By Mark Anthistle, Senior Capital Allowance Analyst at Catax
Prior to April 2014, the buyer of a newly purchased commercial property was generally able to make an unrestricted claim for Capital Allowances on the qualifying embedded plant contained within it. This was only the case so long as the seller (and any previous sellers) had determined the property did not make any claim on the same plant during their period of ownership.
The problem HMRC were facing at this time was that, as Capital Allowances are just one of many aspects of a commercial property sale, most buyers and sellers failed to adequately address them at the point of sale. The lack of understanding in this area lead to claims of which the validity couldn’t adequately be verified due to the unavailability of historical tax and Capital Allowances data.
In order to rectify this uncertainty HMRC introduced the Pooling Requirement for all commercial properties purchased post-April 2014.
What is the Pooling Requirement?
In basic terms, all Capital Allowances on qualifying fixed plant in qualifying use available to the seller must have been pooled by the seller at the point of sale. A fixed amount must also be agreed with the buyer to determine the value of that fixed plant which is to be disposed.
The fixed amount is agreed via an election under Section 198 CAA 2001 with the value not exceeding the capital expenditure incurred by the seller on the fixed plant or the sale price.
What does this mean for commercial property owners?
Unfortunately, the buyer of a second-hand commercial property can no longer make a claim for fixed plant and must rely on the seller to pool the available Capital Allowances and dispose of them in part or in full when the property is transferred.
Sadly, too many commercial property owners are unaware as to the full extent of the Capital Allowances available to them and the significant cash benefits their business can enjoy as a result. It is also because of this ignorance that huge sums of Capital Allowances are being lost forever on a daily basis.
HMRC imposed a 2-year deadline from the date of a commercial property transaction to agree to an election. This means that any party to a property transfer between 1st April 2014 and 1st May 2016 (i.e. 2 years ago at time of writing) that has not yet addressed the issue of Capital Allowances has lost the ability to do so. Additionally, the big worry is that this window of lost opportunity is only going to keep getting bigger and the total amount of tax benefit missed out on is continuing to grow.
For example, an office building bought in February 2015 from a seller who acquired for £1m in 2009 could contain potentially £250k of Capital Allowances which would result in a company tax saving of approximately £45k. If these two parties haven’t agreed an election by now then these allowances and resulting benefit have been lost forever.
Are Capital Allowances on fixed plant going to eventually disappear then?
No, there will always be Capital Allowances available. Generally, any new build construction, property extension, conversion or refurbishment will have Capital Allowances available that do not fall foul of the pooling requirements as well as any property acquired from a seller who did not have a qualifying activity (e.g. a property developer) or is a non-taxpaying entity (e.g. a charity or pension fund).
There are also installations, known as integral features (e.g. electrics, lighting, and cold water), that currently qualify for Capital Allowances but were deemed “non-qualifying” before April 2008. So, if the seller acquired the property prior to this date, they are not able to claim on these integral features and therefore, the pooling requirement does not apply. As a result, the buyer is then able to claim on these integral features based upon their own capital expenditure which may still generate a worthwhile claim. Using the office example above, up to £100k of Capital Allowances could be available if the seller acquired in 2007 instead of 2009.
In summary, all is not lost but awareness of the availability of Capital Allowances on fixed plant and the introduction of the pooling requirement must improve if we are to reduce the rate at which this benefit is lost to the taxman!