Capital allowances allow for a measure of financial relief to businesses in their fixed asset spending. The conditions of capital allowance can be incredibly complicated and are highly subject to change; as such these rules are generally accounted for by a specialist.
Capital allowances are rules in tax law that set out those deductions from profits that are allowed in relation to capital expenditure. They are tax benefits that a company can claim on funds spent on fixed assets. Capital allowances provide tax relief for capital expenditure. They also include machinery such as computers, printers, tills or other equipment essential to running the business. The concept of capital allowances is quite a common one and is standard in many national tax codes.
Capital allowances are complex issues of tax law that require specialist knowledge, especially relating to property. The acceptance of capital allowances as deductions against profits requires documentation that may have to be assembled afterward. There’s also considerable confusion among non-specialists about what may be claimed. For instance, certain embedded fixtures within a building such as lifts, air conditioning, toilets, electrical and cold water systems may be eligible for for tax relief as capital expenditure.
Since the 1980s, specialist consultancies have emerged to interpret the rules in order to maximise tax relief to the advantage of business owners unaware of these capital allowances. Since the recent reform of capital allowance rules, specialist expertise has become even more important. Lovell Consulting, winner of World Finance‘s Best Tax Firm, 2012, is one such firm.
Substantial savings can be achieved by capital allowance write-downs and business owners are often surprised by the extent of the relief they can claim on capital expenditure. Generally, the larger the business and the more property it owns, the more significant claims can be. Gains are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for corporation tax. Relief may be claimed on a wide range of assets such as scaffolding, tools, furniture and other assets used in running the business.
Business that don’t work with capital allowance experts experience confusion. Many firms are unaware that items used privately before being pressed into the service of the business may be eligible for claims. Some owners believe they can claim for things bought and sold by way of trade, yet these are classified as business expenses. It may be possible to claim an allowance on the original cost of a hire-purchased item but not on the interest and other charges, which count as expenses.
The capital allowance regime is a work in progress. Changes have recently been made in the rules and apply for current claims. Findings are sometimes contested in the courts and the resulting judgements, although they may seem abstruse, will often affect thousands of businesses. It’s because of such complexities that accountants, familiar as they are with depreciation and many other issues important to business owners, often rely on firms like Lovell Consulting.
Capital allowances in the UK
Allowable for a retailer who sells fish because it’s a business investment, not for a dealer in white goods because his business is selling refrigerators. Allowances are claimed on the use of the fridge.
If bought on hire purchase, the original price is allowable but not subsequent interest payments. Tractors, trucks, cars and bicycles are eligible for tax claims.
If used in day-to-day operations like other tools of the business, there will be tax relief and recommendations can be made by capital allowance experts.
Plant and machinery contained in a building may be available for a capital allowance claim, such as lifts, heating, and electrics.
Specialists in capital allowances, who often have accounting and property qualifications, work according to a detailed procedure. The purpose is to draw up a picture of the assets with a view to assessing eligibility. Consequentially, they will have a thorough understanding of the pool of items from which to base their allowable claims. These consultancies pride themselves on an amicable and informed relationship with HMRC. This is central to their usefulness to clients. The process typically works as follows:
A detailed analysis is made of what assets fall within the scope of the exercise, whether property, equipment or anything else of relevance. In the case of multiple properties such as hotel chains, or university buildings, this can be a lengthy exercise although the specialists typically seek capital allowance synergies between assets. For instance, energy-efficient technologies may qualify for 100 percent allowances.
Having identified the allowable assets, consultants assemble information on cost and date of purchase, construction expenses, prior claims, qualifying improvements and capital expenditure over the life of the assets among other details. Property is generally subject to surveys.
In construction work, the invoices and other information about expenditure initially supplied by the contractor may not be adequate for assessment purposes. In such cases the existing information must be re-interpreted accordingly.
Once assembled the data is pooled and examined, considering its acceptability to HMRC. The fine print in the rules is nothing if not extensive. For instance, the amount and percentages of allowances are restricted on certain items such as vehicles. In property claims in particular, the information must be presented under a suitable methodology.
HMRC may be involved early to avoid time-consuming and costly readjustments later. The Valuation Office Agency may also be brought in. Here, the good relations of the consultancy with the authorities becomes pivotal.
The total amount of the capital allowances against capital expenditure are assessed, tested and provided to the claimant.
Before they are finally submitted to HMRC, claims must be reconciled for purposes of accuracy with the client’s own financial statements. Discrepancies may put the claim at risk.
Upon submission, negotiations with the authorities may ensue as the finer points of capital allowance tax law are discussed before any write-downs can be apportioned. Depending on the outcome of the discussions, the amount of the write-down may come at a discount to the sum claimed.
As of March 2012, a number of changes came into effect concerning capital allowances. Lovell Consulting offered their take on the changes:
Capital allowances – fixtures
Based on the draft Finance Bill Clause and Schedule published 29 March 2012:
• A buyer of commercial property will need to fix the value with the seller within 24 months of the transaction to claim allowances. This will be used by the seller as the disposal value and buyer as the claim value.
• From 2014 it will be mandatory for the seller of commercial property to pool the value fixed with the purchaser, in order that the owner to be entitled to claim allowances.
• Where properties were acquired prior to April 2012 allowances can continue to be claimed under the existing rules.
• Allowances on plant and machinery will be available if they have not already been relieved under the BPRA scheme.
