Why do fixtures matter for capital allowances purposes?
Capital allowances offer very valuable tax relief for businesses and property investors with a freehold or leasehold interest in commercial property.
Most of that value relates to property “fixtures”. For anyone wishing to claim capital allowances for properties, it is therefore essential to grapple with the concept of fixtures.
References are made in this article to the Capital Allowances Act 2001 (CAA 2001), as that is the legal foundation on which all capital allowances claims are made.
Do fixtures have a special meaning for capital allowances purposes?
Yes. The meaning of “fixtures” for the purposes of claiming plant and machinery allowances is fundamentally different from the accounting meaning of “fixtures and fittings”.
Nothing in the field of capital allowances causes more errors than this simple point.
So how are “fixtures” defined for capital allowances purposes?
For capital allowances purposes, tax law (at s. 173 of CAA 2001) defines a fixture as:
“plant or machinery that is so installed or otherwise fixed in or to a building or other description of land as to become, in law, part of that building or other land”.
What items in a building are fixtures?
For capital allowances purposes, fixtures include (for example) hot and cold water systems, heating and ventilation systems, all the lighting and electrical costs, lifts, toilets, sinks, basins and fitted kitchen and office equipment. That is far from a definitive list, however, and most properties contain significant amounts of other fixtures as well.
Nearly every property contains substantial numbers of fixtures.
Why are there special capital allowances rules for fixtures?
The special capital allowances rules for fixtures came about because of a problem with leased property, but they are now of more general application.
A condition for claiming capital allowances for plant and machinery is that the person who incurs the expenditure must own the asset as a result (s. 11(4)).
Suppose that the tenant of a factory installs an air conditioning system. Once installed, the system forms part of the property, and under general principles of property law it then belongs to the landlord, even though the cost was incurred by the tenant.
As a result, neither party would qualify without special rules: the landlord has not incurred the expenditure and the tenant does not own the air conditioning.
This point was brought out in the 1980s case of Costain Property Investments Ltd, in which neither party could claim allowances, even though a substantial sum had been spent on plant and machinery. The judge commented that there was no reason of principle to justify that outcome, and said that the legislation needed to be re-considered.
Please give an overview of the capital allowances rules for fixtures
The judge’s recommendations in the Costain Property case referred to above were heeded, and the resulting rules (as subsequently developed) now make up Chapter 14 of Part 2 of CAA 2001.
Chapter 14 – entitled “Fixtures” – states that the chapter determines entitlement to allowances for “plant or machinery that is, or becomes, a fixture”. So if an item is a fixture, this is where we must look to decide whether a capital allowances claim may be made, and by whom. In essence, the fixtures rules determine who is treated as the owner of the fixture, so that (all other conditions being met) that person may make a claim.
Some parts of Chapter 14 are of particular importance. Section 198 of CAA 2001, for example, deals with fixtures elections – see below.
What is an example of the difference between fixtures and other plant or machinery?
Suppose an architect buys a small office, and brings in a freestanding desk and a chair. In the accounts the cost of the desk and chair will typically be included under a heading such as “fixtures and fittings”, whereas the office electrics (lighting, sockets, etc.) will normally be included as part of the cost of the property itself, perhaps as “land and buildings”.
For capital allowances purposes, this is reversed: the lighting and electric sockets are fixtures, but the desk and chair are not. (The capital allowances terminology is in fact the more logical, as the lighting and sockets are genuinely affixed to the property, whereas the desk and chair are free standing.)
As it happens, the electrical costs and the moveable furniture all qualify for plant and machinery allowances, but the distinction is not just a legal nicety!
For example, it is common for capital allowances to be claimed for the moveable items but to be overlooked for the actual fixtures. The distinction is also essential whenever property is bought and sold.
So when would a business claim capital allowances for fixtures?
