Do you understand your pooling obligations?

I expect the answer to that question for most people is no. However, failing to comply with new legislation introduced in the Finance Act 2012 will prevent the purchaser of a commercial building claiming capital allowances on any fixtures and fittings acquired with the purchase.

The legislation is simple in its concept but as is often the case, will cause significant practical difficulties. The new rules have been introduced because HMRC are convinced that there has been a large scale double counting of capital allowances caused by the purchasers of commercial buildings making a late claim to pool capital expenditure on their original purchase of the property some years after the date of purchase. Such claims generally assume that the seller has not previously made a claim for capital allowances on these fixtures and fittings and, due to the lapse of time between sale and pooling of expenditure, HMRC has not been able to check the records of the seller to make sure this is correct.

In HMRC’s consultation last year the Revenue recognised the fact that there was a natural tension between the purchaser and seller in connection with capital allowances on fixtures and fittings. The seller is likely to seek a low value on capital assets to enable them to claim higher balancing allowances on sale, whereas the purchaser is likely to want to a high value on fixtures and fittings to enable them to claim a larger capital allowance portion of the sale price. The intention of the new legislation is to ensure agreement between the seller and the buyer as to the amount of capital allowance expenditure available.

The practical problem that seems so far to have been overlooked by HMRC is that the seller of the building is under the obligation to identify and pool the relevant capital expenditure but is likely to have less interest in doing so than the purchaser. Essentially the legislation forces the buyer into ensuring that he agrees a section 198 election with the seller to determine the value of the allowable capital expenditure. If the seller refuses to play ball then the purchasers only option is to apply to tax tribunal to agree the capital allowance pool.

It is still early days, however, what has already become clear is that capital allowances will now form a significant part of the negotiations in the purchase and sale of commercial buildings and accordingly you should keep your accountants advised at the earliest stage when considering a disposal or purchase.