Notable changes from the consultation draft legislation, include:
• A narrowly defined exception to the fixed value requirement where a property is acquired from an entity who is not entitled to claim allowances (example, a charity) who did not themselves fix a value when acquiring the fixtures from a past owner. To allow subsequent owners to establish entitlement to claim they may, (i) obtain a written statement from the non-tax paying seller that no value had been fixed with the past owner and (ii) written statement from the past owner confirming the disposal value, if any, he brought into account on disposal of those fixtures.
• Where a non-business owner not entitled to claim allowances acquires a property in the period April 2012 to April 2014 the pooling requirement is disapplied.
• The government announced 100 percent first year capital allowances on plant and machinery investment in five designated areas of Enterprise Zones in Scotland and Wales in addition to those in England.
• Maps and a full list of Enterprise Zones will be published on the Treasury website.
• The government confirmed the creation of Enterprise Zones for qualifying expenditure for five years from April 2012.
• 100 percent First Year Allowances (FYA) for expenditure by trading companies on new, unused plant and machinery for use in designated assisted areas within enterprise zones.
• Expenditure on assets for leasing is excluded.
• Applies to UK resident companies subject to UK corporation tax only which excludes partnerships with corporate members and individuals.
• Limit of €125m for each project.
• Must create new or expanded business, not replace existing assets.
Feed in Tariffs (FITs) and Renewable Heat Incentives (RHIs)
• Enhanced capital allowances available on plant and machinery for which tariffs are received from April 2012.
• Solar panels are designated as Special Rate pool expenditure (eight percent per annum) from April 2012.
First year tax credits for plant and machinery
• From April 2013 tax credits for expenditure on environmentally beneficial plant and machinery that generates a loss extended for a further five years to April 2018.
Simplification for small unincorporated businesses
• From April 2013 small businesses with receipts up to £77,000 will have the option to calculate tax on a cash receipts and payments basis. This may remove the need to pool capital allowances expenditure in some cases.
• The main rate of corporation tax will reduce to 24 percent from April 2012, 23 percent from April 2013 and 22 percent from April 2014
• General Pool Plant writing down allowances fall to 18 percent from April 2012.
• Special Rate Pool writing down allowances fall to eight percent from April 2012.
• As previously announced, from April 2013 flat conversion allowances and allowances for plant and machinery on safety at sports grounds are abolished.
To request an update on the changes, email John Lovell at firstname.lastname@example.org
After 14 years in the business, Lovell Consulting has established itself as one of the pre-eminent firms in the industry. Its longevity has multiple benefits:
Amicable and mutually helpful relationships with the authorities, principally the Inland Revenue and the Valuation Agency. These relationships are based on full disclosure. Not only can they speed up the processing of claims, they often result in more advantageous settlements. In 14 years all analysis by Lovell Consulting has been agreed with HMRC. Where the authority has raised an issue, they resulted in only minor negotiated adjustments typically amounting to 5-10 percent of the claim.
Thousands of real-life case studies give the firm highly practical insights into the complexities of capital allowances. This unique intellectual property covers the spectrum of the commercial world and underpins Lovell Consulting’s approach.
The firm’s intellectual property is not limited to a trove of case studies. Lovell Consulting’s staff are recognised authorities on capital allowances and deploy that knowledge on every contract. Many of them are dual-qualified in property and accountancy; most of them were trained in one of the Big 4. Just as importantly, they tend to stay with Lovell Consulting, and so offer a personalised and trusted relationship over time.
Unlike the Big 4, the firm does not suffer from tensions whereby staff may act for opposing parties. Managers are entirely focused on a client’s interests.
Lovell Consulting specialises in capital allowances. It was one of the first independent firms to totally specialise and combine surveying and tax professionals under one roof. It is recognised as an industry leader in the provision of independent capital allowances expertise. It advises across industries and tax jurisdictions. Clients range from a small furnished holiday let to large power station facilities. Each client is allocated a specific engagement team. The firm’s work is fully disclosed to the authorities. Lovell Consulting also advises many of the leading accounting and tax firms in this area.
A 28 percent tax savings achieved on hotel refurbishment
Contracted to evaluate capital allowances on the £6.5m renovation of a West End hotel, Lovell Consulting conducted analysis and found that the priced tender contained lump sum items. The firm identified qualifying expenditure of over £3.8m and repairs of £1.7m. The total tax savings achieved will amount to £1.4m at a tax rate of 26 percent, far above client expectations. As a bonus the analysis found that specific water and energy efficient plant qualified under the enhanced capital allowances regime, which gives 100 percent tax relief in the first year.
Restaurant group profits from specialist advice
After refurbishing two sites for substantial sums – respectively for £300,000 and £500,000, a restaurant company called the firm. A review established that allowances of £100,000 had been claimed for fixtures and fittings, sound system and furniture, but no claims had been made on the £700,000 spent on the building and design fees., because the builder’s invoices provided no details. Lovell Consulting, which typically works for a fixed fee or a fee contingent on savings achieved, identified no less than £500,000 in assessable assets. A further £400,000 in allowances was achieved.
Tax holiday on let European holiday homes
If you own a residential property in the European Economic Area that is rented out for more than 70 days a year (105 days per year from April 2012), you may be eligible for capital allowances. About 99 percent of owners of qualifying properties are unaware of this income-boosting benefit, as are most of their accountants. Assuming you own a €500,000 house in Spain containing basic furniture, pay tax on the rental income and meet other qualifying conditions, you may be eligible for a tax saving of up to €75,000.
Under current UK tax law the owner may be able to claim on items such as heating, ventilation, swimming pools, or electrical installations. The key is that the property is available for letting 140 days of the year. Lovell Consulting has found that up to 35 percent of the price paid for the property may qualify for this tax break.