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Capital v Revenue – Understand The Risks v Benefit

As we are fast approaching the self assessment filing deadline for individuals and the amendment window for corporate entities with a year end of March, understanding the importance of what constitutes capital or revenue expenditure, and the risks and benefits associated with it, is extremely important.

24 Jan 2024

Written by:

First Year Allowances for Corporate Members of Partnerships

In a positive move HMRC have updated their capital allowances guidance for partnerships stating that partnerships with underlying corporate partners can claim first year allowances

19 Jan 2024

Written by: Abu Choudhury

Substantial Unclaimed Capital Allowances On Existing Assets

Capital Allowances provide an opportunity to save substantial amounts of money in a lean market yet many property owners and occupiers are already sitting on vast savings without even knowing it.

23 Oct 2023

Written by: David Gibson

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Latest News

Capital v Revenue – Understand The Risks v Benefit

24 Jan 2024

As we are fast approaching the self assessment filing deadline for individuals and the amendment window for corporate entities with a year end of March, understanding the importance of what constitutes capital or revenue expenditure, and the risks and benefits associated with it, is extremely important.

First Year Allowances for Corporate Members of Partnerships

19 Jan 2024

In a positive move HMRC have updated their capital allowances guidance for partnerships stating that partnerships with underlying corporate partners can claim first year allowances

Substantial Unclaimed Capital Allowances On Existing Assets

23 Oct 2023

Capital Allowances provide an opportunity to save substantial amounts of money in a lean market yet many property owners and occupiers are already sitting on vast savings without even knowing it.

The Risk to Lawyers of Not Correctly Addressing Capital Allowances

23 Oct 2023

Solicitors acting for clients on a purchase or disposal of a commercial property must ensure they correctly address capital allowances; failure to do so may give rise to reputational and / or financial risk.

Maximising Capital Allowances and Avoiding Pitfalls Through Timing

23 Oct 2023

The rules surrounding the transition between Super Deduction and Full Expensing can be complex and the importance of fully analysing and understanding any contract for construction or purchase is significant.

Use Capital Allowances to Help Pay for Higher Spec Offices

23 Oct 2023

On a typical £1m CAT B fit out the landlord or occupier, whoever is incurring the expenditure, could recover up to £250k by claiming Capital Allowances.

HMRC Capital Allowances Enquiries Focusing On Certain Sectors

26 Sep 2023

An increasing number of claims being submitted to HMRC are not fully compliant with the legislation, and in some cases are double what they should be, particularly in certain industry sectors.

Unearthing Hidden Treasures – LGT Wealth Article

01 Sep 2023

Veritas Director David Gibson was recently interviewed by Nicholas Duffy of LGT Wealth Management for thoughts on how family offices and property owners can identify Capital Allowances to help leverage other investments. Click here to read in full

Offset ESG Costs With Capital Allowances

09 Aug 2023

The impact of both ESG and MEES on the property sector is resulting in significant capital investments. To incentivise and reduce the net cost of capital investment, tax relief is available by way of capital allowances.

The Directors of Veritas Advisory were involved in the initial HMRC consultation into the interaction of Capital Allowances under the REIT legislation.  REITs operate under a shadow tax regime, which requires the mandatory claiming of all Capital Allowances.  Veritas Advisory in working with many of the REIT companies have an agreed approach that addresses one of the key compliance conditions facing a new REIT.

Converting to a REIT does not remove the tax reporting requirements even though there is no tax to pay at the vehicle holding level, to the extent it satisfies the required conditions, it does not pay any corporation tax on profits or capital gains tax on disposals.  Instead the tax is generally applied to the investor level providing they themselves do not have a tax exemption. But Capital Allowances must be claimed.

Capital Allowances are a form of tax relief which are available on certain types of property expenditure, whether this be on the acquisition of second hand assets by buying property or on the installation of new qualifying assets on developments, refurbishment or fitting out of property.

Whilst there is no tax advantage for a REIT to claim Capital Allowances, as there is for a direct investment in property, Capital Allowances do however provide an advantage by enabling more cash to be retained within the business for re-investment purposes.

Under the REIT legislation 90% of the profits must be distributed to shareholders, known as the property income dividend or PID. However, mandatory Capital Allowances are deducted from the profits that must be distributed, reducing the size of the PID to be issued. It could be argued therefore that Capital Allowances for a REIT, despite not offering a tax saving, remain extremely valuable as 90% of the value of the Capital Allowances can be retained within the business.

That said it is possible for a REIT to have both tax-exempt income and non-tax-exempt income, with the latter not complying to the REIT rules, for example, a new build development which is sold within 3 years of practical completion.  For the non-tax-exempt part of the business, the normal benefit of claiming Capital Allowances applies, reducing the tax liability on profits.

In order to satisfy the REIT condition of it being required to claim Capital Allowances, the onus is on the REIT to demonstrate that it has claimed where it had the entitlement to do so.  It is not acceptable to ignore or to apply blanket figures, as the REIT has to demonstrate that it has adhered to the same Capital Allowance rules as would a direct property investment.  There are two areas where this will need to be considered, on conversion and on all annual capex:

  • On Conversion

All properties which are to be brought under the tax-exempt business will need to demonstrate that Capital Allowances have been claimed to the extent they had entitlement to do so. This requires reviewing the entitlement position for Capital Allowances on each property, both at the time of its acquisitions and also on any subsequent expenditure.

  • On All Annual Capex

For each accounting period, the REIT must demonstrate that it has complied with claiming Capital Allowances where it had the entitlement to do so.  This applies to any points of expenditure, such as on new acquisitions, developments or even on lease incentives in the form of capital contributions

The question of how best to address this requirement has led Veritas Advisory to develop a REIT compliance service which it has adopted for a wide number of existing REIT companies.  In essence, it looks at putting in place procedures which will provide the necessary acknowledgement to HMRC that Capital Allowances have been fully considered by an independent Capital Allowances advisor across all its property expenditure.

Where a claim for Capital Allowances is identified, the value must be calculated in line with the Capital Allowances legislation.  Veritas Advisory will engage its team of consultants to prepare the resulting claim, which will be included within an annual REIT compliance Capital Allowances summary, providing the REIT with proof of compliance should it be called upon.

Given the relative benefit to the REIT in claiming Capital Allowances for the tax-exempt property income business, a claim is only progressed where a material benefit is established.  Through the use of our in-house cost bench-marking and sector knowledge of estimated claim values, the claim preparation process is streamlined to reduce the compliance cost to the REIT, but at the same time delivers full compliance.