capital allowances Archives

What are capital allowances?

Expenses incurred in a business are either capital or revenue expenditure. Revenue expenses are normally for day to day costs such as stationary, or in a property context repairs such as reparing and paintint a wall. Capital expenditure is usually expenditure on items which provide an enduring benefit for the trade. By enduring benefit we normally count a life span of two years as a minimum. Capital expenditure is not automatically deductible from trading profits, so a measure of tax relief is received in the form of Capital Allowances. According to Curtis Plumstone Associates a clear definition of capital allowances is, ‘A Government Tax Incentive to Invest in Plant and Machinery’. This incentive reduces taxable profits by claiming tax relief on certain types of capital expenditure (plant and machinery) to reduce taxable trading profits.

Capital allowances are also available to those who have incurred qualifying capital expenditure on the construction, fit out, refurbishment or acquisition of commercial property within a trade. This can include offices, hotels, restaurants, retail, industrial, mixed use developments and various others.

Commercial property let out to a third party can also attract a claim for capital allowances. This can include property both in the UK and abroad provided the company or individual pays tax in the UK.

Does all capital expenditure qualify for capital allowances?

Not all capital expenditure qualifies for capital allowances. The company/individual claiming the capital allowances must own the asset. Provided the property is held as a fixed asset and not stock, expenditure on the installation of Plant and Machinery (including any demolition costs) will qualify for capital allowances. Plant & Machinery, in the context of property, includes items such as electrical sytems, heating systems, hot & cold water systems and sanitary ware

Please be aware that expenditure on hire purchases, finance leases and cars have a different set of capital allowances rules.

How do I claim capital allowances?

Capital allowances must be calculated and claimed in a tax return. However, there is no time limit on claiming capital allowances, as long as the asset is still owned and used within the trade.

We advise when building, acquiring or completing refurbishment projects on a property, capital allowances are considered at the earliest stage. This will help to maximise the tax benefits. For example solicitors should be advising any potential purchaser of a commercial property to consult a Capital Allowances Specialist such as Curtis Plumstone Associates well before exchange of contracts.

What are Integral Features?

Integral features were introduced in Finance Act 2008. They are fixtures within a building which typically provide a longer lasting use and are harder to remove from the property. Integral Features include: Lifts, hot and cold water systems, heating and ventilation systems, electrical lighting and power systems and external solar shading. Currently, Integral Feature receive the writing down allowance (WDA) of 6% per annum.

For example if you have a qualifying integral features asset with a value of £100,000 in the first tax year, you will claim 6% (£6,000) of allowances and have a balance of £94,000 in the pool to carry forward. In the second year you will claim 6% of the residual balance and carry forward the remainder. This is repeated until all the allowances are fully utilised or the asset is sold/no longer in use.

What are fixtures?

As defined by the Capital Allowances Act 2001 plant and machinery fixtures are fixtures that have been installed/fixed in a property so as to become legally part of the property. Ownership of these “Plant and Machinery Fixtures” passes to the new owner of a property once sold.

So even though “plant and machinery” would include tables, chairs etc. they would not be categorised as fixtures. They are known as chattels or movables and by their nature are not legally part of the property.

What rates are capital allowances given on plant and machinery?

The rates for capital allowances depend on the type of capital expenditure incurred and the date that it was incurred on.

The writing down allowance that is currently given to general pool allowances is 14%, whereas the special pool writing down allowance is 6%. The Annual Investment Allowance and First Year Allowances are far more generous allowance, giving 100% of a certain limit of expenditure within a year.

Example: If you have a qualifying general pool asset with a value of £100,000 in the first tax year you will claim 14% (£14,000) of allowances and have a balance of £86,000 in the pool to carry forward. In the second year you will claim 14% of the residual balance to give allowances of £12,040, carrying forward £73,960. This is repeated until all the allowances are fully utilised or the asset is sold/no longer in use.

What is the Annual Investment Allowance?

The Annual Investment Allowance (AIA) provides 100% tax relief on qualifying plant and machinery up to set expenditure limit within a year.