Suppose that Sara runs a sushi restaurant. The business is going well so Sara is paying tax at 40%. She spends £75,000 to build an extension to the restaurant, and a further £5,000 fitting out the extension with new tables and chairs. The accounts will perhaps show:
- £75,000 under a heading such as “additions to property”; and
- £5,000 as “fixtures and fittings” or even “plant and machinery”.
The treatment of the £5,000 is easy enough; capital allowances will normally be claimed without any difficulty. But Sara should also be claiming tax relief on a big part of the £75,000, and this element is often missed in practice.
How are capital allowances claimed for fixtures?
Continuing with the Sara example from above, the question is how to claim capital allowances for the property expenditure. The tax position can be summarised as follows:
- Sara cannot claim plant and machinery allowances for the entire amount of £75,000, but can claim for the part of the £75,000 that relates to “fixtures” in the extension.
- Suppose that the correct value for these fixtures is £50,000 (two thirds of the total cost of the extension). Sara can claim immediate tax relief at 40% on the £50,000, saving £20,000 in income tax.
- This reduces the real cost of the extension from £75,000 to £55,000, a saving of more than 25%.
In practice, how do you identify and value the fixtures for a commercial property?
If allowances for fixtures are to be claimed, it is obviously necessary to know how much of the overall property expenditure will qualify. It is also necessary to know which specific elements qualify, as these will have to be identified if ever the property comes to be sold.
For a newly built property, the actual costs of construction can be analysed into various categories. The approach to take will depend on the size of the project and on the quality of the paperwork. There may, for example, be a spreadsheet analysis of the building costs (though often without sufficient breakdown, so the spreadsheet will only be the starting point). For larger projects, there may be a bill of quantities together with a schedule of variations.
Within an overall project, there will be elements that do not qualify for plant and machinery allowances at all: the main framework of the building, including foundations, floors, walls, roof, albeit subject to special elements that may qualify for particular reasons. (Separate consideration must be made to see if these qualify instead for structures and buildings allowances – see below.)
Other elements will qualify as “main rate” expenditure (potentially attracting writing-down allowances at the higher, standard rate, though in practice faster tax relief may be gained by claiming annual investment allowances (AIAs)). In a hotel, for example, this will include sanitaryware of all sorts, decorative assets, kitchen equipment, etc.
And there will be many elements of any new build that qualify as so-called “special rate” expenditure. These will attract writing-down allowances at a slower rate, but will again often be relieved by way of AIAs. This category will include, in particular, items designated as “integral features”, including lifts, hot and cold water systems, general electrical and lighting costs, central heating and air conditioning systems.
The best time to identify and categorise the qualifying expenditure is when the property is first built. Where that opportunity is missed for any reason, the exercise can be carried out later, applying specialist valuation skills. The last opportunity will be at the point of sale of the property.
Can you claim capital allowances for overhead costs?
An important exercise in relation to a newly built property will be to allocate preliminary, overhead and professional costs.
The various Wetherspoon case law decisions gave some guiding principles here, and the invariable outcome will be that some such costs do not qualify at all, some qualify in full, and many will need apportioning between non-qualifying, main rate and special rate categories.
How do capital allowances work for fixtures when property is sold?
Fixtures are legally part of the property. Where the property is sold, therefore, the ownership of the fixtures also changes.
Two conditions must then be met, if the valuable allowances are not to be permanently lost, namely the “pooling” and “fixed value” requirements.
What is the pooling requirement?
The pooling requirement is an obligation placed on the seller of a property if the buyer is to be able to claim allowances (s. 187A(3)(a)). In brief, it is essential for the seller to identify all the qualifying capital allowances expenditure before agreeing how the tax relief will be shared with the buyer.
This pooling requirement may be tax neutral for the seller, who will therefore have little motivation to carry through the whole process. For this reason, the contract between the two parties must place a legal obligation on the seller, so as to protect the valuable tax relief for the new owner. This means that the buyer needs competent professional advice before agreeing the terms of the purchase.
What is the fixed value requirement?
This is a further condition that applies if the buyer of a commercial property is to be able to claim allowances (s. 187A(3)(b)).
