The capital allowance legislation was significantly changed in 2014 with the introduction of s187A and B of the Capital Allowances Act (CAA) 2001 to provide a greater emphasis on the buyer to establish their entitlement to claim and if these new requirements are not met, then the capital allowances value is nil. The consequence of this change has led to the taxpayer forgoing a great amount of tax relief.
With the number of possible scenarios, this article is intended only to highlight some of key considerations and therefore each scenario has to be considered on its own merits with no one size fits all solution.
S187A and B applies where the seller is subject to the UK tax system, irrespective if they actually are in a tax paying position. This legislation ultimately asks the purchaser to identify any unclaimed capital allowances expenditure and to then agree to the “fixed value” requirement, which is to enter into an election under s198 of CAA 2001 and satisfy the “pooling requirement”, which is simply for the seller to recognise that agreed value in the next tax return. If either of these requirements are not met, the capital allowances are deemed to be nil.
If you are buying from a non-tax paying entity, so a UK pension, registered charity or government body, then as they are not within the charge to tax, s187A and B does not fully apply. Instead a written statement of no claim is all that is required, which will then give entitlement to claim on the sellers “new” expenditure. Furthermore, you can look back at past owners’ expenditure to establish whether there are any further claims which have not been made. Without a written statement the purchasers value is nil.
It is therefore vital that as part of the due diligence buying process that a capital allowances specialist be consulted so as to establish what the appropriate contract position should be. If left unchecked and the contract is either left silent or, worse still, a £2.00 s198 election agreed, then it is likely that a capital allowances benefit will have been lost. The replies to CPSEs should not be taken at face value, as the seller will often not want to face further scrutiny on the matter and so the onus is on the buyer to have someone to research the claim position and to challenge the initial replies given.
When buying from a seller who could have claimed, then the passing across of any unclaimed allowances is a negotiation point. Often if a property has undergone a recent refurbishment, then that claim will not have been processed and it is for the buyer to secure those allowances, with the quantification exercise to be undertaken by a capital allowances specialist and paid for by the buyer.
In a market where tax is becoming an ever increasing cost to both businesses and on investment return, clients will and should be paying greater attention to securing the best deal for capital allowances as part of the deal’s due diligence process. Capital Allowances are a valuable asset and should be part of the transaction negotiation.
Please contact one of the directors at Veritas Advisory to understand more about our capital allowances due diligence process.