Retail sector owners are often overlooking substantial tax allowances. This happens because their accountants and tax advisors may only pick up simple & obvious plant and machinery (P&M) items, such as chairs, tables, shop display and fittings. When fitting out or refurbishing a retail unit, the construction expenditure is generally not very well detailed for capital allowances, therefore not easily recognised by the accountants and tax advisors. The construction costs may just be a high level summary, where a non specialist may not have the expertise to fully segregate these costs and thus lose the allowances.
The construction costs are typically comprised of qualifying P&M such as heating and cooling systems, electrical services, fire and security alarms etc. However, descriptions such as ‘finishes’ may include eligible items, carpet and some specialist ambient finishes, as well as ineligible items such as partitions and tiling. Surveying and valuation skills are required to split these costs adequately to plant and machinery allowances (PMA) and repairs. In addition, there are further less obvious qualifying items of P&M found primarily within a retail unit, which includes:
- Builders work in connection with mechanical and electrical services
- Acoustic and thermal insulation within existing buildings where provided
- CAA 2001 s.25 incidental costs such as works to lift shafts within existing buildings
- CAA 2001 s.26 strip out of plant and machinery during refurbishment works
- Electrical gears to automated doors
- Plywood support to partitioning in association with display fittings
- Ambient expenditures
Expenditure to create Ambience
Furthermore, retail units may have qualifying items of P&M that create ambience. There is no defined list that states what ‘ambience’ qualifies as P&M. Many items have become allowable through case law and are trade specific. IRC v Scottish & Newcastle Breweries Ltd (1982) 55 TC 252 was a significant case to consider ambience. The taxpayer was able to claim allowances on decorative assets such as wall plaques, sculptures and tapestries. They were not merely part of the setting but performed a valuable function. Therefore where ambience is of importance to the trade, such as in retail units, hotels and restaurants, the definition of qualifying P&M is wider than an office building. It can often be a complicated exercise as the tax case law in this area is still developing. Therefore it is necessary to engage a specialist to identify and maximise the PMA claims. Qualifying items may include:
- Artwork
- Decorative assets
- Specialist finishes
Enhanced capital allowances (ECA)
There may be scope for 100% allowances for green plant such as LED lighting and air conditioning, electric hand dryers etc. The ECA Scheme lets businesses that invest in certain energy-saving equipment specified on the Energy Technology List (ETL) write off the full cost of the compliant equipment against their taxable profit in the first year, thus providing 100% tax relief. These would otherwise attract the lowest writing down allowance at 18% or 8%.
Repairs
Where a retail unit is refurbished, some repairs expenditure such as like-for-like shopfront replacement, wall cleaning, redecoration and floor repairs is not very well detailed and is consequently overlooked. Repairs can be treated as a revenue expense and either deducted 100% in the year of expenditure or follow the accounting depreciation treatment. There could be 10% to 30% expenditure that qualifies as repairs. It is essential to consider the accounting treatment for repairs at an early stage.
Lease Premium
There could be scope to allocate a proportion of the premium paid to capital allowances for the acquisition of the short or long leasehold interest. When assigning leases, it is essential to engage a specialist to get early capital allowances advice and adequate wording at the Head of Terms/offer letter stage. If you can get agreed wording in early, there is less ambiguity for the lawyers to argue about later on with the agreement to lease.
Landlord Contribution
There could be scope to allocate a proportion of the landlord contribution tax efficiently. As mentioned above, getting early specialist advice and wording for inclusion in the contract to protect your capital allowances position is essential.
Benchmarks
We are generally able to significantly increase the allowances, when we are involved at an early stage and carry out detailed cost assessments. For fit out or refurbishment works, up to 90% of the expenditure could attract allowances.
Historical Review
For retail chains it is unlikely that full allowances will have been claimed. It is possible to review all historical expenditure and make a full increased capital allowances claim in a current tax return.
Sampling Approach
For certain large portfolios, there may be opportunity to agree a percentage for qualifying expenditure for capital allowances with HMRC. The reason being new fit-out and refurbishment programmes may have a broadly similar plant and machinery profile. These approaches can require up front agreement of the sample size and qualifying percentage with HMRC.
Recommended Approach
It is important to obtain specialist capital allowances advice before opportunities are missed. Lovell Consulting have a highly skilled and expert team, dual qualified in surveying and tax. Therefore we have the expertise to identify the unusual items of qualifying P&M, as well as segregate the high level construction costs into qualifying P&M items.
