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November 28, 2013

The clock is ticking: why practices need to act now on capital allowances

By Andrew Stanley

The Finance act 2012 introduced wide sweeping changes to the way capital allowances work on fixtures, the lion’s share of these kick in from April 2014. Practices’ clients stand to lose substantial sums if they are not advised correctly, STax managing director Andrew Stanley argues

As you will be aware, businesses can claim capital allowances on eligible items bought for use within the businesses and claim writing down allowances (WDA) against their taxable profits.

Contained in the Finance Act 2012, section 187a and section 187b of the Capital Allowances Act 2001 changed how the transference of capital allowances work when a building changes hands. Mandatory pooling is soon with us, from April 2014. In short if capital allowances have not been correctly pooled, recorded and a transfer value fixed, the opportunity to claim them simply disappears.

In addition, claiming capital allowances on fixtures, fittings and integral building features (e.g. utility systems) is complicated due to the difficulties of accurately valuing systems embedded in a property and the maze of case law. This can lead to capital allowances being inaccurately assessed and processed.

Taxpayers who have not been advised correctly stand to lose substantial sums in unclaimed tax relief, hundreds of thousands of pounds in some cases.

Only one owner is able to take full advantage of the available tax relief during the lifetime of the building, so if the previous owners did not claim the current owner could be in line for a windfall. Individual claims can sometimes amount to as 35% of the value of a freehold but each case is unique and must be assessed individually.

Lincoln Holland JV, a Brighton-based property development and investment business, bought a large residential building in Brighton with several other investors to let out as 37 separate apartments. Capital allowances do not extend to ‘dwelling space’ so the plant and machinery in the apartments were out of the picture. A capital allowances survey revealed Lincoln Holland JV was entitled to capital allowances of over £320,000 on systems in the communal areas, such as the halls, lift and the plant room, not classified as dwelling areas.

Capital allowances at point of saleWhen a commercial building changes hands the parties should enter into a joint section 198 election (s198) to fix a transfer value for the allowances.

Quite often you will see a proposed s198 election at £1, commonly when you have a larger tax savvy vendor selling to a smaller SME. This is of course great news for the seller as they will retain the tax benefit on the items in the building. However, if advised correctly a better deal can generally be negotiated for the buyer.

For example London-based care home owner Robin Roopun was in the process of buying two care homes in Worthing, West Sussex. The vendor issued an election to fix the capital allowance value at £1 in the new buildings, meaning Roopun would have simply lost the tax benefit of the plant in the buildings. Roopun’s solicitors were unable to advise him and the vendors solicitors told them it was £1 or forget the deal.

We negotiated with the vendor and their solicitors on Roopun’s behalf and eventually reached an outcome. Roopun retained the right to claim on the plant and machinery, which included many items that might normally have been overlooked, such as kitchen equipment, extractors, cold water systems and pipework. Many of these items the vendor hadn’t claimed and wouldn’t even have been legally able to claim, their solicitors were looking to out the election in place "just to be sure"!

Across the two properties Roopun claimed £342,000, slashing his corporation tax by nearly £79,000 (23%) as the homes were purchased by his limited company.

Duty of careCome April 2014 ill-advised clients stand to lose substantial amounts and they will look for someone to blame. But who owns the duty of care here?

As we saw in Clarke v Iliffes Booth Bennett [2004], a case not directly related to capital allowances, although one in which it was ruled that a solicitor has a duty of care to understand and advise on every facet of a contract they are instructed on, regardless of what their care letter states. We would envisage that if put to test this would extend to capital allowances in a commercial conveyance.

However they will often look to shift the duty of care by telling taxpayers to speak to their accountant. If you provide general accounting services it is unlikely that your engagement letter covers the transference of capital allowances in a property deal. However if you do give any advice to your client, you now owe a duty of care even if you are not being paid for your input.

If you give advice put in place a separate engagement letter and be 100% sure of what you are advising your client to do. This has always been good practice but is essential now in light of the recent Mehjoo v Harben Barker [2013] ruling. In this case a leading accountancy practice was found negligent after it recommended an inappropriate tax avoidance scheme to a client and they ended up being challenged by HMRC.

Accurately assessing a taxpayer’s full capital allowances entitlement requires a fusion of tax knowledge and surveying expertise. Because of this many practices choose to bring in outside specialists rather than risk tabling impartial advice.

With the mandatory pooling just round the corner accountants must ensure they have access to the specialist knowledge required to protect their clients’ interests and uphold their duty of care. Practices that add value in this area could stand to benefit greatly whilst those that overlook it may find themselves exposed.



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