Many owners of commercial property are paying too much tax because of a lack of meaningful advice from their accountants and solicitors in respect of capital allowances claims.
The government will start consultation in May 2011 on whether to continue to allow capital allowances claims on purchases of commercial property regardless of the purchase date. As the legislation stands at the moment a claim may be made for qualifying “plant and machinery” within the property with no time limitations applied as to the date of purchase. Though properties owned by charities or held in a pension fund are ineligible for capital allowances claims as in these circumstances no tax is paid.
It would seem that the government have realised if the current regime continues it will potentially be vulnerable to the loss of millions of pounds through tax rebates and reduced tax income. Obviously given the current state of public finances in the UK the government wants to retain as much money in HMRC’s coffers as possible.
If the government does manage to reduce how far one can go back in terms of making a capital allowances claim then many owners will have lost out without ever realising that this is the case. Many landlords of homes of multiple occupation (HMO’s) have already lost out, to a great extent, due to changes that HMRC introduced in October 2010 as will many owners of furnished holiday lets if they do not review how recent changes have effected their rights to make a claim.
How then can this situation have been allowed to potentially arise?
Firstly one needs to understand that capital allowances in commercial property are derived from the “plant and machinery” present at the time of purchase plus and subsequent re-developments / refurbishments of the property. The value of “plant and machinery” may as a general rule be anywhere between 10% and 50% (or even more) of the value of these total acquisition and development costs depending on the nature or function of the property. Thus a property purchased for £1m may produce say 35% of this price in capital allowances meaning that £350,000 can be used to shelter profits from taxation over time. At 20% Corporation Tax that would mean a potential total saving of £70,000 for the owner some of which could be in the form of a substantial rebate. Obviously if 40% Income Tax is paid the potential saving doubles to £140,000.
Solicitors at the time of purchase or sale are required to ask questions of the seller about the capital allowances claims history of the property. Armed with this information they would then be able to advise the buyer or seller, depending on who they represent, of the right course of action in terms of making a potential claim or ensuring where a claim has already been made that the allowances are distributed to the benefit of their client via an election agreement. However this is all too frequently seen as a paper exercise with many solicitors unclear as to what their role is within the process and many recommending that the client speaks to their accountant for clarification
So the buck gets passed to the accountant, who in most cases, due to the complexities of the capital allowances legislation (CAA 2001) and effective case law which has built up struggles to know where to turn. This is where an experienced and highly qualified specialist capital allowances firm needs to be engaged to undertake the required surveys to maximise the value of the qualifying plant and machinery present. This leads to the compilation of a report for submission to the HMRC which can produce the required tax savings and in many cases tax rebates.
However for whatever reason the majority of accountants do not engage such firms, whether it is because they are unaware of the potential for a claim or are just reluctant to introduce a third party provider even if it is going to be for the benefit of their client. The fact that most reputable capital allowances specialists will undertake an initial high level review of the client’s potential claim and guarantee not to charge unless a worthwhile claim is possible does not seem to motivate many accountants to make the required recommendation to their client.
So just as “evil will flourish when good men stand by and do nothing so the HMRC will prosper because many accountants and solicitors will figuratively speaking do the same”. Unfortunately time is likely to start running out to try and persuade professional advisors of any perceived duty they may have in this respect so the owners of commercial property will suffer financially at a time when, due to the economy, they may not be able to afford it. However the time has not yet arrived so solicitors and accountants who have to date turned a blind eye to this situation can still redeem themselves for existing and some future clients.