General PrinciplesThe new capital allowances rules which came into effect in April 2012 (and which are going to be tightened even further in April 2014) have made it in even more critical for professional advisers to understand the importance of tax elections. This is especially true when “fixtures” are being disposed of as part of a commercial property sale (S198) or lease transfer (S199). When capital allowances qualifying assets are being disposed of a “disposal value” must be entered into the tax computations. The “disposal value” must not exceed the taxpayer’s claim for those “fixtures” which is dealt with at S196 of CAA2001.
Determination of Disposal ValuesDetermining the disposal values for fixtures may not be as easy as may first appear. Firstly the S198 (S199 for leases) required tax elections only apply to fixtures and should not apply to items such as furniture which are technically not fixtures but “loose chattels”. In reality we see many tax elections which deal only with or include loose chattels. The matter is further complicated by the fact that these different classes of asset may have been grouped together within the vendors tax / accountancy records. Also another issue is that in many instances only a partial claim for fixtures has been previously made with many fixtures which do or could qualify for capital allowances having been ignored or missed. The way in which the value of “fixtures” may be determined if they have not previously been valued is detailed under S562 of CAA2001 and is by means of a “just and reasonable apportionment” of the sale price. In other words the sale price of the property must be broken down into it’s constituent parts to determine how these make up the complete cost. This usually means breaking out the respective costs for land (non qualifying), building or structure (non-qualifying) and fixtures (qualifying). Section 562 is silent on the method for achieving this apportionment and it is therefore accepted that this needs to be a specialist led valuation exercise. Frequently we have seen the determination of values for “fixtures” and “loose chattels” arbitrarily agreed between the parties and it is clear that this is not permissible as a proper apportionment exercise.
Section 198 and 199 Tax ElectionsWhere the value of ” fixtures” has been established the parties are free to agree the “elected” value of those fixtures between the parties via a Section 198 tax election agreement for purchases of a Section 199 tax election agreement for leases. This is provided that the total apportioned values does not exceed the values claimed by the seller as previously stated. From the sellers perspective they will wish to agree as low as value as possible for the tax election to prevent and “claw back” of capital allowances previously claimed. It is worth mentioning here that although it is often regarded that the tax election agreement is an instrument designed for benefit the seller this runs contrary to the underlying law which says the purchaser should benefit from the full allocation of available allowances. However putting this to one side the seller normally has two options:- a) Agree to dispose of the “fixtures” at their tax written down value allowing them to keep the tax benefit already obtained or b) Agree a lower value say £2 which allows them to keep any future tax benefit even though they no longer own the fixtures! While b) may seem to be very hard on the purchaser HMRCs position is that they are not concerned as long as the allowances are not claimed twice on the same assets. Of course for the buyer the reverse of the above is true and they would want to receive as much as the benefit as possible but this should all be part of the commercial negotiations in respect of the property. The buyer should also be aware to what extent a further claim for “fixtures” may be possible after sale e.g where the seller was unable to claim for integral features because they were purchased pre April 2008 before the legislation enabling them to be claimed came into effect.
What detail should be included within a S198/S199 tax election:-Section 201 of CAA2001 sets out what should be included within a tax election agreement as follows:-
- the amount (which must be quantified when the election is made);
- the name of each of the persons;
- information sufficient to identify the plant;
- information sufficient to identify the ‘relevant land’ (ie, the building or land that the fixture is part of s 173);
- particulars of the legal interest acquired, and
- the persons’ tax district references.