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Ray Chidell, author and director of Claritax Books, notes that the changing tax rules for commercial property owners create new risks for both buyers and sellers.

Valuable Tax Relief

Capital allowances for plant and machinery are familiar to most businesses, offering tax relief for everything from computers to cars. While the basic rules are not too complex, the difficulties multiply when it comes to claiming allowances for one valuable category of expenditure, namely fixtures in commercial property.

Although the concept of “fixtures and fittings” is used fairly loosely for accounting purposes, the term “fixture” has a specific meaning when it comes to capital allowances. The word denotes plant or machinery that is so fixed into the property as to become, in law, part of that property. As such, the term covers a huge range of expenditure, including hot and cold water systems, air conditioning and central heating, baths and showers and basins, lifts and escalators, lighting and other electrical costs, carpets and much more.

Buying and Selling Property

These allowances are available for all trading businesses, and also for commercial landlords, though (with some exceptions) they are not given for residential property. Major changes to the rules were introduced from April 2012, though some of these are effectively delayed for two years until April 2014. Between them, these changes turn tax planning on its head, and it is more important than ever for both buyers and sellers to understand the capital allowances angles when carrying out property transactions.

The key change that took effect from April last year is that a property vendor who has claimed allowances for fixtures in the property must formally agree a transfer value for those fixtures when selling that property. That value will almost invariably be included in a “fixtures election” (or “section 198 election”), which is binding both on the parties and on HMRC.

The transfer value is a matter of negotiation between vendor and purchaser, but failure to sign an election is likely to be disastrous. The buyer will be permanently denied allowances on all the fixtures in question, and the seller may well be hit with a substantial clawback of allowances already received (a “balancing charge”).

The change taking effect next April is more demanding: it requires a vendor to identify all fixtures on which he is entitled to claim allowances, and to bring the value into his computations if he has not already done so. Failure will again deny all future tax relief for the purchaser. Although there is no equivalent tax risk in this case for the vendor, the lost allowances will inevitably depress the market value of the property, which may have a commercial cost for the vendor.

Claiming for Older Expenditure

Many property owners have never claimed all the allowances to which they are entitled. The good news is that there is no time limit as such, as long as the property is still owned and the fixtures in question are still in place. If the costs were for a new building (or for an extension or refurbishment), the exercise should be relatively straightforward. If the property was acquired from a third party, it can be more difficult in practice as it will be necessary to demonstrate that tax relief has not already been given to a previous owner.