1.1 Who should read this practice note?
Commercial property lawyers and tax specialists dealing with the sale or purchase of property containing plant and machinery should read this practice note.
1.2 What is the issue?
Starting from April 2014, changes to capital allowance (CA) rules will affect how purchasers and sellers deal with commercial property transactions.
CAs are tax reliefs on expenditure on plant and machinery. Under the new rules, a second-hand purchaser can only obtain CAs if the past owner has pooled the relevant expenditure in a chargeable period, when it owned the property.
"Pooling" in this context means adding the expenditure to the seller's CA pool. Purchasers will need to ensure that records or confirmations of pooling are included in acquisition documents as they won't be able to obtain CAs if the qualifying expenditures are not accounted for at the time property changes hands.
1.3 Why is the law being changed?
The law is being changed because HMRC believes that some taxpayers are making erroneous claims in relation to the capital allowances they are entitled to. The new rules will mean that the issue must be dealt with at the point of sale, accompanied by documentation which will, it is assumed, guard against erroneous claims.
1.4 When will the change take effect?
The change will take effect on:
- 1 April 2014 for corporate tax payers
- 6 April 2014 for income tax payers
1.5 How will the change be brought into effect?
The new legislation is being introduced through sections 187A-B to the Capital Allowances Act 2001 (brought in by the Finance Act 2012).
Pooling means adding the expenditure incurred on the fixtures to the seller's pool of qualifying CA expenditure, though the seller doesn't actually have to claim the allowance.
Under the new rules, if the seller was entitled to claim CAs but failed to do so (and also failed to pool), the purchaser needs to secure agreement from the seller in the sale documentation to pool its expenditure. If this is not done prior to acquisition then all future purchasers can be prevented from claiming the CAs.
2.1 Non-taxpayers and pooling
Some entities, such as pension funds and charities, are not entitled to claim CAs and have nothing to pool. If you are buying a property from an entity like this, you won't be able to claim CAs unless the most recent owner after March 2014 who was entitled to claim allowances (before the disqualified entity) pooled their CAs expenditure.
This means that it is important for non-taxpayers to obtain the requisite information about CAs even though they themselves cannot claim the relief. If they fail to do so, the CAs won't be available to subsequent purchasers, which will reduce the property's value.
3 Fixed value or election requirement
A fixed value or election requirement has applied to property acquisitions since April 2012. This must be satisfied in addition to the new pooling requirement before a second-hand purchaser can claim CAs.
According to this requirement, where a seller has claimed allowances, the seller and purchaser must make an election under Section 198 or 199 of the Capital Allowances Act 2001 (as appropriate) within two years of the date of completion setting out the value of the fixtures. The seller must bring the value into account as a disposal value in its CAs computation; the purchaser should then be able to claim CAs on this amount.
Alternatively, in limited circumstances, the past owner can provide a written statement of the amount of the disposal value of the fixtures.
If the seller has claimed allowances but the purchaser and seller can't agree a value for the fixtures, then either party may apply to the tax tribunal to settle the issue. If the relevant steps aren't taken in time the purchaser won't be able to claim CAs and subsequent purchasers will also be precluded from doing so.
A non-taxpayer can make an election when buying property. However, if they fail to do so, the fixed value requirement can still be satisfied by obtaining written statements from:
- the non-taxpayer, stating that an election was not made at the time of buying and can no longer be made
- the party that sold the property to the non-taxpayer, containing the disposal value that it brought in.
Getting the cooperation of the party who sold the property to the non-taxpayer is unlikely to work, particularly if a lot of time has passed. You should therefore only try to do this as a last resort.
4 Practice advice
Whether you are acting for the seller or purchaser, you should raise the issue of CAs with your client as early as possible. Failing to do so could result in delays or financial loss to your client. If you are unsure about how to go about this, you should consult a specialist CA adviser, or suggest your client consults one themselves.
4.1 Representing the seller
If your client has claimed CAs then their position should be protected by an election (see section 3 of this note).
If your client is a taxpayer but hasn't claimed or pooled, you should make sure they pool prior to sale - assuming your client wishes to pass on the allowances - and if your client wishes to enter into a section 198 or section 199 election to fix the value of allowances, actually claim the allowances prior to sale.
If your client hasn't claimed, and is a non-taxpayer, then a written statement to that effect should be provided to the purchaser, or section 198 elections entered into by the last seller to have claimed allowances.
If you are uncertain about any of this, you should advise your client to contact their accountant or a specialist CA adviser to provide the answers to the pre-contract enquiries.
4.1.2 Commercial property standard enquiries
You should advise your client that incomplete or ambiguous information about expenditure on fixtures will likely be rejected by the purchaser as widely used resources are updated to reflect the change in law. For example, the Commercial Property Standard Enquiries have already been revised to include very specific information relating to expenditure on fixtures.
Enquiry 32 now requires the seller to provide, inter alia, the following information:
- Whether they have claimed capital allowances or allocated any expenditure to a capital allowances pool.
- If they have not pooled, would they be willing to do so, by when, and if not why not.
- If they cannot pool, to provide the name and contact details of everyone who has owned the property since April 2014.
- For each claim made or expenditure pooled:
- a description of the fixture, the amount pooled
- the date it was acquired
- the identity of the installer
- confirmation that they are willing to enter into a section 198 election in that amount on request by the buyer.
Finally, you should include a section 198 election or written statement in the contract and supporting documentation. Not doing this could result in a loss for your client and could even amount to a breach of contract.
Providing this information takes time, so you should encourage your clients to make detailed records at the time of each expenditure to avoid unnecessary delays or financial loss at a later date.
4.2 Representing the purchaser
When representing the purchaser, you should raise the issue of CAs early - certainly before acquisition, as failure to raise the issue until after acquisition could mean that the CAs are lost to your client. As always, if in doubt, you should consult, or suggest your client consults, a specialist.
Regardless of whether your client is a taxpayer, CAs can be important - by ensuring pooling by the seller, non-taxpayer purchasers can preserve the CAs value in case of a future sale. You should always bring this issue to your client's attention and ensure that requests are made for the seller to provide the relevant documentation, pre-acquisition.
If your client is a taxpayer, then provisions should also be included in heads of terms to be negotiated.
5 Further information
This note incorporates material originally published by Practical Law on 28 February 2014. It is reproduced with their permission.