Tax Savings? Capital Idea!
The treatment of capital allowances is an important part of negotiations for the purchase of commercial premises with extensive plant and machinery. Far too many businesses are unaware of the tax savings that can be generated by proper consideration of capital allowances.
WHAT ARE CAPITAL ALLOWANCES?
Capital allowances are a tax relief for the depreciation in value of certain qualifying capital assets. The relief is given on an annual basis over a number of years and is used to reduce the taxable profits of a business.
When a business buys commercial premises containing fixed plant and machinery, a part of the purchase price is apportioned to those assets, and a capital allowances claim can be made in respect of the apportioned expenditure.
MAKING A CLAIM
Until April 2012, the procedure for making a claim was straightforward: the buyer simply decided on a reasonable apportionment of the purchase price and made a claim; or alternatively, the buyer and seller elected to fix the amount of the apportionment (within parameters set out in the legislation) and the claim was based on this jointly agreed amount. Normally a buyer seeks the highest amount possible to maximise the amount on which capital allowances can be claimed; conversely, a seller will normally seek the lowest amount possible in order to avoid HM Revenue & Customs clawing back over claimed capital allowances.
Since April 2012, the buyer is no longer able to decide on a reasonable apportionment unilaterally. The buyer must either reach an agreement with the seller and elect to fix the apportionment or else the matter will be referred to HM Revenue & Customs for it to determine the apportionment. The most sensible and logical time for the election to be made is at the point when the parties agree a price for the overall property.
‘THE POOLING REQUIREMENT’
There is also a further requirement: the seller must have included the fixed plant and machinery expenditure within a tax return (known as the ‘pooling requirement’) so that it can be accepted by HM Revenue & Customs. If the seller has previously claimed capital allowances on the assets this requirement will already be satisfied, but if the seller has not previously claimed allowances prior to a sale of commercial property it will need to meet the pooling requirement before the buyer can make a claim. If the pooling requirement is not satisfied, the buyer (and future buyers of the premises) will be prevented from making a claim.
Capital allowances provide businesses with a perfectly legitimate way to save large amounts of tax, yet they are often overlooked at the time commercial properties are bought. A failure to meet the requirements to make a capital allowances claim could also reduce the value of the commercial property as a result of future buyers being unable to claim allowances.
If you have any queries or would like further information on the issues covered in this e-Brief, please contact a member of the commercial property team on 0113 227 0113.