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Capital Allowances, Corporation Tax Loss Relief & Interest Deductions – Act Now

SERIOUS IMPLICATIONS FOR PRIVATE EQUITY BUSINESSES AND PROPERTY COMPANIES

Capital allowances are available to companies when they incur expenditure on buying, building or refurbishing commercial property and the tax benefits can be significant.  It is a non-contentious way of reducing a tax bill but in our experience is frequently overlooked by companies – either due to the ability to shelter profits through loss relief and debt interest relief or simply due to a lack of understanding over the benefits and ability to claim.

Businesses such as restaurants, hotels and nursing homes are often labour intensive and spread over a number of sites, frequently with historic losses.  They have largely been able to ignore capital allowances.

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However, recent changes in loss relief rules and the new interest restrictions means that many companies will now become profitable and for the first time may well start paying tax. According to the BPF response to UK Government Consultation on Reforms to Corporation Tax Loss Relief these measures will raise an additional £1.36bn in revenue by 2020/21.  A significant impact that not many companies are prepared for. 

The changes could put some developments at risk as their financial viability comes under closer scrutiny – leading more projects to be shelved at feasibility stage.

Not only are these rules complex and run to over 90 pages, they will be introduced from the 1st April 2017 – minimal time for companies to address the issues or take steps to mitigate the impact either financially or administratively.

One way for companies to reduce the tax bill almost immediately and mitigate the impact of these rules is to revisit all capital expenditure incurred on property that is still in ownership and claim any historic capital allowances that are due.   There is no time limit for making claims in current tax returns.

Restriction on Corporate Interest Relief

Going forwards, the restriction on interest will be the higher of:

  • A de minimus of £2m
  • The lower of 30% of ‘tax EBITDA’ (earnings before interest, tax, depreciation and amortisation) and the consolidated net interest expense of the worldwide group (the fixed ratio rule)
  • The lower of a ‘group’ percentage of ‘tax EBITDA’ and the consolidated net interest expense of the worldwide group on third party debt (the group ratio)

Implications for Companies

For companies, where historically they have enjoyed the benefit of interest relief on large debt, the fixed ratio could tip them from losses into payment of tax in quarterly instalments.  This could particularly apply to private equity businesses and property companies.

For property companies within an international group, the proposals could be less punitive than the 30% limit.

Public Benefit Infrastructure Exemption (PBIE)

Certain exemptions to the corporate interest rules have been introduced, and have been extended to include real estate investment businesses.

Companies will be deemed to be qualifying companies if they satisfy certain criteria such as having all profits being fully chargeable to UK tax and comparable debt to other group companies.  Where these qualifying companies hold UK property which is let for less than 50 years, they can elect and remove the qualifying interest from the new rules.

There will also be limited grandfathering provisions.

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Conclusion

Lovell Consulting advises that one of the easiest ways to mitigate the changes is to make sure that historical and current capital allowances have been claimed.   Going forwards, the failure to claim allowances will be extremely costly in tax terms.

It is therefore an excellent time to revisit capital allowances planning.

About Lovell Consulting

Lovell Consulting has a highly skilled and expert team, dual qualified in surveying and tax.  Frequently, construction cost information can be unhelpful and will not provide the level of detail required  to submit a robust capital allowances claim.  Lovell Consulting has the expertise to identify the unusual items of qualifying plant and machinery as well as segregate the high level construction costs.

When buying or selling property, it is vital that the benefits of capital allowances are not lost.  To avoid any potential delay to transactions, it is important that buyers and sellers of commercial property have an accurate and useful exchange of information through the use of CPSE. It is recommended to use a specialist capital allowances firm such as Lovell Consulting to achieve a positive outcome.

Lovell Consulting purely specialises in capital allowances and has provided advice on capital allowances for thousands of commercial transactions throughout our 20 year history.

The team at Lovell Consulting can be reached on 020 7329 1300 for further guidance.

 

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