Adapting to Change - Capital Allowances April 2014

Highlights from E3 Consulting’s 11th February Southampton Property Tax Update

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Southampton based Property Taxation Specialists, E3 Consulting held a Property Tax Update seminar for client and business contacts in February to illustrate a range of Property Tax topics.  

Alun Oliver, Managing Director and Rupert Guppy, Senior Property Tax Surveyor gave presentations on the current media profile of tax planning, Land Remediation Tax Relief and Capital Allowances transactions, due diligence and, in particular, the new fixtures rules under s187A & s187B CAA2001 which come fully into force from April 2014.

Tax planning – needn’t be a dirty word!

Alun discussed the near constant media ‘noise’ in respect to tax planning – incited by the Public Accounts Committee – who either fundamentally misunderstand the tax system; or have been deliberately provoking the debate through ‘confusion’ of the tax laws and how they work in practice.  In short, tax planning is perfectly legal and Capital Allowances and Land Remediation Relief are two ‘plain vanilla’ tax reliefs that can generate significant tax savings for anyone spending money on property!

What do the new rules mean?

Rupert introduced the New Fixtures rules, commenting that “there has been a lot of confusion, as well as scaremongering about the impact of the Finance Act 2012 (FA2012) regulations, coming into force fully from April 2014”.  Contrary to comments in the wider press, they do not mean that Capital Allowances will automatically be lost!  First of all, only transactions after the date of the changes are affected by these rules, so there will be no immediate impact to any tax-payer unless they are planning on buying or selling a property after 1/6 April 2014 for Corporation and Income Tax respectively.

The new rules will mean that future purchasers of second-hand properties who fail to conduct comprehensive due diligence when buying could have their qualifying expenditure in the building deemed to be nil.  This would also deny subsequent purchasers any allowances (excepting new expenditure e.g. refurbishments).

New Fixture Rules

Alun went on to discuss in greater detail the specific tax legislation - FA2012 introduced s.187A and s.187B into the Capital Allowances Act 2001.  These clauses create new “Requirements” that must be satisfied for future new owners after 1/6 April 2014, to benefit from Capital Allowances.

Since April 2012, we have been in a ‘transition period’, but the new rules become fully effective from 1/6 April 2014; meaning that the new ‘Requirements’ must be satisfied where applicable, to ensure qualifying expenditure is not deemed to be nil:

  • “Fixed-Value Requirement” – requires vendors and purchasers of second hand buildings to agree within two years from the purchase date, the disposal value for the plant and machinery fixtures within the property.
  • “Pooling Requirement” – only applies to transactions after April 2014, but the vendor must have “pooled” its fixtures expenditure before the property is sold, if the purchaser is to have a valid claim. 
  • “Disposal Value Statement Requirement” – applies where a claimant is disposing of the property at a price below market value, or that involves more than one interest in land.

This new paradigm, means purchasers (and their advisers) must be very clear on the information they need as part of the transaction due diligence and what to do with the responses they achieve.  Getting timely expert advice will help prevent their allowances being denied.  It will also require sellers to proactively think carefully about Capital Allowances and gather together the necessary evidence required by the purchaser long before the sale.  The ‘correct’ path through these complex tax rules will vary with each property - its specific tax and ownership history - making it essential that experienced, practical and professional support is sought early on.

In time, a two-tier market could evolve; with properties with nil allowances being considered less valuable than a similar property with a continuing right to capital allowances. 

‘Pooling Requirement’ Example

To give you a better idea of how these rules work in practice, here is an example of “How the ‘pooling requirement’ could affect a transaction”:

Say an office is bought in 2009 for £5million and £1million Capital Allowances are identified.

The same office is sold in 2014, after the changes have come into effect, say for £8million.  Using the same proportion of the cost, under the current rules, the expected allowances would be £1.6million.

Under the new rules, the pooled expenditure (by the vendor) would be £1million, so the buyer would be capped to this lower figure and so lose £600,000 of Capital Allowances which, assuming 20% Corporation tax, would have a £120,000 cash impact.

Hence, if you have any current transactions, due to complete after 1/6 April 2014, it may materially benefit a tax payer purchaser to accelerate the transaction to prevent the reduction in allowances due to these rule changes.

Future Dates

This seminar is the first in a series of Property Tax Updates by E3 Consulting.  We will be holding a further seminar for clients and professionals, on Monday 24th March in Southampton. Additionally, we are holding a similar event in London.

Contact Us

If you are interested in attending one of our future seminars, or wish to discuss any property tax matters, please get in touch on 0345 230 6450.

You can also register for our mailing list.

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