The legislation surrounding reliefs is ever changing, with the introduction of Super Deduction from April 2021, its replacement by Full Expensing in April 2023, and the permanent extension of the Annual Investment Allowance to £1 Million from April 2023 it has never been more important to seek the advice of a specialist Capital Allowances advisor to ensure you are maximising your reliefs. If we also factor in the Integral Features 50% First Year allowance we add to the complexities further.

The rules surrounding the transitions between the two regimes can be complex and the importance of fully analysing and understanding any contract for construction or purchase is significant. With Corporation Tax rates having risen by 32% from 19% to 25% the relief is now more pertinent than ever before.

The entity incurring the expenditure also ascertains the entitlement to claim under many of the newer regimes with more asset rich businesses looking to incorporate to maximise the reliefs going forward.

For expert Capital Allowances advice on how to best maximise your reliefs through timing and optimisation, please contact a member of our team.

Post pandemic has seen a flight to higher grade office space by Tenants, both in terms of the amenities on offer and the buildings ‘green’ credentials.  For Landlords wanting to grab a piece of this market, the question often raised to agents is who is going to pay for the fit out.

For smaller office lettings it is often the Landlord who will be asked to procure the fit out works in return for a higher rent over the lease term.  With construction cost inflation, there are added external pressures to account for in making this equation work for both parties.

The good news is that by factoring in the available Capital Allowances, which provides tax relief against certain property expenditure including ‘green’ technology, can significantly reduce the net cost of the fit out.  For example, 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, or almost double that for individuals or partnerships.

Note that the benefit of Capital Allowances can be claimed by both parties and so it is crucial that the agreement is drafted accordingly and so it is advisable to take expert Capital Allowances advice to ensure the best outcome is achieved.

For expert Capital Allowances advice on how to structure lease agreements for fit out works, please contact one of our team to help.

HMRC recently made an enquiry into a Capital Allowances claim prepared by Veritas on behalf of an investor who had developed a standard, unremarkable building.

The claim was fully transparent, HMRC viewed all supporting documentation, enquired into the basis of claiming certain items, and then agreed the full value of the claim.

During a meeting with the HMRC Tax Inspector it became apparent that an increasing number of claims being submitted are not fully compliant with the legislation, and in some cases, are double what they should be, particularly in certain industry sectors.

Consequently, HMRC have had internal discussions about focusing reviews into specific Capital Allowances claims to tackle this potential tax leakage. Add in to the mix the recently introduced 100% full expensing allowances and we can expect a substantial increase into the number of HMRC enquiries being raised going forward.

Errors are compounded by poor data, complex rules and lack of knowledge of the detailed legislation; ensure that the advice you receive not only maximises the available tax savings but is also robust enough to withstand HMRC scrutiny.

ESG (Environmental, Social, Governance) is a framework to assess a business’ appetite for its green and social responsibility. We have increasingly seen commercial property investors aligning investment decisions with their ESG ambitions.

For property investors this means pursuing buildings which are energy efficient and those that provide spaces with the occupiers’ mental wellbeing in mind.

One of the tools used by Government to advance the environmental aspect of ESG is the introduction of the Minimum Energy Efficiency Standards (MEES). MEES sets the energy efficiency standard of commercial properties with an Energy Performance Certificate (EPC) rating.

This is set to increase from E to B by 2030 as a result property investors are undertaking significant capital investments in either refurbishing existing properties or developing new properties which are compliant.

Capital Allowances Opportunity

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.

Currently you have the Annual Investment Allowance (AIA) of £1m which is available to individuals and corporates to write-off 100% of qualifying capital expenditure in the first year up to a limit of £1m, providing a potential tax saving between £450k (45% personal tax rate) to £250k (25% corporate tax rate) respectively.

For corporates there are further First Year Allowances (FYAs) such as the 100% Full Expensing and 50% Special Rate Pool FYA, both allow for 100% and 50% write-off of qualifying capital expenditure in the first uncapped, respectively. The FYAs are in place until March 2026.

Front End, not Back End, Capital Allowances Considerations

Capital Allowances, despite their enormous potential to reduce the net cost of capital projects, are still rarely considered at the outset of a project, or in value engineering exercises, but rather only on completion when less scope is available to maximise the tax efficiencies. Many companies or individuals incurring the expenditure still do not claim Capital Allowances at all.

Bringing forward consideration of the Capital Allowances, seeking advice from a Capital Allowances specialist, will only help reduce project costs, and in some cases, can make a project viable.

