e have come across a number of situations where non-specialist solicitors, accountants and tax advisers have not recognised that a little knowledge can be a dangerous thing. This interview with former Valuation Office Agency (VOA) specialist Michael Edwards highlights the importance of considering Capital Allowances early in Commercial Property transactions.
Michael joined Lovell Consulting after 15 years within the Valuation Office providing capital allowances valuation and policy advice as internal expert to HMRC. Michael studied quantity surveying at Nottingham Trent University and is a chartered quantity surveyor. Mike has a wealth of experience reviewing capital allowances analysis. Mike previously worked with Davis Langdon as a quantity surveyor and has 40 years experience as a surveyor.
Is it possible to claim Capital Allowances on an existing, second hand commercial building?
M.E.: Entitlement to claim Capital Allowances can arise on the purchase of existing buildings. This entitlement is affected by a number of factors the main ones being when the property was purchased and from whom it was purchased.
One matter is that often overlooked is to check if there is an entitlement to claim or if there have been previous claims. This can be a lengthy and involved process and is often not carried out fully.
Another issue often overlooked on claims based on the purchase of a building is the matter of any Landlord/Tenant ownership issues. It is very easy to assume that all buildings will follow the normal Landlord/Tenant ownership split for the type of Property but from our experience this is often not the case and this matter should be researched in order to respond to any HMRC enquiry.
In your experience, what common mistakes are made when making a claim for Capital Allowances on purchased commercial buildings?
M.E.: We are aware of claims based on the Purchase Price of a building being submitted as a simple percentage of the purchase price. The percentage is derived by reviewing various websites and in order to get the claim accepted by HMRC a percentage at the bottom of the identified range is used. As a consequence these types of claims are generally significantly under claimed.
Claims have also been submitted on the basis of establishing a land value and a build cost and then by saying that the difference between the sum of these two figures and the price paid is the value of the Plant and Machinery. This method will not be accepted by HMRC as it does not use the accepted formula method which apportions the value of the various components against the price paid. Claims prepared using the apportionment formula are less likely to be challenged by HMRC.
An important part of the apportionment formula is the land value. This again is an area that is often not adequately researched. Where possible comparable transactions should form the basis of the land valuation but often a residual calculation is required.
The date of the transaction will have a bearing on any entitlement to claim Capital Allowances. What I have mentioned refers to any property purchase that occurred before April 2012.
What recent changes must be considered for transactions after April 2012?
M.E.: For purchases between April 2012 and April 2014 there were transition rules, and for purchases after April 2014 a more restrictive regime is in place.
For purchases after April 2014 it is still worth checking prior ownership and claims history and there can still be an entitlement on tax status of previous owners and date of purchase by the vendor
It is important that proper advice is taken when a property transaction is being considered.
A recent example we had was when an Accountant rang the office and said one of his clients was selling a hotel for £300,000 and the buyer had requested that they apportion £70,000 to Integral Features and would there be any problems with this.
There are a number of problems with this example?
- The Vendor would have to pool the allowances in their tax return and respond to HMRC if they had any queries – so may want to claim a fee from the buyer and have some certainty over the value of allowances.
- £70,000 is very high for additional integral features.
- The Vendor had bought the property for £100,000 so the integral features should be an apportionment of their purchase price not the buyers.
- The Vendor actually purchased the property in 2000 and had not undertaken any refurbishment works so could not claim for Integral Features as they only came into existence from April 2008. Therefore there was no need for the allowances to be agreed in the Sale & Purchase Contract as the Buyer could make an unrestricted claim for the additional Integral Features.
For claims based on actual expenditure incurred on building or refurbishing buildings see other website articles.