My Client has owned their commercial property for years. Is it worth having a capital allowances review?
This is a question we get asked almost every time we meet an accountant and the simple answer is, Yes.
But as with everything tax there is always a catch and it can’t just be straight forward. The dreaded due diligence will raise its head again and pose difficult questions that cannot necessarily be answered immediately. There is almost always a little bit of digging to be done before we can say whether it will be worthwhile for your client.
So, what’s the process?
Initially, establish whether the property is owned by a tax paying entity, have they been profitable, are they profitable or are they likely to be profitable. Assuming a positive response to this, it is worth pursuing for further information.
Next, a seemingly simple question but with huge implications depending on the answer; when did they purchase the property?
There are a few key dates to consider at this point, July 1996, April 2008 and April 2014.
If they have owned the property since between 1996 and 2008 further history of the property will be required to establish the CA position back to 1996 to see if there is an entitlement to claim capital allowances.
If they purchased the property after April 2008, as before the history of the property back to 1996 will need to be established to show entitlement for main pool allowances, but Integral Features (special rate pool) was introduced in 2008 therefore an extra over claim (purely items that qualify for the special rate pool that did not qualify as plant and machinery previously) may be possible if the previous owner owned it prior to 2008.
If they purchased the property after April 2014, CAs will have to have been included within the purchase contract. There is very little that can be done in this situation.
So, the purchase date is important to establish what additional information, if any, we require.
Next is to confirm the purchase price. This will provide a gauge as to the value of capital allowances likely to be available, remembering that the tax relief will be at the written down value depending on which pool the allowances are categorised in. With a purchase the CAs will have to be apportioned to reflect the purchase price, regardless of the size of the property.
Also bear in mind that enhanced capital allowances do not qualify on purchases and the annual investment allowance will not apply to properties that have been owned for a number of years.
If the purchase price is in the tens of thousands, the tax relief may be so small it wouldn’t be a worthwhile exercise, however if it is in the millions it will almost certainly be a worthwhile exercise.
We run a hypothetical calculation to show the tax benefit against costs to illustrate to the end client the immediate benefit and long term benefit.
Finally, we find out if they have carried out any improvements to the property since ownership. If they have, check through the accounts to see if these have been capitalised and if CAs have been claimed.
So, in summary
1. Establish tax paying position of client.
2. Identify when your client purchased the property.
a. Establish which capital allowances pools are available.
b. Establish additional history of property and associated CAs, if necessary.
3. Identify the purchase price of the property.
4. Establish if there have been any improvements to the property.
5. Carry out the capital allowances report.
This article is for information purposes only and does not constitute advice. For further information please feel free to contact us.
This article was written by Iain Stamp MRICS from Elect Capital Allowances Limited, electca.co.uk 01889 740 405
Regulated by RICS