The business/individual can choose how to allocate the AIA. However, allocating it to Integral Features first, obtains the fastest tax relief; as these allowances would otherwise attract the lowest writing down allowance of 6%.

The AIA is available to all businesses but only one AIA is available each year. Partnerships where all members are individuals and sole traders are also entitled to an AIA.

No AIA is available for plant and machinery acquired from ‘connected persons’ or for assets brought into use which had been previously owned by the company/person and used for other reasons.

The Annual Investment Allowance is also time apportioned if an accounting period is more or less than 12 months.

The current Annual Investemnt Allowance is £1m which has been the case since the 1st January 2019.

What is Full Expensing?

Where a company incurs capital expenditure on assets that would otherwise qualify for the main pool (such as most loose plant and machinery, furnishings, manufacturing equipment, IT equipment and capital investment on software) it is entitled to claim a first year allowance and take a 100% in year deduction in respect of the expenditure.

So, for example, where a business would otherwise have a £1m tax liability, if they were to incur £2m of qualifying expenditure on a new production line then, by claiming the full expensing first year allowance, they could reduce their tax liability by up to £500k assuming a Corporation Tax Rate of 25%.

Special rate first year allowance

In addition, for assets that would otherwise qualify for the special rate pool (such as electrical systems, lighting systems and long life assets) a 50% first year allowance is available (with the balance being introduced into the special rate pool as normal). When compared with the ‘normal’ 6% writing down allowances for such expenditure, this is a significant acceleration. In addition the Annual Investment Allowance may also be claimed before the Writing Down Allowance is applied.

What are First Year Allowances?

First Year Allowances (FYAs) attract a100% tax relief on qualifying plant and machinery in the accounting period in which the expenditure has occurred. The following types of expenditure qualify for FYAs:

Enhanced Capital Allowances (ECAs) – energy efficient plant and machinery which has to qualify according to the Government Energy Technology list. ECAs have ended from April 2020. However a retrospective claim can currently still be made
Electric Vehicle charging points
Zero emission goods and vehicles
Cars with certain C02 emissions

Unlike writing down allowances, if the accounting period is longer/shorter than 12 months, FYAs are not time apportioned. The assets must not be second hand or they will not qualifying for FYAs.

What happens when I purchase an asset but cannot get Annual Investment Allowances (AIA)?

If an asset qualifying for Capital Allowances is purchased but the AIA has been fully utilised then the expenditure will be treated under the standard capital allowances rules and receive a writing down allowance of either 14% or 6%.

Can capital allowances be claimed on investment property?

You can claim capital allowances for plant and machinery in a commercial investment property. For residential investment properties, you cannot claim capital allowances within a dwelling (in line with legislation) unless they are a serviced apartment or qualify as a furnished holiday let. However a claim for plant and machinery within the communal areas of an apartment blocks is possible provided the property is held as an investment. This includes assets such as lifts, carpets, lighting and fire alarm installations within corridors and communal areas.

Can capital allowances be deferred/carried forward?

You can defer capital allowances in whole or in part (if it is not beneficial to claim all the allowances), and claim the residual allowances in future years.

However there can be disadvantages of not claiming capital allowances in the year the expenditure is incurred as you may miss out on fully utilising the 100% Annual Investment Allowance.

Can capital allowances create loss?

If a business is loss making, claiming capital allowances may create further losses for the year. You can elect to carry back the loss for the previous 12 months of trade, assuming the business was profitable. For post April 2017 losses, you can elect to carry forward losses to be off set against future trading profits.

Can capital allowances be carried back?

Capital allowances cannot be carried back. However if the result of claiming capital allowances created a trading loss, the loss created may be carried back to the previous 12 months of trade, assuming the business was profitable. There is also the option to amend a previous year’s tax return and submit a capital allowances claim (as long as it is within the time limit to amend).

