What are capital allowances?

In principle, capital allowances seem simple enough. Also known as writing-down allowances, they are rules in tax law that set out the extent to which deductions from profits are allowed in relation to capital expenditure. Thus they are tax benefits that a company can claim on funds spent on fixed assets. These can include anything from the building costs of factories, hotels, investment properties such as blocks of flats, hospitals, silos and warehouses to many other kinds of fixed assets. They can 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 tax codes across the globe.

In practice however, capital allowances are complex issues of tax law that usually require the application of specialist knowledge, especially relating to property. For instance, at first glance they may seem similar to depreciation charges, which spread the capital expenditure out over time, but are in fact fundamentally different. Also, the acceptance of capital allowances as deductions against profits requires detailed documentation that may have to be assembled after the fact. There’s also considerable confusion among non-specialists about what may actually be claimed. It’s not well known, for instance, that certain embedded fixtures within the building itself such as lifts, air conditioning, toilets, electrical and cold water systems may be eligible for writing down under specific terms.

Thus since the eighties, highly specialist consultancies have emerged to interpret the rules correctly in order to maximise them to the advantage of business owners unaware of their full entitlements. And since the reform of capital allowance rules in 2012, specialist expertise has become even more important. Lovell Consulting, winner of World Finance’s Best Tax Firm, 2012, is one such firm.

Why do I need to know?

Substantial savings against profits can be achieved by capital allowance write-downs and business owners are often surprised by the extent of these write-downs. Generally, the larger the business and the more property it owns, the more significant the allowances may be. However such allowances are not solely the right of large corporations, as many small business people believe. They are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for corporation tax. Thus they may encompass a wide range of assets such as scaffolding, ladders, tools, furniture and other core assets used in the running of the business.

Most business who don’t work with experts experience considerable confusion on capital allowances. Many firms for instance are unaware that items used privately before they are pressed into the service of the business may be eligible for writing down. Some business 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 business expenses.

Like much tax law, the capital allowance regime is a work in progress. Changes have recently been made in the rules and apply for current returns. Findings are sometimes contested in the courts and the resulting judgements, although they may seem abstruse, will often affect thousands of businesses of all kinds. 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.

What’s allowable in UK

A refrigerator..
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.

A vehicle…
If bought on hire purchase, the original price is allowable but not subsequent interest payments. Tractors, trucks, vans, cars and bicycles are eligible.

Machinery…
Yes, if used in day-to-day operations like other tools of the business like ladders, office furniture and computers.

A building…
The plant and machinery contained in a building may be available, such as lifts, heating, air conditioning, and electrics. This is where it gets complex.

How does it work?

Specialists in capital allowances, who often have accounting and property qualifications, work according to a detailed procedure. The overall purpose is to draw up a full picture of the assets of the business with a view to assessing their eligibility. At the end of the process they will have a thorough understanding of the pool of items, fixed or otherwise, from which to base their allowable claims. These consultancies pride themselves on an amicable and informed relationship with HMRC. Indeed this is central to their usefulness to clients. Here is how the process typically works:

A detailed analysis is made of what assets fall within the scope of the exercise, whether property, equipment or anything else that may be relevant. In the case of multiple properties such as hotel chains, nursing homes or university buildings, this can be a lengthy and demanding exercise although the specialists typically seek capital-allowance synergies between the 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 of items, construction expenses, details of prior claims, qualifying improvements and capital expenditure over the life of the assets among considerable other detail. Property is generally subject to thorough surveys.

In construction work, the invoices and other information about expenditure supplied by the main contractor may be fine for the purposes of billing the client but quite inadequate for assessment purposes. In such cases the existing information must be re-interpreted accordingly.

Once assembled, often from multiple sources, the data is then pooled and examined in the light of its acceptability to HMRC under the rules. And 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 methodology suitable to the authorities.

HMRC may be involved early on to avoid time-consuming and costly readjustments later. The Valuation Office Agency may also be brought in for its views. Here, the good relations of the consultancy with the authorities become central to the process.

