The current Capital Allowances system comprises approximately 400 pages of legislation. In addition, HMRC provide lengthy guidance manuals on how to interpret the legislation, supported by various case law. In comparison the accounting rules for depreciation are a mere 11 paragraphs of guidance notes.
As the OTS report suggests, businesses should employ specialist capital allowances consultants to work out what does and what does not qualify. There are two main areas of complication; identification and property investment transactions.
To determine what items of expenditure to claim, a business must consider many factors, including that of its own specific trade and how it uses the item in question, what costs are associated with that item and splitting out costs, which are often aren’t comprehensive, to ensure the correct pool allocation.
Identification of machinery by accountants is straightforward. However, complications arise in the category of land and buildings and leasehold improvements.
Expenditure on a building project comprises a contractor valuation of the works, elements including labour, plant and materials, and in addition there will be various professional fees, site set up costs and other directly incurred expenditure.
There is no definition of what plant is to help allocate this item for a relief and the information produced on a project is not a tax friendly list of items, set out for the calculation; indeed it is the opposite.
The process is further complicated with the acquisition and disposal of investment properties. This is noted in the report as one area that stands out for attention. Under FRS105 investment properties are revalued every year and are not depreciated. The OTS stated this is a challenging problem for which it has not found a simple answer.
The current process for transferring Capital Allowances from a Seller to a Buyer on sale is by a mechanism known as a Section 198 election, and rules introduced in 2012 and 2014 only made the process of agreeing what value can be passed to a new owner even more complicated.
Without specialist advice Capital Allowances are often missed with a common mistaken assumption that they are not relevant on that particular transaction with no scope for further allowances to be identified and claimed.