Capital Allowances When You Sell an Asset

When you have claimed capital allowances on a moveable asset / plant and machinery (such as furniture and white goods) you are required to recognise a disposal value on sale of the asset. The disposal value typically equates to the proceeds attributed to the movable asset agreed between the Seller and Buyer, restricted to the original cost.

Similarly when you have claimed capital allowances on fixed assets / plant and machinery within a commercial property (such as the air conditioning, electrical installations and sanitary installations), you are required to recognise a disposal value on sale of the commercial property. Again the disposal value typically equates to the proceeds attributed to the fixed assets agreed between the Seller and Buyer, restricted to the original cost. However, unlike moveable assets, as the Seller of fixed plant and machinery, you are able to agree a CAA 2001 s198 tax election. The tax election will enable you to agree a disposal value figure between the original cost of the fixed plant and machinery and a minimum of £1. This mechanism only available in the UK for fixed plant and machinery, enables you to retain the capital allowances claimed on fixed plant and machinery on sale of a commercial property.

Are Capital Allowances the same as Depreciation?

Depreciation is an accounting adjustment to recognise the decrease in the value of an asset (movable or fixed assets) over time due to wear and tear and obsolescence. It is non-deductible for tax purposes. However, capital allowances are essentially a tax deductible version of depreciation. Capital allowances are the means by which a tax deduction is obtained overtime for some qualifying assets (moveable or fixed to property).

What are the Structures and Buildings Allowances?

The Structures and Buildings Allowances (SBAs) were introduced in Finance Act 2019, providing tax relief on a straight line basis of 3% for expenditure (excluding general pool, special rate pool and revenue expenditure) incurred on commercial property construction contracts awarded on or after 29 October 2018. SBA allowances can be claimed on works including structures, walls and ceilings etc. where previously no tax relief could be claimed. However it is important to note that the timing of claiming SBAs is dependent on several points, including when the works undertaken to the property are brought into use.

SBA’s are not available on residential premises which includes dwellings, student accommodation, aparthotels and prisons.

It is also important to consider that if SBA’s are claimed, there will be a deduction in the base cost of the amount claimed for Capital Gains purposes if you sell the property as an asset. This will therefore increase the amount of Capital gains to be a paid.

Working out capital allowances

Where information is missing or incomplete it can be complex to work out and to calculate capital allowances. A capital allowances specialist can assist to value the allowances available in complex cases.

Curtis Plumstone Associates are an independent specialist firm of capital allowance valuers and can be contacted via their website at curtisplumstone.com

Key capital allowances takeaways are:

Capital allowances provide an absolute tax saving on qualifying plant and machinery. The sooner capital allowances are considered and claimed, the greater the chances of obtaining faster tax relief.

It is important to review historical expenditure as allowances can be claimed on assets that are still owned and a specialist can help identify potential savings even if the information is not of a high standard.

When it comes to selling or buying a property, capital allowances are often over looked and it is beneficial to get advice early on to establish the capital allowances position and avoid any problems later on. If you are in this position contact John Plumridge directly on either jplumridge@curtisplumstone.com or 07779 756213

What makes Buildings different?

Business and commercial property owners understand capital allowances are claimable on assets for permanent use in their business. By permanent, HMRC generally means an assets to be used for at least two years or more. Therefore assets such as computers, desks and chairs fall easily into this category. Accountants deal with these types of capital allowances all the time. This is on the basis the supplier invoices make it clear what has been delivered.

Things become markedly more complicated when dealing with the purchase, construction or development of a commercial property. Information and invoices are presented which will inevitably cover claimable and non-claimable costs. The Capital Allowances Act 2001 (CAA2001) at s173 refers to “Plant and Machinery (P&M) Fixtures” being claimable and defines a P&M Fixtures as:-

“plant or machinery that is so installed or otherwise fixed in or to a building or other description of land as to become, in law, part of that building or other land”.

