We have seen a number of articles that refer to the risk of unclaimed capital allowances being lost as a result of the new capital allowances rules. It is estimated that there is over a billion pounds of unclaimed capital allowances in the UK. The concern is that any such unclaimed allowances could be lost forever if an owner of fixtures does not identify and document the allowances available when the property is sold.
This April (1st for corporation tax and 6th for income tax) sees the commencement of the two major changes to the capital allowances regime, introduced by the Finance Act 2012 and referred to as the “pooling requirement” and the “fixed value requirement”. The purpose of these changes is to address HMRC’s concern that buyers were claiming excessive capital allowances and HMRC could do nothing about it as they did not have sufficient records to ascertain the correct level of allowances. The new rules require owners to “pool” their qualifying expenditure on fixtures in a tax return (thus bringing the expenditure into the capital allowances system at an early date) and “fix” the value of the fixtures on a sale (thus providing a “road map” of disposal and acquisition values made by successive owners).
Owners will need to allocate their expenditure on fixtures to a pool in a chargeable period beginning before the owner sells the fixtures. Even if a seller has not pooled its expenditure on fixtures at the time it sells the fixtures, it could nevertheless satisfy the pooling requirement by including it in its tax return for the chargeable period in which the sale takes place or (subject to complying with the applicable time limits) by amending a return, for an earlier chargeable period. “Pooling” the expenditure does not mean that the owner has to claim the allowances. All it means is that the owner has to include a computation of the expenditure in a tax return. This will enable the owner to transfer the allowances (and get value for them) on a sale of the property. An owner should pool its expenditure on fixtures even when it is a person that is not entitled to claim allowances (for example, a pension fund), in order to be able to transfer the allowances on a sale of the property.
Failure to meet this requirement means that the buyer (and the buyer’s successors) will not be able to claim allowances in respect of those fixtures. This means that any unclaimed capital allowances will be lost unless action is taken to pool the allowances (at the latest) when a sale of the property takes place.
The fixed value requirement
On a sale of a property that includes fixtures, the seller and the buyer will also have to satisfy the fixed value requirement in order to pass on any capital allowances and can do so in one of the following ways:
- the seller and the buyer join in a section 198 election (or, in the case of the grant of a lease, a section 199 election); or
- the First-tier Tribunal, on an application by the seller or the buyer, determine the amount of the price that should be apportioned to the fixtures (this will be done on the just and reasonable basis); or
- if the seller is a person that is not entitled to claim allowances (for example, a pension fund), but a former owner was required to satisfy the fixed value requirement, (i) a written statement by the former owner of the amount of the disposal value for the fixtures that was brought into account by the former owner and (ii) a written statement by the purchaser from the former owner (which might or might not be the seller) that the fixed value requirement has not been, and can no longer be, met.
The fixed value requirement must be satisfied within two years of the date that the buyer acquired the fixtures (and the property).
In practice we expect this requirement to be met by having a section 198 (or 199) election in most cases.
What do the new rules mean?
- Capital allowances provisions in sale agreements will have to be detailed and they are more likely, therefore, to be more heavily negotiated as a result of the new rules.
- A seller will need to ensure that it has carried out a detailed review of its capital allowances history and is able to make available to a buyer all relevant tax returns and computations.
- A buyer is likely to ask more detailed questions on the capital allowances history and will want comfort in the sale agreement that the seller has (or will) meet the pooling requirement. The standard commercial property enquiries used on nearly all commercial property transactions have already been updated to capture that detail.
- The fixed value requirement means that, most of the time, a section 198 election will be required and, therefore, this will be provided for in the sale agreement. The amount to be included in the election will need to be considered carefully by the seller and agreed with the buyer.
- Sellers with a well ordered capital allowances history may be able to offer large tax reliefs to their buyers and negotiate a better sale price than sellers lacking in information
- Post 1st/6th April 2014 an owner of properties with fixtures thinking of selling should review its capital allowances position and should do so in particular when major works are carried out. This will ensure that its records are up to date. This is the case even if the owner is an entity that cannot claim capital allowances (such as a pension fund or a charity), as any unclaimed allowances would be lost if the owner has not met the pooling and fixed value requirements.