Whether a tenant or an owner-occupier, significant refurbishment or fit-out expenditure will qualify for Capital Allowances, reducing the net cost of a project by as much as 20% for companies or even more for individuals or partnerships.

What elements of a refurbishment qualify for the tax relief?

Contrary to common perception Capital Allowances isn’t restricted to just mechanical and electrical services; in some instances 100% of a refurbishment or fit out can now qualify for capital allowances, at differing rates.

Current Opportunities

From 1^st April 2023, and for the following 3 years at least, 100% full expensing allowances can be claimed on plant and machinery including fixtures within leased buildings. This means that for every £10,000 spent on qualifying assets companies will be able to immediately reduce their tax liability by £2,500. There is no limit to the value of full expensing allowances claimed.

How to maximise the savings

Use a specialist Capital Allowances advisor and submit a fully disclosed and detailed Capital Allowances to HMRC. Not only are HMRC increasing their investigations into the basis of Capital Allowances claims but using a specialist will also help identify those allowances at a higher rate which are not broken down within contractor costs.

The accelerated 130% super deduction and new 100% full expensing capital allowances are set to drive an increase in HMRC enquiries into Capital Allowances claims, increasing the importance of preparing fully substantiated claims, supported by case law and legislation.

In March this year HMRC started to issue ‘nudge letters’ to companies who have claimed the 130% super deduction and 50% special rate allowance prompting companies to check their basis of claim for these first year allowances with an initial focus on leasing restrictions and companies with an accounting period straddling 1 April 2021.

Nudge Letters – What are they?

It is a cost effective form of communication by HMRC sent to taxpayers who HMRC believe have a tax issue to disclose. HMRC have recently targeted Research and Development Claims which offer significant accelerated tax reliefs, and it is expected there will be a similar push for Capital Allowances claimants who have and will benefit from the new 100% full expensing allowances, in addition to the super deduction claims.

It is also expected that HMRC will open enquiries into those that do not respond or make a full disclosure.

HMRC are requesting companies to provide evidence of the asset purchase contract, when the asset was brought into use, correspondence or the date when the supplier was first approached, delivery dates, copies of invoices etc.

This emphasises the importance of a robust claim report and the need to disclose this within the relevant tax return; a blanket claim approach will not be adequate.

Veritas Advisory recommend using an experienced specialist capital allowances advisor as this avoids any pitfalls in claiming the first year allowances, ensures the tax savings are maximised, and ultimately is able to withstand an HMRC enquiry being raised into your tax return.

The Spring Finance Bill 2023 was published on 23 March setting out the legislation of the temporary full expensing capital allowances and 50% integral features.

It has been confirmed that expenditure only has to be incurred between 1 April 23 and 31 March 2026, irrespective of the date of contract for the works. This means that all plant and machinery on new and unused expenditure will benefit from 100% first year tax relief (uncapped) and 50% of the integral features can be relieved in year one with the standard 6% writing down allowance applying in subsequent periods.

For second hand property acquisitions the £1,000,000 annual investment allowance offers 100% first year tax relief.

In the Spring Budget the government announced the largest ever Capital Allowances tax incentives to be introduced for companies investing in their properties and businesses, forecasted to save £8bn a year. The changes are summarised as follows:

Permanent Tax Relief

• Confirmation of £1million annual investment allowance

From 1 April 2023 to 31 March 2026

• ‘Plant and Machinery’ on new and unused assets to attract 100% relief
• ‘Special Rate Pool’ on new and and unused assets to attract 50% first year relief

For 5 Year Period (Dates to be confirmed)

• Enhanced Capital Allowances in new Investment Zones
• Enhanced Structures and Buildings Allowances in new Investment Zones

With the corporation tax increasing by 30% it has never been as important to not only maximise the Capital Allowances but to allocate to the higher writing down allowance.

Veritas Director Clive Curd presented at the Brunel University Knowledge Transfer Partnership (KTP) showcase event.  The event was welcomed by Prof. Geoff Rodgers, Pro Vice Chancellor, with presenters Mark Lynch, KTP Advisor, and Dr Valentina Stojceska, Reader, Department of Mechanical and Aerospace Engineering.

Clive’s focus was on the experience with a KTP on developing a tax assisted Artificial Intelligence (AI) system to assist SMEs in capturing tax relief, something Veritas have been developing over the past couple of years to innovatively analyse property expenditure for Capital Allowances purposes.