By Mark Anthistle, Senior Capital Allowances Analyst at Catax
The Current Predicament
The Pooling Requirement has previously been covered in significant detail, so I will avoid elaborating on the technical elements of its introduction any further in this issue. However, we find that- because many clients and their advisors are only instructing a specialist such as Catax once contracts have been exchanged, it can result in substantial tax savings being missed. This is especially so given the potential for the majority, if not all, of the Capital Allowances being available to the seller and not the buyer.
The Pooling Requirement generally requires the seller to pool all available Capital Allowances and either retain them or dispose of them to the buyer upon completion. If these allowances have not been identified by the seller (which often happens to be the case) the potential benefit and tax savings will be lost forever if not addressed in time.
The fundamental issue we face with our clients as buyers is, they are often only made aware post-completion of the potential tax savings available to them. At this time contracts have already been exchanged with the seller and ownership has transferred to the buyer, so, in terms of the seller, they have little to no incentive to cooperate and assist the buyer in identifying the unclaimed Capital Allowances and disposing of them appropriately. There could be a great deal of work to be done on their part with no reward at the end (unless the buyer agrees to share a percentage of the Capital Allowances), so without appealing to their better nature, getting them to work with the buyer, for the buyer, is extremely difficult.
The Ideal Scenario
It is therefore preferable for Catax to be consulted during the contract negotiation stage and prior to exchange as we can ensure the relevant provisions are put in place by advising that tailored clauses are inserted appropriately into the agreement thus safeguarding any taxable benefit for the buyer.
These clauses are worded specifically to guarantee seller cooperation post-completion while maintaining the existing timeline so as to not delay the transfer in any way. We can also offer input on the replies completed by the seller to the CPSEs relating to Capital Allowances. The responses to these questions can only strengthen the buyers’ position further.
We were instructed by a client in May last year to assist with their claim to Caapital Allowances on a holiday park they were purchasing the following month and, at this stage, the CPSEs had been completed, but contract negotiations were ongoing. Thankfully, the seller had stated in the CPSEs that they were willing to discuss the matter of Capital Allowances if required, and we established via Land Registry that they acquired the property in January 2008 for £850k.
We successfully managed to have our clauses supplied to the solicitor inserted into the contract with the agreement of the seller and, at this point, allowed the transfer to continue and complete as planned without delay.
Following completion, we commenced our full due diligence procedure; however, this time, instead of on behalf of our client, it was based on the seller’s acquisition. With the terms of the contract in place and binding, we had the full cooperation of the seller allowing the process to run smoothly.
Catax identified nearly £125k of unclaimed Capital Allowances for the seller who then, as agreed in the contract, disposed of in full to our client resulting in a tax saving of £23k in the year ended 31st October 2018.
In addition to the main claim, we were also able to complete an integral feature claim for our client based on their purchase expenditure of £3.6m given the seller acquired the property pre-April 2008 and before the introduction of integral features. A further £23k of Capital Allowances were identified and added to the above figures.
Catax was able to establish a total of nearly £148k in unclaimed Capital Allowances for the client. However, 84% of this amount was generated from the seller. Without their cooperation, the claim would have been restricted to the integral features which yielded a tax saving of just over £4k compared to the significantly larger savings noted above.
This highlights the need for commercial property buyers to take a proactive approach with regards to Capital Allowances and employ Catax at the earliest opportunity to ensure the maximum benefit is obtained. It could be a costly decision to delay appointing a specialist due to incorrectly believing it will have an adverse effect on the exchange date.
Given the restrictions the Pooling Requirement legislation imposes together with the experiences we have had historically in gaining the fundamental cooperation and assistance required of the seller post-completion, it has never been more important that the subject of Capital Allowances is properly addressed and given the time and resources it deserves.
If you’d like to talk about anything discussed in this blog, please contact us!