly legal, however caused great concern to HM Revenue and Customs who were struggling to quantify the amount of tax they might have to pay out.

To counter the number of historical claims, HMRC introduced two rounds of rule changes.  Starting from 6 April 2012 (1 April for companies), the buyer and the seller needs to agree the amount attributed to fixtures, usually via a Section 198 election, with the option for either the buyer or seller going to a First-tier Tribunal within two years of the sale if they are unable to agree.  Where neither the buyer nor a previous buyer has made a claim, the buyer can claim capital allowances under the just and reasonable apportionment rules.

The second change was that from 6 April 2014 (1 April for companies), if all available allowances haven’t been “pooled”, i.e. identified before a commercial property is sold; included in a capital allowances computation; and notified to HMRC, all allowances are lost forever – for the seller, the buyer and any future buyer.

Now, where there has been a previous claim then a Section 198 election should still be agreed between the parties, with the option of the First-tier Tribunal if they cannot.  However, where it is established that the seller could have claimed capital allowances but did not do so, it is now imperative for the seller to formally notify the expenditure qualifying for capital allowances in a tax return to HMRC before a sale and this also needs to be actioned before entering into a Section 198 Agreement to agree the capital allowances on sale. In practice this really needs be agreed as part of the negotiations on sale of the property.  Lawyers acting in relation to such transactions should therefore bring this to the attention of their clients.

If the above is missed during the sale, the new owner will have to persuade the seller, after the event, to allow a capital allowances claim to be made. The seller would have to agree for the capital allowances to be pooled into their own tax computations and then enter into a retrospective Section 198 election within two years of the sale.  The problem is that seller is unlikely to agree to do so without some financial incentive provided by the new owner, if at all.  In this scenario lawyers need to make sure that they can not be held to blame.

Practically speaking we are seeing lots of commercial property transactions where a s198 election has not been given any consideration.  Or even transactions where the s198 election has been completed incorrectly, be it unsigned, or not even mentioning any figures!

This is a tricky area for all concerned and something that often needs to be run past your client’s tax advisers.

Steven Holmes is a tax consultant based in the Leeds office of top 30 UK firm of accountants, Armstrong Watson.  Steven is a member of Armstrong Watson’s specialist UK wide legal sector team.

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