Although there is not a definitive list within CAA2001 of these “Plant & Machinery Fixtures” many of them have been established through legal precedent and general acceptance with HMRC. A few examples of what is claimable are listed below:-

Heating systems including boilers
Electrical systems connected to qualifying plant
Lighting systems
Sanitary ware
Storage racking
Air conditioning systems
Lifts

It is not only the initial cost of fitting these items which is claimable but also any relevant professional fees which need to be apportioned correctly. These would include architects, design engineers fees. In addition contract Preliminaries can also be apportioned.

Why you should Engage a Specialist?

Simply put a capital allowances specialist will maximise your capital allowances claim for “Plant and Machinery Fixtures”. We have the detailed training, knowledge and experience to analyse cost information relating to commercial property. This is true whether it is a second hand purchase, new build or the development of an existing property.

The cost information for these projects can be presented in a way which does not make it easy to define what is covered within the costs presented. Add to this the fact that much of the cost maybe defined as structural which may qualify for a different type of capital allowance named “Structural and Buildings Allowances” or SBAs. SBAs have their own separate rules in terms of how quickly they may be utilised to reduce your tax bills.

However tempting it might be to not engage a specialist to save on fees the downsides of not doing so could be huge. Inevitably claims could either be under calculated or overcalculated. This means the tax benefits are either reduced or if overcalculated opens the door to the possible clawback of tax and interest charges and penalties being levied. Also if an inflated claim has been made then HMRC will not only demand the repayment of the tax with interest they may impose a fine due to your negligence. Ultimately it is the taxpayer who has to take responsibility for the information in their tax returns.

How to Access Our Services

You can access our initial advice free charge in a number of ways:-

email us using info@curtisplumstone.com
complete our contact form
for a specific project you can complete our Capital Allowances Estimate Form

To read more about how to choose a capital allowances claims specialist click our post here

HMRC Updates the tax position for FHLs

The following has been reproduced from the website for the “Institute for Chartered Accountants in England and Wales” (ICAEW)

HMRC has published clarifications on the draft legislation introduced to cover not only Capital Allowances and Furnished Holiday Lets but many other tax considerations as well.

Abolition of FHL tax rules

On 29 July 2024, the government published draft legislation for consultation, which provides for the abolition of FHL tax rules from April 2025. In its response to the consultation in September, ICAEW’s Tax Faculty raised a number of issues where clarification was needed.

HMRC has now published further guidance which addresses many of those points. In particular, HMRC has made it clear that the intention is to remove the specific tax reliefs currently available for FHLs and not to change other rules. The guidance confirms, for example, that holiday accommodation, whether previously qualifying as an FHL or not, remains standard-rated for VAT.

Capital allowances and s198 elections

The general rule is that capital allowances cannot be claimed for expenditure incurred on items for use in a dwelling (s35, Capital Allowances Act (CAA) 2001), but this does not apply to FHLs. Transitional rules will apply on the abolition of the FHL regime so that capital allowances can still be claimed on expenditure included in a capital allowances pool by 1 April 2025 for corporation tax and 5 April 2025 for income tax.

The faculty had asked HMRC to explain how the transitional rules will apply where an election is made under s198, CAA 2001 to fix the amount allocated to fixtures on the sale of a property. HMRC has confirmed that the expenditure allocated to fixtures will not qualify for capital allowances in the hands of the purchaser if s35, CAA 2001 applies (ie, the fixtures are for use in a dwelling).

FHLs commencing in 2024/25

On commencement, FHL status is determined by reference to the 12 months from when the property is first let as furnished holiday accommodation, rather than the 12 months from the start of the tax year/accounting period. How this will work once the FHL rules are repealed (ie, would a new business take account of the part of the 12-month period falling after 1/6 April 2025)?

HMRC has confirmed that this will be the case. Where a business commences in 2024/25, the relevant period for the purposes of the occupancy conditions begins on the first day in the tax year (or accounting period) in which letting commences and may extend past April 2025.

Business cessations

The faculty had expressed concern that a lack of clarity around business cessations and the rules for capital gains tax (CGT) relief may lead to disputes. In particular, the faculty asked HMRC to clarify if:

business asset disposal relief will continue to be available for three years where an FHL business ceases in 2024/25 on taking in a long-term tenant; and
the abolition of the FHL rules will itself be treated as a business cessation.

