10/9/2018 CAPITAL ALLOWANCES 9 OCTOBER 2018 CONTENTS Nolan - - PDF document

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10/9/2018 CAPITAL ALLOWANCES 9 OCTOBER 2018 CONTENTS Nolan - - PDF document

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10/9/2018 CAPITAL ALLOWANCES 9 OCTOBER 2018 CONTENTS Nolan Masters CA Benefit, how CAs work and examples David Gibson CA Transactions, opportunities and changes Mark Lacey Construction Market Overview to Brexit WHAT ARE

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CAPITAL ALLOWANCES

9 OCTOBER 2018

CONTENTS

 Nolan Masters – CA Benefit, how CAs work and examples  David Gibson – CA Transactions, opportunities and changes  Mark Lacey – Construction Market Overview to Brexit

WHAT ARE CAPITAL ALLOWANCES

 Government tax incentive – not a “scheme”  Determined by legislation and 100 years of case law  Interpreted and claimed by tax payers; not automatically

given

 If not claimed then the tax payer misses out but can look

back

 HMRC check claims are correct

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WHAT IS THE BENEFIT OF CLAIMING CA

 Deduction against corporation or income tax  Creates a cash flow benefit and increases return on

investment

 Lower tax rate environment, but increased proportion of tax

to pay

 Only form of tax relief against property capital expenditure

HOW IT WORKS

Basic Tax Return Without Capital Allowances With Capital Allowances Rental Income / Profit £2,000,000 £2,000,000 Deduct Allowable Costs i.e. Debt Finance (£1,000,000) (£1,000,000) Capital Allowances No Claims (£1,000,000) Profit Subject to Tax £1,000,000 Tax to Pay (@ 20%) £200,000

CASH BENEFIT OF £1M QUALIFYING EXPENDITURE

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CASH FLOW BENEFIT OF £1M

  • Benefit claimed over a number of

years

  • Claim the relief at different rates
  • Can carry forward unclaimed

allowances Tax Planning Need to analyse the expenditure to claim the relief at the highest writing down allowances available

HOW TO UNLOCK THE BENEFIT

Hold as investment Own the relevant interest in land Incur capital expenditure

Tax Free Fixtures Non Qualifying Capital

CLAIM OPPORTUNITY 1 - ON ACQUISITION

  • Claim on second hand fixtures
  • Who has entitlement, one claimant

per fixture

  • Valuation exercise of building, land

and P&M Tax Planning Have two years to agree value of Capital Allowances, contract provision critical to enable purchaser to address post completion

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CLAIM OPPORTUNITY 2 - ON DEVELOPMENT

  • Available on certain qualifying

fixture

  • Based on actual costs incurred
  • Apportion certain allowable costs

Tax Planning Accelerate basic rates of tax relief for energy efficient plant & machinery, must be certified at the time of expenditure

CLAIM OPPORTUNITY 3 - ON LEASE INCENTIVES

  • Type of lease incentive
  • Who pays for what
  • Structure agreement

Tax Planning If contribution paid towards expenditure qualifying for capital allowances, tenant can treat as non taxable income receipt

CLAIM OPPORTUNITY 4 - REFURB OF CORES

  • Capex reviews, capital vs revenue
  • Assist cost feasibility
  • Recovery via the service charge

Tax Planning Consider empty voids where landlord contributes to service charge pot

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CLAIM OPPORTUNITY 5 - FULL REFURBISHMENT

  • Main structure already in place,

higher qualifying %

  • Claim incidental expenditure under

s25

  • Capital vs revenue considerations

Tax Planning Allowances available where the thermal qualities of a building are improved

LAND REMEDIATION RELIEF CLAIMS

  • Available for clearing contamination

e.g. asbestos, gases, Japanese knotweed

  • Qualifying expenditure attracts

150% tax relief

  • UK Corporate tax payer only with

available tax credit Tax Planning Available to both investors and developers

HURDLES TO MAKING A DEVELOPMENT CLAIM

 Time restricted ?  Information not available - no cost details ?  Does the benefit warrant a review ?  Who picks up the claim ?

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BUYING AND SELLING

 What do I need to do and when?  What are the angles?  The seller says there are no allowances to pass across?

What next?

