HM Revenue & Customs has issued a consultation, proposing to change the rules for claiming Capital Allowances on fixtures in a building. The changes, which were trailed in the 2011 Budget, are likely to create significant problems for property buyers.
Capital Allowances are a tax deduction claimed against fixed assets such as cars, computers, machinery, office equipment and the like. It is the tax equivalent of depreciation.
Generally, a business (such as a property business or a trade) may claim Capital Allowances whenever it wants. The only requirement is that the asset should still be in use by the business when the Capital Allowances are claimed.
This is a common situation for people / companies buying properties for use in a business: they are often unaware that they may claim tax allowances when they buy a second hand property and may only find out when their adviser tells them so. This may come to light several years after the property has been acquired - but the current rules provide the comfort that there will be no problem as the Capital Allowances may still be claimed provided the business still uses the property.
However, HM Revenue & Customs has taken exception to some of these 'late claims' on the basis that where they are made many years after the property was purchased, the 'true value' of those eligible fixtures may be difficult to agree; there is also the risk that the previous owner may have claimed Capital Allowances on those fixtures already, so that there is an effective duplication of relief.
The proposals are:
- The purchaser must identify the amount of expenditure on the property which is eligible for Capital Allowances within one or two years of acquisition
- The purchaser must effectively agree that amount with the vendor, to ensure that across both parties, the total amount claimed for Capital Allowances is not excessive - broadly similar in principle to the current election under CAA 2001 s 198.
Both of these proposals will place additional burdens on the buyer.
The first proposal is a significant restriction which goes against the flexibility currently available in the Capital Allowances legislation. That flexibility is particularly useful for property purchases, where the buyer is frequently unaware that Capital Allowances may be claimed, and the process of assessing eligible expenditure can be complex and time-consuming.
The second proposed change will potentially damage the purchaser's negotiating position, as the vendor is not necessarily obliged to agree the amount available to be claimed - particularly after the deal has been made.
Further information can be found at Capital Allowances for Fixtures
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Hi Andy,<br /> <br /> For years, the legislation has been structured to allow the flexibility which these new proposals seek to limit, precisely where that flexibility is most needed. Deriving valuations on second hand properties can be very time consuming.<br /> <br /> However, it is also fair to say that there are real risks of excessive claims where the property's history is uncertain, and where previous parties may have claimed allowances.<br /> <br /> HMRC is clearly unhappy with the current situation, and seeks to change the playing field. Given how little opposition there appears to have been so far to the reduction in Annual Investment Allowance, and Capital Allowances rates generally, I don't see that there will be any great resistance on this particular issue.<br /> <br /> It follows that there is likely to be a transitional period wherein many property owners will want to claim their entitlements before it's too late.<br /> <br /> Regards,<br /> <br /> Lee
Unlike previous proposals regarding FHLs, are these more likely to get through as they've been proposed by this government?<br /> <br /> And will it cause a rush of claims (which will need to be paid out) to be made this year?