The total amount of the capital allowances against capital expenditure – for instance, on the fit-out of a restaurant chain – are assessed, tested and provided to the client.

Before they are finally submitted to HMRC, claims must generally be reconciled for purposes of accuracy with the client’s own financial statements. Any discrepancies may put the success of the claim at risk.

After the claim is submitted, 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.

Recent UK regulations

As part of an on-going reform of the increasingly complex tax code, the government proposed a wide range of changes to the capital allowance regime in 2011. Some of these alarmed the industry. Among other planned measures were modifications of the rules relating to renovation of business premises, improvements to land, time limits on pooling expenditure, the creation of so-called enterprise zones for qualifying expenditure within certain limits, abolition of allowances for safety measures at sports grounds and so on. These changes, incorporated in the Finance Bill of December 2011, threatened to significantly reduce the amount of allowances that businesses could claim. However, while some changes have held, others were watered down or abandoned altogether in the light of expert evidence from the industry.

One measure the government dropped was a time limit on the pooling of expenditure incurred before April 2012. Thus claims now continue to be possible at any time before the sale of a property. For example, if a building is acquired in 2004 for £1m and is found to contain qualifying plant and machinery of £0.2m, it can be sold at any time until December 2014 with the £0.2m in allowances still available in the general pool. Similarly, relief for land remediation remains intact.

Industry experts

After 14 years in this specialist 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 relevant authorities, principally the Inland Revenue and the Valuation Agency. These relationships, which are based on full disclosure, are important for clients. Not only can they speed up the processing of claims, they often result in more advantageous settlements. The firm has proved this time and again – in these 14 years all analysis by Lovell Consulting has been agreed with HMRC. In those cases where the authority has raised an issue, they resulted in only minor negotiated adjustments typically amounting to 5-10 percent of the total claimed.

Thousands of real-life case studies give the firm special and highly practical insights into the complex world of capital allowances. This unique intellectual property covers the spectrum of the commercial world and underpins Lovell Consulting’s approach to their work.

Important as it is, 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; indeed most of them were trained in one of the Big 4 firms and joined from there. Just as importantly, they tend to stay with Lovell Consulting, and so offer a personalised and trusted relationship over time for clients.

No conflicts of interest. Unlike the Big 4, the firm does not suffer from tensions whereby staff may act for opposing parties. Managers are entirely focused on the interests of their clients.

Lovell Consulting exclusively 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, clients and tax jurisdictions. Clients range from a small furnished holiday let to large power station facilities. Each client is allocated a specific engagement team. All the firm’s work is fully disclosed to the tax authorities. Lovell Consulting also advises many of the leading accounting and tax firms in this specialist area.

Case studies

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 a specialist analysis and found that the priced tender contained lump sum items. By the time the firm had finished a detailed assessment, it had identified qualifying expenditure of over £3.8m and repairs of £1.7m. Over time, the total tax savings achieved will amount to £1.4m at a tax rate of 26 percent, far above the client’s 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 in the firm. It had not previously sought specialist advice on capital allowances. A review quickly 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. The main reason was that the builder’s invoices provided no details. Lovell Consulting, which typically works for a fixed fee or a fee contingent on the savings achieved, identified no less than £500,000 in assessable assets. Thus a further £400,000 in allowances was achieved for the restaurant group.

Tax holiday on let European holiday homes
If you own a residential property in the European Economic Area that is actually rented out for more than 70 days a year (105 days per year from April 2012), you may be eligible for a capital allowance. However something like 99 percent of owners of qualifying properties are unaware of this income-boosting benefit, as indeed 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 relatively simple qualifying conditions, you may be eligible for a potential tax saving of up to €75,000. On a €1m property, the saving could reach €150,000.

Here’s how it works. Under current UK tax law the owner may be able to claim on a wide range of items such as heating, ventilation, swimming pools, sanitary ware, energy and 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.