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November 3, 2011updated 12 Apr 2017 4:11pm

A capital idea

New HMRC proposals should provide greater certainty to the process of claiming capital allowances. Capital allowances are deductible from a companys taxable profits in the form of an annual writing down allowance for expenditure on plant and machinery On 31 May, HMRC published a consultation document setting out proposals for two notable changes to the current capital allowances regime.

By Adam Willman

New HMRC proposals should provide greater certainty to the process of claiming capital allowances.

 

Photograph showing Adam Willman from Norton RoseCapital allowances are deductible from a company’s taxable profits in the form of an annual writing down allowance for expenditure on plant and machinery. On 31 May, HMRC published a consultation document setting out proposals for two notable changes to the current capital allowances regime.

In order to qualify for capital allowances, HMRC propose that:

  • businesses should pool their expenditure on fixtures within a short period (either one or two years) of acquiring them (the ‘mandatory pooling’ proposal). The aim is that an agreed value is reached while the seller is still contactable or HMRC may still raise an enquiry and that this occurs before the last date when both parties are able to amend their tax returns (normally a year after they file their returns); and
  • the buyer and seller of a second-hand building must agree the amount of the sale price attributable to the fixtures, and within a similar timescale, record and formally submit a joint note of their agreed price to HMRC with their respective tax returns.

Why are these changes thought to be necessary? When a business property containing second-hand fixtures is sold, the cost of the fixtures on which the new owner is entitled to claim capital allowances must not exceed the disposal value that the previous owner is required to bring into account for those fixtures in their capital allowances computation.

That disposal value is the amount of qualifying expenditure clawed back from the seller and hence available for the buyer. This ensures that overall the buyer and seller together do not claim capital allowances equalling more than the original expenditure on the fixtures.

A buyer and seller may together elect to apportion a part of the sale price to the fixtures, up to a maximum of the lower of the sale price and seller’s expenditure on the fixture (known as a ‘section 198 election’). This election must be notified to HMRC within two years.

However, in practice, at the time of sale, the parties often neglect to apportion an amount to the fixtures and may value them differently in their respective capital allowances calculations.

Since there is no time limit on pooling the expenditure on plant and machinery (provided the fixture is still owned and used in the business), this may be several years post-acquisition at a time when the previous owner has had its tax returns signed off and is no longer contactable (including where a company has become insolvent) and HMRC are no longer able to raise an enquiry, making it very difficult to determine the disposal value, and ensure that there is approximate symmetry.

Furthermore if the issue is no longer material to both parties, there may no longer be any recourse to the First-Tier Tribunal (FTT) for determination of a single value. This therefore has, in HMRC’s view encouraged owners of ‘fixtures heavy’ businesses to make substantial late fixture claims where it appears likely the previous owner would have claimed capital allowances and the bulk of the expenditure would have already been written off.

HMRC also proposes fixing the tax written down value in the hands of the seller as the minimum amount that may be agreed as the price on the sale of a fixture. This is to prevent the seller retaining the benefit of capital allowances when it no longer possesses the asset as part of its business.

Until now it has been possible through a section 198 election to apportion any value as low as £1 (€1) to fixtures, with a view to the seller retaining the benefit of allowances. If this is not possible, HMRC instead propose improving anti-avoidance measures to prevent the acceleration of capital allowances on fixtures.

The need for change was highlighted in the recent decision of The Granleys [2011] UKFTT 376 (TC), a case which involved both the sellers and buyers of a residential care home business making a capital allowances claim in respect of the same plant and machinery.

Prior to the sale, the sellers commissioned a specialist capital allowances adviser which identified further items of plant and machinery for an additional retrospective capital allowances claim. However, since the sellers were moving abroad, the adviser did not proceed with a claim on their behalf.

For the tax year in question, both the buyers and sellers appeared to make a claim in respect of the additional expenditure identified by the report.

The FTT ruled that although the buyers had acted in good faith and taken all reasonable steps to verify whether a previous claim had been made, the appellants had failed to discharge the burden of proving that the sellers had not already claimed capital allowances. HMRC’s decision to refuse the buyers’ claim was entirely reasonable.

 

Comment

The new HMRC proposals should provide greater certainty to the process of claiming capital allowances.

HMRC will have access to the agreed record of unrelieved expenditure available in respect of qualifying assets and this should prevent taxpayers from purposely making late capital allowances claims years after they have acquired fixtures, when knowledge of any previous claims is virtually impossible to ascertain.

For the taxpayer, it will force the parties to apportion consideration to fixtures when this is fresh in their minds and will be particularly helpful for situations when the last owner is not chargeable to tax and a current owner must discover the disposal value of the last owner but one.

At present, a buyer can find itself in a position prior to a sale of fixtures where it is preferable not to bring the value of potentially available capital allowances to the seller’s attention as this may weaken its negotiating position. While beneficial at the time of sale, this may prove subsequently to be a short-sighted strategy when capital allowances are not in fact available. However, there may be a need to fine tune the proposals and ensure they do not impact businesses negatively.

 

Next steps

The consultation period has now closed. The government intends to publish draft legislation later in 2011 with a view to including it in the Finance Bill 2012.

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