The last couple of years have seen some of the most significant additions to capital allowances legislation since July 1996 – the introduction of the mandatory pooling and fixed value requirements (CAA2001/S187A/B). Additional legislation has been introduced to ensure that the cost of a fixture is written off only once during its useful economic life, thereby preventing any costly duplications of tax relief. Both requirements apply to commercial property transactions taking place from April 2014 (the fixed value requirement was introduced two years earlier).
We now approach April 2016 which marks the two year anniversary of the pooling requirement’s introduction. This key date forms a capital allowances deadline for those that purchased or sold commercial property shortly after the new rules took full effect.
Although a great deal has been written on the subject since its announcement we have found the industry slow to react, with failure to put additional measures in place often leaving tax relief hanging in the balance. The commercial property standard enquiries (CPSE.1) raised by conveyancers have been updated to account for the new rules, but unfortunately their responses are still lacking in detail. What is promising is the surge of enquiries we have received from solicitors and accountants alike, seeking specialist advice on the necessary actions.
The capital allowances position should ideally be established at an early stage of the transaction, prior to the exchange of contracts when both parties are engaged in correspondence and have an active interest in reaching an agreement. However in practice this is often not the case and the sale agreement remains silent from a capital allowances perspective, or a generic clause is included to protect the seller but does not ensure that they have actually made a claim.
Fortunately the allocation of capital allowances can be agreed up to two years after the transaction, by way of an election under CAA2001/S198. This two year window is quickly drawing to a close for those involved in transactions during the early stages of the mandatory pooling requirement (April 2014) and it is more important than ever to act now in order to allow sufficient time for the necessary due diligence to take place.
The requirements will apply to the vast majority of transactions, though there are exceptions. If the property has not been owned by a UK taxpayer, eligible to claims capital allowances since April 2012 then the requirements do not apply. Common examples are properties being sold by developers, charities, pension funds and government bodies. In each case, providing no prior claims have been made in line with CAA2001/S185, the new owner is able to make an apportionment of their purchase expenditure in order to arrive at a value for the qualifying plant and machinery.
As the legislation applies only to plant on which the vendor was eligible to claim allowances, it follows that certain integral features fall outside of the requirement if the vendor acquired the plant prior to April 2008. New owners can therefore sometimes make an ‘overage’ claim on certain items, notably cold water installations, small power and general lighting, based on their acquisition cost. It is important not to take the generic responses and proposals for a £2 election at face value, and to seek specialist advice if there is any doubt as to whether additional tax relief is due.