finance act 2012 Archives - London Chartered Accountants Blog

April 2012 and April 2014 changes to tax law have considerable impact on property transactions which, if ignored, can lead to wasted tax relief.

Since 1996 the extent that a purchaser of commercial property can claim capital allowances on assets within a property has been limited to the disposal value brought into the tax computation by the vendor, or by a previous owner. Purchasers have therefore had to make enquiries into the property’s capital allowance history.

The above led to the introduction of a joint election between the purchaser and seller that state the amount of the sales price that is apportioned to fixtures. The amount specified in the election cannot be greater than the vendor’s costs of the fixtures. Typically purchasers would wish the sum to be high and vendors wish it to be low. The election is often one of the more emotional aspects of purchase negotiations.

The election only covers assets subject to claims from 1996 onwards. This does not prevent purchasers of older buildings identifying assets on which a claim has never been made and making a “late” claim on those assets installed within the building before 1996.

The Finance Act 2012 changes the administrative processes and scope for tax planning.

At present, the joint election is good practice. From April 2012 it is mandatory for the value of fixtures being transferred to be identified. If a joint election is not used then the only alternative is that the Tax Tribunal process determines it for the parties. From April 2012 it has been important that there is certainty as to the transfer value as, unless the value of fixtures is determined, the purchaser (nor any future purchaser) is prevented from making a capital allowances claim on those fixtures.

From April 2014 capital allowance claims will only be possible to the extent that assets have been subject to an earlier claim. This will lead to owners having increased documentation requirements to substantiate claims and purchasers seeking sight of that evidence during the commercial negotiations. A further impact is that it will prevent late claims for pre-1996 expenditure. Taxpayers therefore have until March 2014 to make the first ever claim on pre-1996 property expenditure.

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.