In practice, the fixed value requirement is nearly always met by having a valid fixtures election. This election is a vital part of the transaction.
What is a fixtures election?
When a commercial property is sold, it is nearly always necessary to have a fixtures election (sometimes referred to as a “section 198 election” or simply as a “capital allowances election”). The election determines, for capital allowances purposes only, the value at which the fixtures are passed from the seller to the buyer. This in turn determines how much tax relief the buyer can claim for those fixtures.
The election also has important implications for the seller. Indeed, the consequences for the seller who has claimed for property fixtures but who does not have a valid fixtures election in place at the point of sale can be very serious.
The law governing this election is found at section 198 of CAA 2001 (with an equivalent provision at section 199 where a new lease is granted).
Are fixtures elections complicated?
The fixtures election is not an inherently complicated document, and getting it right does not have to be an expensive process. However, there are certain fundamental conditions that must be met, and failure to do this can be extremely expensive for either party to the transaction (or indeed for both parties).
If the seller has not yet identified and valued all the property fixtures, this will need to be done. Ideally this will happen before the fixtures election is signed, but if there are time pressures to complete the sale and purchase of the property, a careful workaround can be created so as to protect the interests of the buyer.
Many of the problem areas for such elections revolve around a failure to meet the detailed conditions given at s. 201, and indeed to make the proper distinction between fixtures and other plant and machinery in the first place.
What happens if I don’t claim capital allowances for fixtures?
If capital allowances are only claimed for moveable items of furniture then the claim may be far less than is permitted. The taxman will never say “you have not claimed enough tax relief” so it is entirely down to the business owner and his or her accountant to identify and claim the extra tax breaks. Those extra tax savings are, nevertheless, entirely legitimate and not controversial as long as the claim is correctly made.
If you do not claim, HMRC will not impose penalties. However, you will miss out on very valuable tax relief. Failure to claim will also complicate matters when you come to sell the property in the future.
How can I tell if a claim for capital allowances has been missed?
This is a common problem in practice, perhaps especially when an accountant takes over a new client.
There is a rule of thumb for identifying whether capital allowances for fixtures have been under-claimed wherever a property has been bought or an extension built. It will be necessary to see both the accounts and the tax computations for the year in which the costs were incurred.
Check the figures in the accounts for “fixtures and fittings” (and for other obvious new plant and machinery in the year, including cars and other vehicles). For the same year, look at the figure for “additions” in the capital allowances computations. That figure should be much higher than the combined figure in the accounts for “fixtures and fittings” and any other obvious plant and machinery. If it is not, it may well be that insufficient allowances have been claimed, as part of the cost of the property will also qualify for tax relief.
Can I claim structures and buildings allowances instead of bothering with fixtures?
Structures and buildings allowances (SBAs) are another type of capital allowance.
The fixtures rules only apply for the purposes of plant and machinery allowances, and are therefore not a feature of an SBA claim as such. Indeed, the SBA legislation makes it clear (see s. 270BI) that SBAs cannot be claimed for fixtures. As such, a fixtures claim should always be considered alongside the SBA claim.
As a tax planning consideration, claiming under the fixtures rules almost certainly gives the better tax outcome in any case.
Where can I find out more about fixtures?
You can watch a short YouTube video, in which fixtures are explained more fully, below:
Or just get in touch with us. At Six Forward, we deal with capital allowances fixtures all day every day.
We provide a complete capital allowances support service for accountants as they prepare tax computations, whether the client is an individual with a single furnished holiday property or a group of companies with huge multi-use properties, perhaps combining offices, commercial units, communal areas and residential accommodation.
As part of our work we will prepare a fully defensible fixtures claim for the maximum amount permitted by law. We will also prepare fixtures elections, we will negotiate as necessary with the other party to the transaction, we will provide advice as needed by the accountant, and we will deal with all the capital allowances queries raised by the lawyers acting for the transaction.
