What are Capital Allowances?
Capital Allowances recognise expenditure incurred in the purchase of commercial properties and other assets as a tax allowable expense (unlike ‘depreciation’), reducing taxable profits and the associated tax liability; furthermore, claiming Capital Allowances do not increase your future capital gains tax liability if the property is subsequently sold. However, recent legislative changes place even greater emphasis on both buyers AND sellers of commercial property to review their Capital Allowance entitlement.
The majority of individuals and companies entitled to claim Capital Allowances on commercial property expenditure have not claimed their full entitlement and have therefore failed to maximise their tax relief.
Innovation Tax have helped secure millions of £’s of tax relief via Capital Allowance claims for our clients and our specialist expertise and knowledge of the Capital Allowance Act 2001 (CAA2001) ensures our clients benefit from the best advise possible.
PROJECT COST EXAMPLES
The breadth and scope of Capital Allowances is varied and, as such, many businesses and advisors fail to claim the maximum benefit available.
Qualifying expenditure can be incurred through various project types, some of which are outlined below.
/ Fit Out
Hotels Care Homes Dental Practices GP Surgeries
Veterinary Practices Offices Industrial Units Warehouses
Retail Units Car Showrooms Pubs Restaurants
Petrol Stations Students Lets Holiday Lets
Heating Ventilation Lighting Telecoms
Electrical Installations Data Installation Security/CCTV
Hot/Cold Water Systems Lifts/Escalators Fire Doors
Machinery Flooring Windows Sanitary Fittings
Why items are missed?
There is a misconception amongst businesses claiming Capital Allowances in that most assume that their advisors will claim all the relief due. However, when identifying embedded allowances within a commercial property, the process requires an in-depth room-by-room survey to identify qualifying items for the purposes of appropriately valuing them.
In our experience, accountants will usually claim for items where the fixed value of an asset is known by either an invoice/receipt value; this usually applies to ‘moveable’ items within the property. For items which are not ‘easily moveable’, the value is often more difficult to obtain, either because the items were inherent when the property was acquired or because they have been installed after acquisition by way of appointing a contractor to undertake refurbishment or improvement works to the property.
The Capital Allowance legislation has been refined over the years with new rules which affect all commercial property transactions.
2012 – Introduction of Fixed Value Requirement
Both the buyer and seller of a commercial property must agree and sign an s.198 election, confirming the value at which the fixtures are to be transferred for the purposes of a Capital Allowances claim, either at the point of sale or within two years of the transaction date.
2014 – Introduction of Pooling Requirement
The seller must ‘pool’ the value of all fixtures within the property being sold and notify HMRC by including this in their tax return. Only once this has been declared to HMRC is the buyer able to claim Capital Allowances on the acquisition.These changes are very important and should be addressed by engaging a specialist Capital Allowances adviser to ensure the correct procedures and documents are in place. Unless addressed correctly, the buyer of the property may lose any entitlement to claim Capital Allowances tax relief for ever.
Other related reliefs
Capital Allowances provide relief by allowing for the deduction of expenditure incurred in acquiring ‘Plant & Machinery’ from your taxable profits.
Most types of Plant & Machinery can be deducted in full as part of the Annual Investment Allowance (AIA) for the period in question, currently legislated at £1,000,000 pa; capital assets which don’t qualify for AIA (or whose costs breach the £1,000,000 limit) may instead be deducted at either 8% pa or 18% pa, depending upon the nature of the asset.
Plant and Machinery
Capital Allowances can be claimed for qualifying expenditure on items which are used in the business, often referred to as ‘Plant & Machinery’, which include:
CAPITAL ALLOWANCES BY THE NUMBERS
Investment (AIA) limit
Total claimed in the 2018/19
4 in 10
Companies not claiming their full Capital Allowance entitlement
Up to 45%
Of the purchase price can qualify on property acquisitions
Up to 65%
Of fit-out / refurb expenditure
Super Deduction Relief available on qualifying capital investments
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Structures and Building Allowance (SBA) was introduced in the 2018 Autumn Budget to provide a straight-line relief on eligible construction costs incurred for new non-residential structures and buildings.
SBA’s provide tax relief on eligible construction, renovation or conversion costs incurred on or after 29th October 2018 at an annual rate of 2% on a straight-line basis over a 50-year period, once trade has commenced in the building. The rate has been increased to 3% from April 2020.
Qualifying SBA expenditure can include fees for design, preparing the site for construction, construction works, renovation, repair and conversion costs and fit-out works.
When a business sells an asset on which SBA’s have been claimed, the remaining entitlement will be passed on to the new owner. Generally, no balancing adjustments are required, however when an asset is sold, the total amount of the SBA’s claimed will be added to the seller’s disposal receipts to calculate any chargeable gains on the sale to prevent relief on the same expenditure twice.
Whilst claiming SBA’s may seem straight forward, the interaction with other Capital Allowance reliefs (RDA, AIA etc) needs to be carefully considered to ensure costs are relieved under the correct provisions to obtain the maximum relief available.
The Finance Act 2021 included changes to SBA’s whereby accelerated Capital Allowances are available for investment in the eight designated freeports. The incentive provides 100% first year Capital Allowances for expenditure on new plant and machinery together with an enhanced 10% rate of SBAs, which will allow businesses to write-off qualifying expenditure within a Freeport tax site over a 10-year period.
The Super Deduction Relief was announced in the Spring Budget 2021 to stimulate capital investment on plant and machinery by providing an extra 30% deduction on qualifying expenditure, taking the overall deduction to 130%. This applies to expenditure incurred between 1st April 2021 and 31st March 2023 and on new P&M only (i.e., not second-hand).
Contracts must be entered into on or after 3rd March 2021; any which pre-date this will be excluded, even if the expenditure is incurred within these dates.
Usual rules/exclusions apply for cars, assets for leasing, ships, connected party transactions and all the usual anti-avoidance legislation applies.
The intention is to reward expenditure, which was unplanned before the budget announcement, with the super-deduction being available at 130% for agreements on/after this date and paid within the dates above.
There is also a 50% first-year allowance for special rate (including long life) assets until 31st March 2023 for companies where the £1m AIA allowance has been exceeded.
In addition to the AIA threshold, certain environmentally friendly asset types may qualify for 100% Enhanced Capital Allowances (ECA), whilst assets acquired in pursuit of qualifying Research & Development may attract Research & Development Allowances (RDA), also at 100%.
Structures and Building Allowance (SBA) was introduced in the 2018 Autumn Budget to provide a straight-line relief on eligible construction costs incurred for new non-residential structures and buildings. SBA’s provide tax relief on eligible construction, renovation or conversion costs incurred on or after 29th October 2018 at an annual rate of 2% on a straight-line basis over a 50-year period, once trade has commenced in the building. The rate has been increased to 3% from April 2020.
|Plant & Machinery|
|Bought 2nd hand||Assets held for leasing||Main rate assets||Special rate assets||New disposal rules||Structures & buildings|
|Super-deduction (130% FYA)||✔||✔||✔||N/A|
|Special Rate FYA (50% FYA)||✔||✔||✔||N/A|
|Annual Investment Allowance (100% up to £1m)||✔||✔||✔||✔||✔||N/A|
|Writing down allowances (18%)||✔||✔||✔||✔||N/A|
|Writing down allowances (6%)||✔||✔||✔||✔||N/A|
|Freeports (100% ECA, uncapped)||✔||✔||✔||N/A|
|Structures & Buildings Allowance (3% pa)||N/A||N/A||N/A||N/A||N/A||N/A|
|Freeports (SBA 10% pa)||N/A||N/A||N/A||N/A||N/A||N/A|