A recent important Supreme Court decision in Centrica Overseas Holdings Limited v HMRC addresses the deductibility of expenses incurred by a company.

The decision puts beyond doubt that such expenses may be non-deductible by virtue of being capital in nature. Until recently it was generally thought that transaction-related expenses should, if incurred before a firm decision is taken to proceed with a specific transaction on specific terms, usually be deductible expenses of management. The Supreme Court has now confirmed that a more nuanced approach is required, to establish whether the expenditure is capital or revenue in nature.

The Centrica case concerned the treatment of an aborted transaction and the financial, legal and other advisory costs it sought to deduct as expenses of management. The Supreme Court noted ‘expenditure on an abortive capital disposal transaction is capital nonetheless’, and so it does not matter that there may be uncertainty as to whether a proposed transaction will proceed to a successful conclusion.

We have often seen costs such as professional fees related to a development, acquisition or disposal be treated as deductible costs by clients and their accountants where they are deemed to be abortive costs. This judgement demonstrates that the bar for obtaining deductions has been raised considerably.

Receiving accurate and professional Capital Allowances advice has never been more important.

Not only are Allowances more advantageous than ever before, but HMRC are strategically targeting tax leakage – including through Capital Allowances – with plans to recruit 5,000 additional compliance officers over the next five years.

Capital Allowances rarely stand still. Chancellors can’t seem to resist tinkering, and adjustments to Capital Allowances have been included in every Finance Act since the current legislation was introduced in 2001.

Facing budget cuts stemming from the Global Financial Crisis and struggling to keep tabs on non-compliant claims, restrictions introduced in 2012 and 2014 were designed to make HMRC’s job of policing the legislation easier.

In reality, all the changes accomplished was to create more rules for ill-informed or badly-advised taxpayers to overlook.  Consequently, many Capital Allowances claims over the past few years have gone unchallenged by HMRC, despite not being in adherence with the legislation.

HMRC devoted a lot of its staff and resources to monitoring the Coronavirus Job Retention Scheme and other targeted pandemic recovery reliefs and incentives.  As that work tails off we can expect to see existing staff – plus a share of the 5,000 new recruits – deployed to other areas.  None are more topical or high-profile right now than Capital Allowances.

Already we have seen a notable uptick in enquiries into Super Deduction and Full Expensing claims, after many years of claims being nodded through.  This increased activity is very welcome – we’ve long called for a higher level of scrutiny into Capital Allowances claims to weed out some of the unscrupulous advisers operating in the market.

Typical examples of errors (let’s be diplomatic and call them “mistakes”) that we’ve come across include:

• Incorrect (or no) legal basis for claiming on property acquisitions
• Allocating expenditure to the profit and loss account despite being capital in nature
• Claiming Capital Allowances without supporting evidence
• Wrongly claiming Full Expensing or Super Deduction
• Claiming structural works as main pool plant and machinery
• Allocation of expenditure to incorrect pools
• Claiming for assets in non-qualifying areas of mixed-use property

Capital Allowances is a complex and fluid area of tax law.  With both the value of tax relief and the likelihood of HMRC enquiry reaching historic highs, investors should seek out specialist guidance from advisors who are professionally qualified.  This is the only way to benefit from the full incentive without overstepping the mark.

Hailed as the “Greatest Tax Break in History” when it was introduced in 2021, the 130% Super Deduction aimed to take some of the sting (and the negative headlines) away from the hike in Corporation Tax rate that was announced in the same speech.

Sadly unlike the CT increase, it was only ever going to be temporary.  Its replacement, Full Expensing (FE), took over in April 2023 as a slightly less headline-grabby 100% First Year Allowance.

In simple terms, “Full Expensing” means that if a company buys a qualifying asset, the full cost of that asset can be deducted from its taxable profit.  You may spot that the change from Super Deduction to Full Expensing isn’t nearly as significant a downgrade as it may seem.  In cash terms, 130% relief at a tax rate of 19% is pretty much identical to 100% relief at 25%.

In effect, the cost of the investment is reduced by a quarter. 

An alternative way of looking at it is that the payback period for the investment is reduced.

Alongside the 100% first year allowance for main pool plant, the FE regime continues the 50% first year allowance for Special Rate Pool plant that was introduced alongside Super Deduction.

Both are considerably more helpful for cashflow than the 18% relief that preceded Super Deduction, or 6% for Special Rate assets.  Both of these reducing-balance Writing Down Allowances remain in place for some assets, for some expenditure, and for some tax payers.

When FE was first announced, it was – like Super Deduction – only a temporary measure, but with the important promise that there was an ambition to make it permanent when economic conditions permitted.  This permanence was confirmed in Jeremy Hunt’s final Budget in Autumn 2023.

Obviously there’s been a lot of water under Westminster Bridge since then, and when it comes to the new government’s first Budget in October, all bets are off for most taxes.  Back when she was in opposition however, Rachel Reeves did indicate an intention to retain the Full Expensing regime.

It deserves to survive – these tax breaks were designed to operate as an economic stimulus to stabilise the economy in the aftermath of Covid, and were prolonged to cushion the economic shock of the conflict in Ukraine.  The UK is still feeling the effect, so the underlying drivers haven’t gone away.

