Joelson Wilson
Friday 03 February 2012

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Capital Allowances

When commercial real estate is acquired the availability and quantum of capital allowances for any purchaser of the property on the fixtures contained within depends on whether any capital allowances have previously been given.

A fixture is defined at Section 173(1) of the Capital Allowances Act 2001 (CAA 2001) 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 and includes any boiler or water filled radiator installed in a building as part of a space of water heating system.

Section 185 of CAA 2001 states that the purchaser’s entitlement to capital allowances is restricted to the disposal value that the past owner of the property brought into account even where this may not have been the immediate past owner and it is the purchaser’s responsibility to obtain and provide details of prior claims and disposal values.

If it can be established that no restriction applies under Section 185 then the purchaser’s entitlement is governed by Section 562 of the CAA 2001 which requires a purchaser to make a just and reasonable apportionment of the purchase price for the property to establish the level of capital allowances available.

Where the seller has made a Capital Allowances claim for fixtures then it is possible for the seller and purchaser to jointly elect to fix the disposal value for the fixtures on the sale of the property (Section 198 election). Once the election has been made it is irrevocable and binds all parties including HMRC to the figure stated.

It is therefore vital that when providing replies to paragraph 19 of the Commercial Properties Standard Enquiries (CPSE) form that sellers provide full and frank disclosures. It is also incumbent on a purchaser to follow up any replies provided by the seller to ensure that the purchaser has the necessary information to make a fair assessment of its potential entitlement to capital allowances.

As a result of the significant increase in capital allowances claims for fixtures in historic property acquisitions, HMRC has been concerned that because of perceived defects in current rules, tax is being avoided as capital allowances are considered to be on more than the original cost of the fixtures contrary to policy.

Following publication in May 2011 of a consultation document, on 6 December HMRC published draft legislation for inclusion in the Finance Bill 2012 setting out new rules on capital allowances for fixtures.

The new rules will take effect from April 2012. There will be a transitional period for certain elements of the new rules up to April 2014.

The legislation will make the availability of capital allowances for purchases of fixtures dependent on:

• Previous expenditure on fixtures being pulled at any time before a sale and

• The seller and purchaser jointly electing under Section 198 of the CAA 2001 or using first tier tribunal proceedings under Section 563 of the Act to agree the value of fixtures within two years of the sale, or

• In exceptional circumstances the past owner providing a written statement of the disposal value for fixtures that they had some time earlier been required to bring into account within two years of a later sale.

For expenditure incurred before April 2012 both the pooling requirements and formal fixing of the value for fixtures are not applicable and for expenditure incurred between April 2012 and April 2014 the pooling requirement is also not applicable.

An original proposal to force mandatory pooling for fixtures within one or two years of the sale has been replaced with an open ended timeframe up to the point the property is sold. There will also be no catch up requirement for properties acquired before April 2012.

Additionally the proposal to introduce a record of agreement on disposal between seller and purchaser has been dropped in favour of using the existing legislative procedures of a joint election or independent determination by the first tier tribunal.

Other key areas of original proposals such as the imposition of tax written down values for joint elections has also been dropped meaning sellers and purchasers are still free to determine their value at any level up to the original cost of the fixtures.

New proposals mean that a much more thorough approach will have to be taken to the issue of capital allowances and in particular providing detailed replies to paragraph 19 of the CPSE so both sellers and purchasers are aware from the outset of the transaction what the key capital allowances areas are that need to be addressed and dealt with effectively. If capital allowances are not pooled by a seller in time then no capital allowances will ever be available to the purchaser or any future owner of the property.

Section 198 elections must be properly completed or if that cannot be agreed by the parties they must ensure that clients are aware of the procedure to enable determination of the value through the first tier tribunal. Failure to complete either of these steps will mean no capital allowances for the purchaser or any future owner are available.

Most businesses will welcome the changes to the original draft legislation. HMRC and HM Treasury appear to have listened to the views of businesses and advisers expressed during the consultation period to produce a regime which more properly reflects the reality of achieving the desired policy objective.