By Dean Needham, Senior Capital Allowances Analyst at Catax.
Now we have settled into our deluxe new offices, the Capital Allowances Team thought this would be a great opportunity to highlight the type of Capital Allowances and level of tax relief that is potentially on offer for our clients with similar office premises. In particular, the scenario that has allowed the current owners of 3 Scott Drive to benefit from a Capital Allowances claim.
At Catax we specialise in identifying embedded plant and machinery which qualifies for Capital Allowances. Many Accountants do claim Capital Allowances to some degree, which generally consists of loose trade furniture and equipment; however, many don’t have the knowledge or tools available to generate the maximum claims on the embedded plant.
What is embedded plant?
Embedded plant is, in simple terms, equipment and installations that are permanently attached to the property and are needed for the building to function for its intended use. As you look around the offices here at Scott Drive you will notice the following items of embedded plant which we look for when generating a Capital Allowances claim for our clients:
Establishing prior claims and new post-2014 legislation
The first questions we asked when we looked at Scott Drive are:
The reason we ask this is that new legislation brought in by HMRC states that any new Capital Allowances claims on property purchases must be passed to a new owner by the seller.
In the case of Scott Drive; the current owners bought the property in February 2018, so it must abide by the new legislation.
Once we have established the purchase date, we then request purchase documentation from the transfer. We request these documents as, in most cases, they detail how the seller treated the property for Capital Allowances purposes.
We must establish that the property has had no previous Capital Allowances claims against it as you can only claim on an item of embedded plant once, this cannot be duplicated or repeated.
The purchase documents revealed that the seller constructed 3 Scott Drive in February 2004 and, unfortunately for our client, claimed all Capital Allowances available on the build at the time including the air conditioning installations. Therefore, they cannot assist in passing Capital Allowances to the new owner, as per the 2014 legislation.
Does this mean that we should close our file?
We must examine the extent of the seller’s Capital Allowances claims; there are also a couple of ways in which we can work around the post-2014 legislation, one of these is an Integral Features Claim.
The Integral Features Claim
When the seller constructed 3 Scott Drive in 2004, there was a small subset of embedded plant which, due to HMRC legislation at the time, did not qualify for Capital Allowances. These included the following:
Hence the seller was unable to claim Capital Allowances on the above, and they remain unclaimed.
HMRC then changed the legislation so that any expenditure made post-March 2008 on the above embedded plant would qualify for Capital Allowances. Even though HMRC changed this legislation in 2008, as the seller built the property in 2004 they still could not claim.
Since the seller could not claim on the integral features, the new owner of Scott Drive can now make an unrestricted claim on them, without falling foul of the 2014 legislative changes.
The Benefit Available
An integral features claim is significantly lower in value than a regular claim, typically the claim for an office is around 6% of the purchase expenditure compared to a full claim which would be 22%.
As such the benefit to the client is significantly reduced. However, if the purchase was made in a tax year which is still open to amendment, it can be included in the Annual Investment Allowance (AIA) which has a current limit of £200,000 per year. Essentially, this means that the claim could be relieved in a single tax year as opposed to writing down a small percentage each year over many years.
After a detailed survey and analysis of the property, we were able to generate an Integral Features Claim of £85,400, which is a great result.
As Scott Drive was bought in February 2018, the claim will be introduced into an open tax return (tax year ending 31st December 2018) and can be utilised in the AIA.
Essentially, we have reduced the taxable profit by £85,400. Without our involvement, the client would have paid tax on this amount (at the current corporation rate of 19%).
Subsequently, the client has benefitted from a tax bill which has been reduced by £16,226 for 2018!
Even though the purchase documentation showed prior claims had been made by the seller, through correct analysis and investigation we have successfully generated a fantastic benefit for our client.
We would always recommend engaging as soon as possible with the Capital Allowances Team on potential new claims. Crucially, we can generate a claim across a multitude of scenarios, as demonstrated by our dealing with a ‘dreaded’ seller’s claim here for 3 Scott Drive.