HMRC has confirmed that “where legislation refers to the cessation of business, it means an actual cessation of business activity”. HMRC says that the date of cessation is “the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future”, and that to benefit from CGT reliefs beyond April 2025, the business had to cease before then.

The guidance also confirms that HMRC does not consider that the repeal of the FHL tax rules means that an FHL business has ceased.

Jointly owned property

The FHL rules tax married couples and couples in a civil partnership who own property jointly on their share of the income from the property. However, once the FHL rules have been abolished, couples will be taxed 50:50 unless they have a Form 17 in place. Form 17 can be used where the property is held in unequal shares.

The faculty welcomes that HMRC’s guidance draws attention to this. The faculty had suggested that HMRC promote awareness of the issue so that couples have time to consider completing Form 17 before the changes take effect. The faculty had also urged HMRC to consider extending the 60-day period for couples to submit the form, but this has not been done.

CGT and anti-forestalling

Clause 14 of the draft legislation includes an anti-forestalling rule, which is intended to prevent a CGT advantage through the use of unconditional contracts. HMRC’s guidance explains that where a contract is made on or after 6 March 2024, and the disposal takes place on or after 6 April 2025, CGT relief will not apply unless the claim includes a statement confirming that the conditions in the draft legislation are met.

In simple terms, the draft legislation requires that either:

the purpose of entering into the contract was other than to avoid the changes made in connection with the abolition of the FHL regime; or
the contract was entered into by unconnected parties wholly for commercial reasons.

Serviced Accommodation – Does it Qualify for Capital Allowances?

In recent years there has been a steep increase in the purchase of property labelled as “Service Accommodation”. This has also been accompanied by a number of, self proclaimed, experts offering training. Unfortunately the message given in some cases is that running “Serviced Accommodation” is a means of being able to avoid the usual capital allowances restrictions for residential property and other onerous requirements.

The truth is there is no reference specifically to “Serviced Accommodation” within the Capital Allowances Act 2001 and therefore it does not automatically qualify. As a reminder the Capital Allowances Act states that subject to other qualifying conditions, the following may be able to claim capital allowances:-

Ordinary Property Businesses
Trades
Furnished Holiday Lets (FHLs)

The most relevant of the above for the owners of “Serviced Accommodation” is normally Furnished Holiday Lets (FHLs). Therefore when we are asked whether “Serviced Accommodation” qualifies for capital allowances we first look to see whether it meets the requirements of an FHL.

What are the Qualifying Requirements for FHLs?

If you want to read these in detail then see our previous blog on this subject. However as long as the Serviced Accommodation operates in the same way as an FHL the main tests will be around the availability for letting and the pattern of letting. Therefore the following minimum requirements need to be met:-

the property needs to be available to let for 210 days per annum
the property must actually be let for 105 days per annum
there must not be a pattern of longer term letting within any financial year. Longer term letting is defined as any period of 31 days or more where the let is to the same person. If the total of these types of lets is 155 days or more in any financial year then the property cannot qualify as an FHL.

In our experience, it is the last bullet point above, which disqualifies many owners of Serviced Accommodation from claiming capital allowances. For many owners of Serviced Accommodation the certainty of long term lets, with a premium for rentals is their goal. However we believe it is not made clear to those who are entering the world of Serviced Accommodation that their property does not automatically qualify for a capital allowances claim.

What Could Go Wrong?

As we can see from the above there is a danger that an owner of “Serviced Accommodation” may mistakenly make a claim for capital allowances. Automatically making a claim for capital allowances without being aware of the facts is definitely a high-risk strategy. One where the legislation, past precedent and case law is not on your side.

If the owner gets it wrong they could be opening up themselves to penalties imposed by HMRC or a future discovery assessment. Therefore we would encourage anyone who is entering this area of property ownership and letting to contact us first for professional guidance.

