When to claim Capital Allowances can often be overlooked on developments and so here we consider the timings and associated benefits of early tax planning around developments.
Capital Allowances are available to be claimed in the tax year in which the qualifying expenditure is incurred. Let us take the example of a business or investor who develops an office building which they intend to hold. The investor has say a 31 December tax year end and the development starts on 1 April 2017 running 12 months on site to completion. Under most traditional forms of development, the main contractor receives milestone payments, usually monthly up to practical completion.
Whilst the building is not finished at the 31 December 2017 tax year end, 9 months of work have already been paid for and the legislation provides entitlement to claim Capital Allowances once the qualifying asset is a fixture to the building. This enables an “interim” claim to be made at the 31 December 2017 based on the expenditure committed to at that point in time.
The claimant, then has a further 12 months in which to submit that “interim” claim as part of their annual tax return which falls due by 31 December 2018. This provides the benefit of claiming one year of allowances, which would otherwise be missed out on if left to be claimed on completion of the development.
A further “final” Capital Allowances claim is then prepared and submitted in the following tax year in which the project completes.
In practice, many business and investors embarking on such developments will rely on their advisors to pick up Capital Allowances and often it can be reviewed months after completion or worse case, not at all.
For this reason, we inform clients that our preferred time to get involved in a development is as soon as the project has reached outline design stage. By considering Capital Allowances at this time, it will enable them to be tax planned and claims maximised, by creating efficiencies to information flows and generating Enhanced Capital Allowances for the procurement of energy efficient plant & machinery, which provide 100% tax relief, as opposed to claiming the relief over a number of years.
The legislation does provide the ability to go back in time to make a claim on any historic development expenditure, albeit in the last open tax return, as opposed to when the expenditure was incurred. If, however Capital Allowances are not considered at the outset of a development, this can often result in them not being addressed at all.
If the utilisation of the Capital Allowances and intended holding period of the asset is unknown. By simply quantifying and claiming the Capital Allowances at the time of the development, it will help to mitigate against any possible future tax liabilities and maximise the level of claim, at the time the information is readily available.
To discuss this article or if you have any general Capital Allowance queries, then please get in contact with one of our Directors.