Ray Chidell on Capital Allowances fixtures elections in commercial properties – and a notable recent tax case which supports the “just and reasonable” basis.

Capital Allowances and Fixtures in Commercial Properties

Capital allowances can offer very valuable tax relief when constructing or buying a commercial property. The allowances are given for the cost of fixtures, which will include all the electrical wiring and plumbing costs, heating and air conditioning, alarm systems, carpets, lifts, toilets and basins, and much more.

If the property is being constructed from new, it will usually be possible to analyse the expenditure to see how much of the total can be allocated to fixtures to allow a claim to be made. Where a property is bought second hand, however, a different approach is required to determine the amount on which allowances are available.

The rules were tightened up in 2012, and those changes became fully effective in April 2014. Broadly speaking, the two parties must now reach a formal agreement about the transfer value of the fixtures in the property, and they must set that value in stone by signing a “fixtures election” (under CAA 2001 s 198). That transfer value is then binding on the two parties and also on HMRC. It does not have to be realistic, or represent a market value, but a pre-requisite is that the vendor of the property must first have taken account of the fixtures in question in his own tax computations, before then agreeing the value at which the fixtures will be transferred.

There are still some circumstances, however, where a fixtures election cannot determine the value to be ascribed to the fixtures in the property. This is usually where the vendor has been unable to claim allowances for some or all of the fixtures in question.

This could be, for example, where the vendor is a pension fund or a charity (in which case it will not have claimed allowances at all).

A more common example, perhaps, is where the vendor has owned the property since before April 2008. In this scenario, the vendor will not normally have been able to claim allowances for cold water systems or for general lighting or other electrical costs. As no election is possible for these items, the value of these fixtures must instead be determined by making what the legislation calls a “just and reasonable apportionment”.

What this means is that the law overrides, for capital allowances purposes, whatever is contained in a sale and purchase agreement regarding the split of an overall proceeds figure between different assets. So if the agreement says that the proceeds should be £200,000 to goodwill, £2 million to the property and £5,000 to “fixtures and fittings”, the capital allowances law states that these figures should be ignored unless they represent a “just and reasonable apportionment”.

Just and Reasonable Apportionment Basis

The correct valuations to use when making an apportionment have been thrashed out between surveyors and HMRC over many years and are published in the Valuation Office Agency – Capital Gains & Other Taxes Manual. The approach does not have any statutory basis but it is well established. Furthermore, a very recent case at the tax Tribunal (Bowerswood House Retirement Home Ltd v HMRC [2015] UKFTT 94 (TC)) has approved the approach, noting that it had “been used over many years in this context” and that (in that case, at least) it did give a just and reasonable apportionment.

As such, we now have Tribunal approval for a long-established approach, whereby the apportioned value of plant and machinery is to be calculated using the formula:

Purchase Price x A/(A + B + C)

where:

A is the replacement cost of qualifying items of plant and machinery;

B is the replacement cost of the whole building, excluding qualifying items of plant and machinery; and

C is the bare site value.

So the formula looks not at current market value but at the replacement cost. The key point to note is that the value apportioned to the plant and machinery is often much higher than both its original historic cost and the (possibly negligible) amount it would attract if sold separately from the property. So the fact that a property may be old, and the fixtures dilapidated, does not mean that a capital allowances claim will be of little value.

This article has been adapted by Ray Chidell from Capital Allowances 2014-15, written by Ray and by Lindsay Pentelow. The book, and the complementary A-Z of Plant & Machinery, written by the same authors, are both published by Claritax Books. Lindsay Pentelow BA, CTA (Fellow), FCA is a tax partner with Mazars and leads the firm’s tax business in the Central Region. He is also co-author of a title on Research & Development Allowances, again available from Claritax Books.