Fundamentally, businesses need certainty and predictability when preparing investment appraisals and financial models.  When we listen to next month’s Budget speech we are hopeful that for once, Capital Allowances will be left alone.

• 100% annual investment allowances can still be claimed this year
• Losses in the furnished holiday let businesses can be carried forward beyond April 2025
• Existing pools of allowances as at April 2025 can continue to be claimed beyond that date

To maximise the the available tax savings we recommend the following:

• If acquiring or improving FHLS incur as much expenditure prior to April 2025
• Check Capital Allowances claims have ben made on all historic expenditure
• Request advice on current and historic property purchases as many FHL owners overlook claiming on this expenditure, which can be the equivalent to 20% of the purchase price

The Court of Appeal has overturned a ruling in the Upper Tribunal regarding a capital allowance sale and leaseback avoidance scheme, applying the Ramsay principle (W T Ramsay Ltd v IRC, 1982) and looking at the intention of the legislation as a whole.

The Ramsay principle posits that when a transaction comprises a series of pre-arranged artificial steps, devoid of any genuine commercial purpose other than tax avoidance, the proper course of action is to scrutinise the transaction as a whole.

The decision by the Court of Appeal will have far reaching implications in that it clearly resets the boundaries of what is a capital allowances avoidance scheme designed to increase the quantum of capital allowances claimed

100% Full Expensing Allowance Extended, but not just yet….

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; often we see expenditure incorrectly allocated as revenue deductions.

HMRC enquiries are on the rise across the tax regimes and ensuring accuracy in your return has never been more important and the distinction between Capital and Revenue is not as simple as it may seem and with several large profile cases which have gone through varying stages of legal review focussing around the principles of like for like replacement, modern day equivalents or the concept of entirety.

Where all or large proportions of a capital project have been incorrectly allocated as a revenue deduction, the tax payer themselves could be subject to a fine of up to 100% of the “percentage of tax lost” so for instance on a £1m refurbishment, if this had previously been all classed as revenue expenditure, but actually £500k of this was capital in nature, to an individual the penalty could be upto £225k. The burden of the fine will sit with the tax payer, who have a duty of care to check their returns for inaccuracies.

Expenditure of a capital nature not qualifying for revenue deductions should instead be identified as capital allowances where possible, especially with the generous current 100% full expensing allowances, and prior to that the 130% super deduction, offering considerable tax relief.

We work with a variety of accountants and tax advisors who seek specialist advice in respect of this complex area of tax law. If you require any advice in respect of this matter then please reach out to a member of the Veritas Team who have a strong track record of correctly analysing capital and revenue expenditure on projects, and successfully negotiating these with HMRC where required to do so.

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 such as the 130% super-deduction, 50% special rate pool allowance and 100% full expensing. This applies to both partnerships where you have only corporate partners or mixed partnerships where you have a combination of individual and corporate partners.

One should note the 130% super deduction ended 31 March 2023, therefore the only way for corporate partners can claim this relief will be to amend their tax returns which fall within the relevant period.

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.

There is no time restriction to review historic expenditure for Capital Allowances tax savings, as long as the fixtures are still owned.

Accountants are often relied upon by their property clients to navigate every complex tax regulation, but they cannot be an expert in everything nor have the time and resources to do so, much like how GPs refer patients to specialist consultants for specific treatments.

It is easy to unintentionally overlook specific opportunities to claim capital allowances when acquiring, refurbishing or developing a property. Legislation is not always black and white; even a seemingly simple restaurant fit out or office refurbishment gives rise to opportunities to claim tax savings many would ignore or overlook.

Ensure you receive the correct advice; there are countless reasons why the tax savings have not been realised on historical expenditure yet it is assumed everything must have been claimed.

Speak to one of the Directors to discuss how to unlock the existing tax savings, or if related to current or future projects, how to maximise the accelerated 100% full expensing relief.

In most cases, solicitors acting for clients on a purchase or disposal of a commercial property rarely receive information which will satisfy the position of the Capital Allowances. As a consequence, if enquiries are not made in good time pertaining to the amount of Capital Allowances available on a transaction, they can be a sticking point, delay the transaction and potentially lead to lost tax savings.

Capital Allowances are often incorrectly stated as not applicable in the CPSEs, or the default position taken is a £2 s198 election in Sale and Purchase agreements. However, this often does not reflect the actual position nor the most favourable commercial agreement for either the seller or the buyer, with financial implications to either party.

Specialist Capital Allowances advice, ideally at Heads of Terms stage, can help reduce the risk associated with not correctly addressing the Capital Allowances on sale; having the draft contract clause wording reviewed prior to exchange is key in order to protect the allowances for either the seller or the buyer.

On a property purchase of £5m, the total tax deduction could be up to £300k for a corporate entity, or more if an LLP; failure by lawyers to seek the correct advice can expose themselves open to both reputational and financial risk if tax savings are either missed or have to be repaid to HMRC.

For expert Capital Allowances advice on the required due diligence on transactions, please contact one of our team to help.