Hotels are particularly suited to a Capital Allowances Claim

As a rule Hotels are one of the most suited types of commercial property when it comes to making a claim for capital allowances. In this post we briefly state why this is the case.

Hotels Contain Plant

Hotels are rich in “Plant” which qualifies for capital allowances under the general “Fixtures” rules within the Capital Allowances Act 2001. Some of these fixtures include:-

Lifts
Air-conditioning
Heating
Sanitary equipment including toilets, baths and showers
Signs
Fire detection equipment
Hot & cold water systems
Wi-fi and telecommunication systems

Additional Plant

In addition to many of the common items found in other commercial property hotels contain items which are not commonly found in other buildings. Some of these include:-

Swimming Pools
Gymnasium Equipment
Laundry Equipment
Reception Desks & Bars

Items Creating Ambience

In addition to all of the above and more besides capital allowances are allowable on many items which create ambience. That these are allowable is as a result of a legal case of IRC v Scottish & Newcastle Breweries Ltd (1982) 55 TC 252. This means that items such as works of art, ornaments and bric-a-brac may normally be allowable for capital allowances purposes.

These items may also be allowable in other buildings where ambience is created for the benefit of customers such as Restaurants & Public Houses. However they would not be allowable in other commercial buildings such as Offices.

Making a Capital Allowances Claim

As a general rule the level of capital allowances claimable for a hotel will fall between 20% to 30% of the original purchase price of the property. Although if an extensive development or refurbishment work has been undertaken this percentage can increase dramatically when the costs of purchase and refurbishment are added together. Also luxury hotels may attract a higher percentage because of both the quality & quantity of eligible fixtures.

If you own a hotel or hotels (or you have clients who do) then please contact us for a free capital allowances claims estimate

Are capital allowances available on the purchase and fitting of doors?

One of the useful things about studying “Google Analytics” for your website is that it does let you know what questions potential clients are looking for when searching the internet for answers.

One question which appears to be regularly asked is whether doors attract capital allowances? The answer to this, as with many other things connected with capital allowances, is not all together straight forward.

Generally speaking the answer would be no.

In the majority of cases capital allowances are not claimable on doors but fittings such as door locks, handles, kick plates and door closers are claimable. The door itself is considered to be part of the structure of the property and therefore does not qualify for Plant and Machinery (P&M) capital allowances.

When may a door be claimable?

However there may be certain circumstances where a door may be claimable i.e. where it’s purchase and fitting are made wholly necessary by the addition of or modification of a qualifying piece of plant and machinery. Therefore in these circumstances it may be claimable as an associated cost in connection with a qualifying piece of plant and machinery.

Another factor which may need to be considered is whether the door is of a specialist nature and whether it qualifies for P&M capital allowances because it is specifically required because of the specialist nature of the trade incurring the expenditure.

Electric Doors

Since the introduction of the Integral Features Legislation in April 2008 electrical systems may be claimable where previously they were usually only claimable where connected to a qualifying piece of Plant & Machinery. This means that although a door itself may not be claimable any electrical closing system would be.

JD Wetherspoons

A recent tax case which has been ongoing since the 1990s has made decisions in respect of whether JD Wetherspoons may claim certain elements of their refurbishment and redesign costs as P&M capital allowances. Among the items considered were the construction of public toilet cubicles. On this particular item the tax tribunal found in favour of JD Wetherspoons i.e. that the construction costs of the toilet cubicles are allowable as they were associated and made necessary by the sanitary ware which is claimable as capital allowances expenditure. Therefore one must conclude that the cubicle door is claimable as part of the construction costs of the toilet cubicle.

Are you Missing the Bigger Picture?

You have obviously visited this page because you have or are planning to fit or replace doors in a building. However if you own the freehold of the building have you checked to see whether capital allowances have ever been claimed on the “plant & machinery fixtures in the property?”. This is where the majority of our work is concentrated because, it more often than not, produces large tax savings for our clients. If you own the freehold of a property or have a long leasehold then why not complete our “Free High Level Review Form” to ensure you are maximizing your property related tax relief.