ACQUISITIONS - ESTABLISH LEGAL ENTITLEMENT

  • 1. Fulfill Fixed Value & Pooling Requirement

 Fixed Value Requirement

Agree CA position

s198 Election Tribunal Written Statement  Pooling requirement

Insert figures in accounts

ACQUISITIONS - ESTABLISH LEGAL ENTITLEMENT

  • 2. Has the relevant interest been acquired?

Freehold / Leasehold?

  • 3. Historic Property Ownership

Prior Owner Claim History Timing of Historic Purchases and Capex

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ACQUISITIONS – BUYER TO ESTABLISH ENTITLEMENT

HOT Stage Never assume no Capital Allowances available Review legal entitlement to claim on property Review CPSEs (don’t provide all the answers) Don’t be silent – ask questions Insert appropriate contract wording to facilitate future claim Post Completion Prepare claim and finalise s198 election with Vendor

MISSED CLAIM OPPORTUNITIES ON ACQUISITIONS Timing of Expenditure Pre / Post April 2008 Capital Contributions Fall Outside of s198 election Non Tax Paying Tenants s181 - Claim on tenants fit out Properties Acquired Vacant / Part Vacant Potential claim on retained fixtures Unclaimed Allowances Property Fixtures v Loose Equipment

No CAs Available £2 s198 Election Not Applicable

CASE STUDY - OFFICE ACQUISITION Barrier: Acquired with £2 s198 Election in Place Value: £50,000,000 Client: Private Background: Acquired 2016 but assumed no CAs Never made claim… until now Seven figure Capital Allowances

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CASE STUDY - OFFICE ACQUISITION Barrier: Contract Silent and Not Aware of CAs Value: £29,000,000 Client: Overseas Investor Background: Acquired 2014 from Developer Unaware of Capital Allowances Assumed time restriction to claim £7,000,000 Capital Allowances CASE STUDY - INDUSTRIAL ACQUISITION Barrier: Vendor Believed No CAs Available and Advised ‘Not Applicable’ Value: £3,900,000 Client: UK Investor Background: Vendor acquired in 2016 with £2 election Vendor didn’t make own enquiries Claim based on Vendor purchase price £380,000 Capital Allowances CASE STUDY - SHOPPING CENTRE ACQUISITION Barrier: Acquired with £2 s198 Election in Place Value: £345,000,000 Client: UK REIT Background: Acquired 2 Assets a) Taxpayer with £2 Election b) Council who Developed 17 Capital Contributions Made by Vendor

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CASE STUDY - COMPANY ACQUISITION Barrier: CA Position Silent and No Info Provided Value: £50,000,000 Client: Overseas Investor Cash Saving: £1,500,000 MISSED CLAIM OPPORTUNITIES Not aware of claim opportunities Think it is too late / No record of costs Irrecoverable VAT Failure to Claim Incidental Expenditure Not profit making but have future tax liabilities Client assumes accountant or someone addressing it Failure to Structure Grants / Contributions Correctly

Capital Allowances

Accountant QS Lawyer Client

CASE STUDY - DOCTORS SURGERY EXTENSION Barrier: Advised CA value too small Received Grants = 90% of Final Account NHS - £500,000 Pharmacy - £670,000 Value: £1,300,000 Final Account Client: GP Partnership Cash Saving: £205,000

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CORPORATION TAX REFORM April 2019 CGT applies to all UK asset sales including offshore companies Rebased from April 2019 April 2020 Offshore companies to be brought under UK corporation tax regime Offshore companies to have restriction on deductible interest to value of £2m across Group Corporation tax rate reduced to 17% CORPORATION TAX REFORM -WHAT DOES IT MEAN?  Increased future tax liability for Offshore Companies Tax rate reduced from 20% to 17%, but CGT to be charged on future sales. Most effect in 3-4 years time Restriction on deductible interest likely to apply to most offshore property investors  Capital Allowances will become more important Historically offshore companies able to mitigate tax liabilities using debt relief and CAs of little interest  What Next? Plan for future tax liabilities. Claim now and build up allowances

Market Overview in the run up to Brexit Veritas I RICS HQ 9 October 2018

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The macro picture |2018

The UK is still attractive to Foreign Direct Investment GDP growth in the UK has slowed and is forecast to lag behind other developed nations Supply has peaked, the pipeline is low and tenant demand is getting stronger

Construction output (change on previous quarter) Q1 2018

  • 0.84%

Q2 2018 +0.90%

Currency rates whilst the euro rate has somewhat stabilised, the dollar rate has been volatile.

