While the increase in the annual investment allowance to £250,000 was welcomed by businesses, practitioners are facing some complex transitional rules. In determining the amount of AIAs which can be claimed, there are two calculations. First, what is the maximum available for the whole period and, second, what is the maximum for each notional period. Without a careful review, the opportunity to maximise a claim could be lost. Also, the rules introduced in FA 2012 are in force and there are a number of practical problems where a property is acquired.
On 1 January 2013, the annual investment allowance (AIA) was temporarily (for two years) increased to £250,000 – ten times the previous limit of £25,000. This was welcome news for businesses, but the transitional rules are incredibly complex and calculating the amount of relief is not straightforward.
At the same time practitioners are facing these rules, they are also grappling with the FA 2012 rules on pooling and joint elections. Some of these rules are in transition and will apply in full from April 2014.
The purpose of this article is two-fold. Firstly, we will examine the draft Finance Bill 2013 Sch 1 provisions on AIA and see how these impact on claims. Secondly, we will look at how practitioners are dealing with the FA 2012 changes and examine the practical problems being faced.
Annual investment allowance
Important terms in the draft FB 2013 are:
Two calculations need to be carried out to determine the available AIA:
How the rules work is best dealt with by way of examples – see examples 1 and 2.
FA 2012: transition April 2012 to April 2014
Since 1 April 2012 new rules, set out in CAA 2001 s 187A, apply to acquisitions of property containing fixtures from a vendor entitled to claim allowances in respect of the historic expenditure. There are essentially three requirements of the new rules:
The fixed value requirement is that where the vendor of the property has claimed allowances on a fixture, the parties to the transaction need to enter into a formal agreement to fix the value of those fixtures. Failing to do this will prevent the purchaser (and any subsequent owner) from claiming capital allowances in respect of those fixtures.
In some circumstances, the purchaser can obtain a written statement from the previous owner that states the disposal value brought into account to satisfy the fixed value requirement. Allowances can then be claimed on the values contained in the statement. This disposal value statement is used where the fixed value requirement cannot be met.
The pooling requirement, which comes into effect from April 2014, means that the vendor who is entitled to make a claim for allowances in respect of fixtures must quantify and pool the qualifying expenditure to enable a purchaser to claim allowances under the ‘fixed value requirement’.
What it means in practice
There are some misconceptions about the practical impact of the transitional rules. One is that it is possible to ignore previous owner claims to allowances. Another is that if there was a tax election by earlier owners, this would not be binding until transactions take place after 2014. In most cases, practitioners want a simple apportionment of the purchase price as per CAA 2001 s 562, without any reference to previous capital allowances claims. However this approach to capital allowances has no basis in legislation or case law (see The Granleys v HMRC (TC01269) or CAA 2001 s 185. Indeed, the fundamental reason why capital allowances legislation has been changed is that HMRC struggled to effectively police the situation. Consequently, during the transitional period it is still necessary to consider claims made for fixtures by a previous property owner. However, even if there is a tax election for £1, further additional allowances may be claimed by the new owner. This is illustrated in case study 1.
What if buyer and seller forget to sign a tax election or unable to agree?
We have seen situations where allowances have been claimed with no mechanism to agree a tax election or quantum. There is still a two-year window post sale for parties to try and agree. If there is no agreement, there is a tribunal mechanism (CAA 2001 s 187A). Based on how HMRC and the Valuation Office interpret and apply the legislation on fixtures apportionments, the buyer is likely to benefit from the tribunal. The seller is likely to lose all allowances where a property is sold for a gain. There is a partial claw back if the property is sold for a loss. It is therefore important where sellers have made claims to agree well drafted capital allowances elections as part of the sales contract.
Transition misconceptions
One misconception is that there has to be a tax election and this can lead to parties applying blanket £1 tax elections to all property sales. However, if the seller has not claimed allowances such as a property developer, charity or even a taxpayer who has made no claim, then an election is not valid and should not be entered into. Consequently it is worth checking to make sure that the seller was actually entitled to claim allowances. However, if someone is in the charge to tax and entitled to claim allowances, it is possible that they have not got around to making a claim. In this scenario they may wish to agree a mechanism now so that they can claim and enter into a valid tax election within two years.
Practical problem area
When buying properties from receivers, it can be problematic to establish the tax history. During consultations, HMRC believed that all receivers will be under a duty to obtain the best possible price for a property and that they would provide tax history, access to tax computations and be willing to enter into tax elections where claims have been made. In practice this is not the case. The records are often not available and receivers are not willing to enter into the elections with incomplete information.
Be fearful of commercial property sales post April 2014
After April 2014, it is a potential professional indemnity nightmare for lawyers and tax advisers. After this date, it is mandatory that a seller has either pooled or claimed allowances on fixtures where they are entitled to do so. Otherwise a buyer will be denied allowances. An exception is if the seller is outside the charge to tax and can obtain written statements as per CAA 2001 s 187A(8). See case study 2.
What action is required now
For any client likely to sell a commercial property after April 2014, it is important to start collating the capital allowances history now. There are currently many owners of property who are entitled to claim allowances but choose not to. While they may not wish to incur the time and cost of analysing capital allowances, they should as a minimum collate records of what the capital allowances history is. This will enable sellers to be helpful and cooperative to buyers.
Also from April 2014, buyers of property should consider clauses in sale contracts requesting sellers to pool or claim full allowances within two years of sale.
Conclusion
Dealing with capital allowances and in particular the transitional rules can be complicated. Where clients are considering an investment in assets or the acquisition of a property, the rules need to be considered carefully to maximise the relief available. Also, where capital allowances claims have not been made on a property now might be a good time to review this.
John Lovell is a director at Lovell Consulting
Paula Tallon is managing partner of Gabelle LLP
