By Mark Anthistle – Senior Capital Allowances Analyst at Catax
In October’s Tax Talk, fellow Capital Allowances specialist, Dean Needham discussed the Capital Allowances claim Catax made for the landlord of our new offices located here at 3 Scott Drive. He detailed the various types of plant which qualify for tax relief (e.g. heating, air-con, electrics, lighting, sanitary, etc.) and some of the due diligence we carry out on all properties to ascertain an entitlement for our clients to claim.
We managed to identify a total of £85,400 of unclaimed Capital Allowances, and the burning question I’m sure many of you had after reading Dean’s article was “how did they arrive at that figure?”
Well, let me show you…
We completed a just and reasonable apportionment of the purchase price to determine the value of the qualifying plant. The valuation process requires an assessment of the land and a replacement value of the building and its qualifying assets.
The formula we adhere to is Q = P (A/(B+C))
Q = Qualifying expenditure
P = Purchase price
A = Reconstruction value of plant & machinery
B = Reconstruction value of building (including plant & machinery)
C = Bare site value
We know the purchase price is £1,407,000 including Stamp Duty Land Tax (SDLT) of £57,000, so to complete the equation, we must establish a bare site value and a reconstruction value of the building.
As part of our site survey of the property, our surveyor estimated the site area in line with the site boundaries stipulated by Land Registry. We then cross-reference this area with the historical rates per hectare, published by the Valuation Office Agency, to generate a bare site value. The rate takes into consideration the type of land use (e.g. industrial, residential or agricultural), the date in which the property was acquired, and the UK location.
We estimated a site area of 2,170m2 (or 0.217Ha) and a rate per hectare of £2,500,000 to determine a land value of £542,500.
Reconstruction Value of the Building
Our next task is to determine the value of the building by ‘reconstructing’ it. This is accomplished using an Excel cost model appropriate to the type of building in question, which in this case is an office.
The cost model has a rate per metre squared of every item that is required to reconstruct this type of building (e.g. external walls, windows, doors, roof, etc.). The rates supplied in our cost model were taken from an actual office construction in Trafford Park completed in October 2009. The Excel also appropriately adjusts the rates to allow for variances in costs when considering location and date of purchase (i.e. the cost model rates are based on prices from the fourth quarter of 2009, whereas 3 Scott Drive was acquired in the first quarter of 2018. Both buildings have a North West location).
We then enter the Gross Internal Floor Area (GIFA), which our surveyor also measured as part of the site survey, to calculate a cost per item. We found the GIFA to be 1,061.10m2.
So, for example, the stairs have a rate of £11.84/m2 which is adjusted to £13.93/m2 when allowing for the variances detailed above. This generates a cost of £14,781.12 when multiplying by the GIFA.
This process is then repeated for all installations with further adjustments made to allow for the cost of design and preliminaries to produce a total reconstruction cost. In this case, it was finalised as £1,980,311.60 with a reconstruction value of plant & machinery to be £153,125.89.
We now know all figures required to complete the above equation and can calculate the value of the available Capital Allowances as follows:
P = £1,407,000.00
A = £153,125.89
B = £1,980,311.60
C = £542,500.00
Q = P (A/(B+C)) = £1,407,000.00 (£153,125.89 / (£1,980,311.60 + £542,500.00) ) = £85,400.01
So, now you know. The secret is out. But, like all good magicians, I have left out some of the finer details to make it seem a simpler task than it may appear above. However, hopefully, you now have an understanding of the work that is involved in ensuring the value of the Capital Allowances identified on behalf of our clients is as accurate as possible and will stand up to the scrutiny of accountants and, if required, HMRC.
In fact, it is this pride we have in the standard of our work which has helped us obtain an enviable reputation with HMRC resulting in a significant reduction in the number and intensity of enquiries raised year on year. We can happily say with confidence that our clients are in safe hands.