New legislation is proposed which, from April 2012, will impact on the ability of purchasers of commercial property to claim tax relief for any part of the purchase price apportionable to fixtures. The rules will oblige parties to focus on the value of capital allowances for the fixtures within the property at the time of sale and could put pressure on sellers to "get their house in order" to avoid a price chip.
What should you do?
- as a seller, consider what expenditure you have incurred on fixtures which have not yet been reflected in your capital allowance pools. Negotiate with purchasers over the value of any allowances that may pass on. Even where you have been precluded from claiming allowances yourself (eg because you are a non tax payer) you may get value from previous expenditure
- as a purchaser, consider what use you (or a future tax paying successor) can make of allowances transferred to you and seek to apportion the purchase price accordingly
- for both parties, ensure there is a provision in the sale contract providing for a formal s.198/9 election to be made to fix the apportionment in the agreed amount. Purchasers will also want a seller warranty relating to the pooling requirement
- make the election on/shortly after completion. This preserves the purchaser's ability to claim allowances and prevents either party arguing for a different apportionment at the Tribunal.
Background to the proposed changes
Generally, allowances are given by writing down the pool of all qualifying expenditure currently at a rate of 20% per annum (to be reduced to 18% from April 2012) or 10% (to be reduced to 8% from April 2012), for integral features of a building (eg lifts, air conditioning and electrical wiring). On a sale of the building, allowances may pass to the purchaser up to the amount of the seller's disposal value (broadly, its expenditure on the fixtures).
Under current rules, although the parties are able jointly to elect the amount to be treated as attributable to the items qualifying for capital allowances under sections 198/199 Capital Allowances Act 2001 ("s198/9"), there is no obligation on them to do this. Further, there is no time limit within which a purchaser must claim allowances. This leads to evidential difficulties for HMRC in establishing that allowances are not being over claimed: purchasers may make a claim several years after the sale at a time when, in practice, it is difficult/impossible to establish that this is not for more than the amount that the seller has recognised as disposal value.
Proposed changes
Draft rules were published in December 2011; these are likely to form part of Finance Bill 2012, taking effect for completions on or after 1 April 2012 for corporation tax purposes and 6 April 2012 for income tax purposes. Very broadly, once in play, a purchaser will not be entitled to claim allowances on fixtures which it has bought unless:
- The seller has, at some point before the sale, recognised the expenditure in respect of the fixtures in its pool (this condition must be met from the end of March 2014).
- The parties have made a joint election under s198/9 as to the amount that the purchaser has paid for the fixtures and made that election within two years of the date of completion. Or, if no such election has been made, one of the parties has referred the apportionment question to the First Tier Tribunal (a potentially costly, time consuming, exercise with an uncertain outcome).
The new rules only apply, however, if a previous owner who has incurred potentially allowable expenditure was entitled to claim capital allowances in respect of that expenditure. So if all previous owners (other than those who had ceased to own the fixtures before April 2012) were traders or non tax payers, the new rules will not be applicable.