Capital allowances are a form of tax relief that are intended to act as an incentive for businesses to invest in capital equipment (including commercial property) by allowing companies or individuals to depreciate their assets at an advanced rate – thereby paying less tax.
Plant and machinery is probably the most common form of capital allowance for property owners. While the definition of ‘plant’ remains vague, typical items include air conditioning, heating, fire alarms, furniture, carpets, curtains and even sanitary fittings.
When a property is acquired, any plant and machinery allowances available to the purchaser must be valued according to section 150 (1) of the Capital Allowances Act (CAA) 1990.
This requires the apportioning of the purchase price paid for a property between its three constituent parts: the land, the non-qualifying building structure and the qualifying items of plant and machinery fixtures.
Similarly, when a property is sold, section 59 (2) of the CAA requires the vendor to apportion the sale price to assess the value of any plant and machinery disposed of along with the property.
Virtually every commercial property, regardless of its age, is likely to contain significant levels of plant and machinery. Indeed, it is not uncommon for the amount of qualifying expenditure to be as much as 20% of the purchase price paid.
The solicitor is involved in the property transaction from the initial enquiry stage, often even before the purchaser’s tax adviser is aware that a property is being acquired. It is therefore this acting solicitor’s actions that can determine the level of plant and machinery allowances, if any, that a new purchaser will be entitled to claim.
Until recently, the apportionment valuations undertaken by a purchaser and a vendor had little or no impact on each other.
On 24 July 1996, comprehensive restrictions were announced, which meant that every future claimant is limited to the maximum allowable amount. This amount is the disposal value brought into account by the most recent post-July 1996 claimant, be that the current or any previous vendor.
The effect of these changes is that it is no longer possible for a purchaser to make enquiries solely of the vendor to see whether a potential restriction applies. If the vendor did not make a claim, but acquired the property after July 1996, then the purchaser will need to establish whether the previous vendor made a claim that could restrict the new purchaser’s entitlement.
To ensure that no restriction applies, this line of enquiry will have to go back through every prior vendor since July 1996, or until the last past claimant is identified. The further we move away from July 1996, the more exhaustive these enquiries are likely to become.
This is an area where solicitors can add value to the existing services they offer. Potential areas of uncertainty could arise, for example, if there had been a claim made by the vendor on the initial acquisition of the property, but not on any fixtures within a subsequent refurbishment.
Having identified whether a previous claim was made, a potential purchaser still needs to ascertain the extent of any restriction that applies. By asking a few questions, the purchaser’s solicitor is in the ideal position to ascertain the basis of any restriction.
Acting for the vendor
When a property is sold, it is the disposal value of any plant and machinery also sold that determines the level of any allowances that have to be repaid by the vendor to the Inland Revenue (IR) – a clear incentive on the part of the vendor to minimise his disposal value.
One method is to insert an apportioned plant and machinery figure within the sale agreement, but these figures typically have no basis and go against all IR guidelines.
Fortunately for vendors, the 1997 Finance Act introduced alternative apportionment provisions: section 59B of the CAA 1990.
Where the vendor has claimed allowances, these new provisions allow the vendor and purchaser to jointly elect a disposal value, irrespective of whether the purchaser is entitled or intends to make a claim. If the rules are followed correctly the election is also binding on the IR. The election, which is not possible to change or undo, must be made within two years of the sale.
Again, solicitors acting on behalf of vendors are ideally placed to enquire whether their clients require the purchasing party to enter into a section 59B election. If the vendor does not enter into an election for a lesser value than his original claim, then the legislation requires the vendor to repay all past allowances claimed.
