How to maximise claims for fixtures & fittings
WHERE a UK taxpayer invests capital in building, buying, refurbishing or fitting out a commercial property, they will usually have a right to claim capital allowances on fixtures and fittings contained in the property.
At present, many fixtures and fittings qualify for an immediate 100% tax write off under the capital allowances rules.
There are also some limited circumstances in which capital allowances can be claimed on residential properties in multiple occupation (HMOs). Qualifying furnished holiday lets are also eligible.
Who cannot claim capital allowances? Non-taxpayers and those who hold property as trading stock, rather than investments: such as property developers, for example.
What qualifies as fixtures and fittings? The list is very long. In a modern office block the following might qualify:
- Central heating/air conditioning systems
- Computer/telecoms wiring and trunking
- Automatic door closers and, in some circumstances, door handles
- Electrical installations and equipment
- Lighting/external security lighting
- CCTV cameras and equipment
- Movable partitions
- Alarm systems
- Fire safety equipment/signage/emergency lighting
- Toilets, etc
- Kitchen equipment
- Hot and cold water systems
- Furniture, carpets, blinds, storage facilities
- White goods (dishwashers, fridges, etc)
- External signage
- Car park barriers
- Security equipment, rhino posts etc
The above items fall into one of two categories. They are either ‘plant and machinery’ or, since April 2008, ‘integral features’ or long life assets. Integral features comprise:
- Electrical lighting, wiring and power systems
- Hot and cold water systems
- Heating and air conditioning
- Lifts, escalators and moving walkways
- External solar shading
Basically long-life assets and integral features comprise assets with a longer useful life than most assets.
Obviously plant and machinery such as office furniture will wear out in, say, five years but integral features like cold water systems should last for over 25 years.
Therefore plant and machinery currently attracts capital allowances at 20% per year, whereas integral features attract just 10% capital allowances. However, both currently qualify for the Annual Investment Allowance, so up to £100,000 of spending on integral features could qualify for immediate tax relief.
The above 20% and 10% capital allowance rates are set to fall to 18% and 8% respectively from April 2012 and the Annual Investment Allowance will be reduced to £25,000.
Depending on the trade there are more or less items available to claim on.
Remember you can claim for the existing integral features when you buy a commercial property and any new ones you install.
It is believed that only about 60% of those entitled to claim do so and, of those, half claim too little.
This could be because, at the point a property is acquired, the taxpayer may not have sufficient profits to offset the capital allowances. Or it could be because the taxpayer does not know they have a right to claim capital allowances or their advisors do not have the necessary skills.
Some investors will not buy a building unless there are capital allowances present. A building rich in allowances may be worth 10-15% more than one without any present to be claimed.
The skills required are knowledge of taxation, valuation and quantity surveying, to identify and isolate the proper size of claim. The most difficult scenario is analysing the allowances available in a second-hand building, where an apportionment is required. The main points to consider are the replacement cost of the building, the plant and machinery and the underlying land value.
The easiest cases are those where building, refurbishing and fitting out occur, as there will be actual cost data to analyse.
At present, it is possible to analyse, and claim for, expenditure going back as far as 1947.
There are, however, limits on which period these historic allowances can be claimed in: generally no more than two tax years prior to the point of claim.
There may also be limits as to the amount available to claim if a previous owner (since 1996) has brought a figure into account on a sale of the property.
Joe bought an office building in 2004 for £350,000 plus VAT. He did not recover the VAT incurred of £61,250. The previous owner had owned the building since it was built in 1995 and confirms that no capital allowances claim has ever been made. Joe instructs James to prepare a claim for him in 2011.
Here the claim will be based on £411,250, the VAT inclusive amount. James identifies a significant number of items in the building. There is a full central heating system, some air conditioning units, fire and burglar alarms, two sets of male and female toilets, movable partitions, two kitchens, etc, and James isolates and apportions some £100,000 of allowances, or around 25% of the historic cost. As Joe is a 40% taxpayer, this will be worth a significant amount in tax relief over the next few years.
Governments hate tax reliefs!
Over the last few years industrial and agricultural buildings allowances have been abolished; the Annual Investment Allowance, £100,000 this year, will fall to £25,000 in April next year; plant and machinery allowances have come down from 25% to 20% and will fall to 18% from 2012; and the long-life assets/integral features writing-down allowance will fall from 10% to 8%.
On top of all this, HMRC is currently seeking to limit the ability to go back in time to claim historic capital allowances to one or two years (under the terms of a current consultation). The idea is to prevent purchasers of buildings from claiming (as Joe did in the above example) unclaimed or under-claimed allowances from previous owners who have not identified and claimed these allowances in the past.
However, several of the integral features mentioned above were only claimable from 2008 and will therefore often be unaffected. For example, cold water systems, which could not usually be claimed prior to 2008, will generally continue to be claimable where a property has changed hands only once since April 2008.
If HMRC gets its way and you have not yet claimed the allowances contained in property you occupy for business purposes, you will lose the right to valuable allowances and may adversely affect the value of your property.
Taxpayers may possibly have as little as 18 months to put historic claims in place, as HMRC is aiming to put the new legislation in place in the 2012 Budget.It really is a case of: ‘use it or lose it’!