€ $

The retail market remains challenged and uncertain In summary

  • London’s commercial market has been fairly

resilient with a 30% increase in London transactions with new market entrants, comparatively cheap assets and changing risk attitudes.

  • Current construction delivery model coming

under increased focus

  • Labour constraints continue

City vacancy rate 4.7% West End vacancy rate 4.0%

The macro picture |2018

Currency – a different story

1.07 1.08 1.09 1.1 1.11 1.12 1.13 1.14 1.15 1.16 1.17 2018 GBP:EUR exchange rate and volatility 1.15 1.2 1.25 1.3 1.35 1.4 1.45 2018 GBP:USD exchange rate and volatility Average High Low

Materials Tariffs

100 105 110 115 120 March July November March July November March July November March July November March July November March 2013 2014 2015 2016 2017 2018 All materials index average

Labour

Evidence – tracking

2017 movement 2018 year to date Concrete 5.6% 1.3% Fabricated Structural Steel 7.9% 5.0% Steel scrap 21.8%

  • 1.8%

Bar reinforcement 28.4%

  • 1.4%

Oil 16.6% 17.3% Copper 18.5%

  • 8.1%

Aluminium 19.7% 1.3% alinea materials index 3.7% 2.8% alinea commodities index 17.1%

  • 6.5%

CICJ agreement 2.75% 3.2% Steelworkers agreement 2.0% 2.5% Electricians agreement 2.0% 2.5%

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Key drivers of cost - materials

43% 18% 12% 1% 8% 5% 11%

Manufacture / Materials Labour Management Staff & Design/Engineering Delivery Organisation Risk - Design Coordination / Site Margin/OHP

Labour

  • Construction wages increased by nearly 6% in

the year to March 18 (UK average =2% in the same period)

  • CIJC agreement = 6.2% increase over the next

two years (3.2% this year)

Labour

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John Glenn

Productivity Main Contractors – A contractor or a consultant?

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Key influencing factors Inflation |Next 12 months

UK Construction output expectations (from CPA) Total construction Infrastructure Offices 2018 0.0 6.4

  • 20

2019 2.7 13.1

  • 10

2020 1.9 UK Construction output expectations (from CITB) Total construction Infrastructure Commercial Residential (private) 2018 1 3

  • 1

4 2019 2 9

  • 3

3 2020

  • 1
  • 2

2 2021 1 2 2022 2 2 4 2

  • Continued pressure on materials
  • Sustained Labour shortages
  • Uncertain pipeline
  • Realistic view on margin

Tender Price Inflation % Annual Change

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Brexit - Timeline Brexit - Variables

  • Cost Planning & Reporting
  • Planning procurement
  • Tendering and contract negotiations
  • Contract Administration

Variables

  • Currency Changes
  • Tariff changes
  • Border control disruption
  • Labour supply constraints

Laying off risk through supply chain Off site materials storage in the UK Brexit - Exposure Typical Major London Project Impact - 10-30% of total cost depending on typology

  • Steel – rebar, plate / sections (Europe, US &

China)

  • Cladding / glass - Europe
  • Lifts - Europe
  • MEP – Europe
  • Other – dry lining, blocks, stone, aluminium,

metalwork, components, commodities (5- 15% Europe)

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Clive Curd Dip Prop Invest, MRICS, MCIOB clive.curd@veritasadvisory.co.uk DDI: 020 3793 7154 Mob: 07502 376 973 Nolan Masters MRICS, ATT, BSc (Hons) nolan.masters@veritasadvisory.co.uk DDI: 020 3771 4315 Mob: 07502 376 204 David Gibson MRICS, ATT, BSc (Hons) david.gibson@veritasadvisory.co.uk DDI: 020 3771 4316 Mob: 07502 376 957

46 Blandford Street, London, W1U 7HT T elephone: 020 3130 0293 www.veritasadvisory.co.uk

Mark Lacey Partner mark.lacey@alineaconsulting.com DDI: 020 3818 1121 Mob: 07770 220 310