The new legislation brings the consideration of Capital Allowances to the Contract stage of the transaction. The point to stress is that for transactions subsequent to April 1st 2014, if a Section 198 Election has not been made within 2 years of the contract the buyer’s, and any future buyer’s ability to claim to Capital Allowances will be forfeited. However, if properly pooled the ability to claim tax relief for such items will be transferred to the buyer.
What this means in practice
Historically there was no requirement for the sale contract to mention capital allowances and the onus was on the buyer to backtrack the expenditure to enable a claim to be made.
The new rules have resulted in changes to the pre-contract Commercial Property Standard Enquiries, in particular enquiry number 32 which now requires the Seller to provide more details with regards to any claims for Capital Allowances and any expenditure allocated to the “pool”. Items included under the broad term “plant and machinery” are wider and more diverse than people may think.
It can include anything from integral fixtures and fittings to fire alarms, air conditioning, lifts and escalators and may even extend to items such as telephone and computer systems. Expenditure on the building and fixed structures cannot be apportioned to the pool and case law is developing in this area to fine tune the definition of which items can be pooled.
The 2015 case Bowerswood House Retirement Home v HMRC disputed whether expenditure on a swimming pool and covering conservatory could be claimed. The ruling was that the conservatory enclosure formed part of the building structure and as a result could not be included in the “pool” within the plant and machinery requirement. Items must be “justly and reasonably apportioned”.
What’s in it for me?
Benefits of the new rules seemingly pass to the buyer. If buying a property that has been recently fitted out or refurbished or has had any new services installed such as telephone and computer systems the buyer should ensure, if not already done so, that these items are pooled by the seller.
Getting the right advice in these circumstances may result in a very attractive outcome and could turn a marginal return on an investment into a very lucrative deal. In such circumstances the potential to claim and willingness to pass the tax relief on to the buyer should be emphasised by the seller to assist in securing the deal at the pre-contract stage.
What’s the catch?
The onerous burden falls on the seller to have the expenditure properly apportioned by an accountant and or Capital Allowances Specialist. This can be a timely and costly task.
In some cases it can be deemed too much trouble for the Seller to become involved in, especially where a fast turnaround is required. If detailed expenditure on claimable items has not been recorded to the required standards, it may seem a pointless exercise for the Seller, if they themselves do not wish to claim or to become involved.
However, legislation allows 2 years from exchange of contracts for surveys to be carried out on the value of the items, so long as the election has been made. This is a point that should be emphasised by both the buyer and their advisers during negotiations.
How we as Solicitors come into the equation?
Capital Allowances are now relevant at to the contract stage of the transaction, meaning Solicitors can address the issue early on in the negotiations. Once the issue has been highlighted specialist advice must be taken and we can work with the specialists to ensure the contract contains the necessary provisions required to enable any available allowances to be claimed.
So whether you are buying or selling a commercial property, if you have any issues regarding Capital Allowances speak to Majid Mahmood or Katrina Fox from our Commercial Property Team for advice.