Missed capital allowances claims – the problem and the solution

Where a business buys a car or a computer or some heavy machinery, the cost will naturally be classified in the accounts under some appropriate heading. Claiming capital allowances is then straightforward, subject only to the quirks of different rates of allowances and other special rules.

In relation to property, though, there is a potential problem.

Statutory references in this article are to the Capital Allowances Act 2001.

Suppose that a company buys a care home and that the sale and purchase agreement shows £3 million for the property and £100,000 for fixtures and fittings. An analysis shows that the £100,000 relates entirely to moveable furniture, including beds, tables and chairs.

The accounts allocate the £3 million to property and the £100,000 to fixtures and fittings. A capital allowances claim is made for the £100,000 but no claim is made for the property.

In this scenario, a huge claim is being missed, as a substantial part of the £3 million may also qualify for plant and machinery allowances. The missing claim here relates to the fixtures in the property, and it is important to remember that the term “fixture” has a specialist capital allowances definition, different from the way the term is used for accounting purposes (s. 173).

It is not far-fetched to think that the missed claim could represent a potential tax saving of several hundred thousand pounds for a limited company (and even more for an individual or a partnership, because of the higher income tax rates). This is a wholly legitimate tax saving, not remotely provocative to HMRC as long as the claim is correctly made and the rules about entitlement to claim are fully respected.

The mechanics for claiming relief can present challenges, especially where existing properties are acquired, and this is our specialist field at Six Forward, where we take the burden off our accountancy partners, moving the PI risk from your policy to ours.

Let’s illustrate this by continuing with the above example. Our work at Six Forward would typically include the following:

• We would make some initial enquiries. Suppose that these show that the vendor company bought the care home as a going concern in June 2014, and extended the property, adding four new bedrooms, in 2015. The 2015 accounts show small additions to plant and machinery and a large addition to property.
• From Land Registry records, we establish that the 2014 vendor had owned the property since 2002.
• We would liaise with the vendor’s accountants to establish the history of any capital allowances claims. If no claims, or only inadequate claims, have been made for the extension in 2015, we would negotiate with the vendor and would prepare an additional claim for the vendor to include in its current or most recent accounts. This is to meet the statutory “pooling requirement” of s. 187A.
• We would further negotiate to transfer some or all of that value to the purchaser by way of a fixtures election under s. 198. This meets the related “fixed value requirement” (again, s. 187A).
• We would make enquiries of the current vendor regarding the treatment of capital allowances in 2014. For most of the fixtures, the correct capital allowances treatment of these will be black and white, and the claim may be zero if the conditions were not met at the time.
• However, if any of the fixtures from that time have since been replaced, a claim for those items will be possible, on the same lines as for the extension in 2015.
• The vendor in 2014 would not have been able to claim allowances for certain items now classified as “integral features”. If the current vendor has not claimed for these (which appears to be the case) then again these can be pooled in the most recent accounts and the value can be transferred over to the current purchaser.
• This will involve a valuation (apportionment) exercise (per s. 562), which we would undertake using methodology that is accepted by HMRC and that has been tested in the tax tribunals. The resulting figures are generally much higher than the mere residual cost of old items.
• We would liaise with the solicitors to ensure that the buyer’s interests are protected, and would prepare valid fixtures elections to ensure that the potential allowances are preserved.
• We will provide final figures for inclusion in the buyer’s capital allowances claim, split between the main rate and special rate capital allowances pools, and allocated (where appropriate) across different accounting periods.

This is in reality quite a straightforward case study. In other instances, and especially where leases are involved, it may be necessary to check whether a third party has a “prior entitlement”. Again, there will be cases where more complex valuation issues may arise, perhaps because of inadequate building invoices, where once more we follow an agreed process to produce results that are acceptable to HMRC.

In all instances, the end result is to prepare the highest possible claim that can legitimately be made, taking account of all statutory restrictions.