Be Aware - New Rules Apply to all Transfers of Commercial Property
If you are in business, you can claim tax allowances (capital allowances), on certain purchases or investments that you make on business assets. Whilst you cannot directly deduct your expenditure on those assets when calculating your profits or losses, you can deduct a capital allowance. This applies whether you're self-employed and pay Income Tax or are a company or organisation that is liable for Corporation Tax.
Many common business assets such as office equipment, furniture and machines or tools, may be considered to be plant and machinery for capital allowance purposes, and expenditure on them would qualify for Plant and Machinery Allowances (PMA).
New rules came into effect on 1 May 2014 which mean that capital allowances, which allow for tax relief for fixtures in property, must be identified and documented at the point at which commercial properties are bought or sold, or they will be irrevocably lost.
Reports suggest that there has been a lack of awareness about the changes. Any party who oversees a relevant transaction must inform their client of the changes in relation to capital allowances.
Prior to April 2012 there was no requirement for sellers1 and purchasers2 to agree a single disposal / acquisition value for 'property embedded fixtures and features' (PEFFs) within the overall sales price when a property changed hands. Neither was there any time limit on when, if ever, PEFFs were to be added to the capital allowance pool. All that changed on 1 April 2012 (and again on 1 April 2014).
Since 1 April 2012 we have been in a two year transitional period (for corporation tax - from 1 April 2012 up to and including 31 March 2014; for income tax - from 6 April 2012 up to and including 5 April 2014).
During this transitional period, where the seller claimed capital allowances on fixtures, there is a new requirement to fix the value on sale. The Fixed Value Requirement ensures that the seller’s disposal value and purchaser’s acquisition value are one and the same through a s.198 election. This election must be entered into within two years of the buyer's acquisition of the interest in the property.
The rules changed again on 1 April 2014 to include a new 'Pooling Requirement'. If a purchaser wishes to claim capital allowance on fixtures in a property, the past owner must have allocated its expenditure on the fixtures to a capital allowance pool prior to its sale or must have claimed a first year allowance in respect of the expenditure.. If the disposal value is higher than the seller's written down value, within the relevant pool, the seller will be subject to tax on the balancing charge.
The practical effect of these changes are to make both the pooling of capital expenditure and s.198 elections mandatory if purchasers wish to claim capital allowances. This may cause problems for purchasers of properties after April 2013 if the seller was entitled to claim capital allowance but chose not to and did not therefore pool its' capital expenditure. In such a situation, it will be necessary for the purchaser to negotiate with the seller to require it to pool its expenditure prior to the sale and suffer any potential tax cost arising from an associated balancing charge.
If the 2012 Fixed Value Requirement or the 2014 Pooling Requirements are not met, then the ability to claim capital allowances on these fixtures will be lost to the purchaser and any future owners. For the business owner, this means an irrevocable loss of an important tax allowance and, for some types of commercial property, a potential reduction in future sales value. In this regard, purchasers would be advised to ensure that the sale and purchase agreement contains either a warranty that the seller has pooled its capital expenditure on fixtures in the property or an undertaking that it will do so prior to completion of the transfer of the property.
The new legislation will operate so that if a person purchases a property from a seller who cannot claim capital allowances (e.g. charity or company trading in property) the Pooling Requirement and the Fixed Value Requirement must still be met if the previous owner was entitled to claim capital allowances. This is likely to result in additional due diligence being required where properties are purchased from persons unable to claim capital allowance in order to ensure that the requirements are met and valuable capital allowances remain available.
For further information contact Jemma Crane on 01392 687542 or email firstname.lastname@example.org.
1. ‘seller’ being the person who has transferred an interest in fixtures, whether by sale of an interest in those fixtures or otherwise
2. 'purchaser' being the person who has acquired an interest in fixtures, whether by purchase of an interest in those fixtures or otherwise