3/20/2019 CAPITAL ALLOWANCES 19 MARCH 2019 1 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 but not automatically given If not claimed then the tax payer misses out but can look back HMRC check claims are correct 2 WHAT IS THE BENEFIT OF CLAIMING CA Deduction against corporation or income tax Available on certain assets including property 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 3 1
3/20/2019 HOW IT WORKS Basic Without With Tax Return Capital Allowances Capital Allowances Rental Income / Profit £2,000,000 £2,000,000 Deduct Allowable Costs (£1,000,000) (£1,000,000) i.e. Debt Finance Capital Allowances No Claims (£1,000,000) Profit Subject to Tax £1,000,000 0 Tax to Pay (@ 20%) £200,000 0 4 CASH BENEFIT OF £1M QUALIFYING EXPENDITURE 5 MAIN TYPES OF CAPITAL ALLOWANCES 18% Plant & Machinery Allowances 8% Integral Features and Thermal Insulation (reducing to 6% April 2019) 100% Enhanced Capital Allowances (applicable until April 2020) 100% Annual Investment Allowance (£1,000,000) 100% Research & Development Allowances 2% Structures and Buildings Allowances (contracts entered into after 29 October 2018) 150% Land Remediation Relief 6 2
3/20/2019 HOW TO UNLOCK THE BENEFIT Hold as investment Non Incur capital Tax Free Qualifying Fixtures Capital expenditure Own the relevant interest in land 7 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 8 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 9 3
3/20/2019 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 10 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 11 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 12 4
3/20/2019 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 13 ACQUISITIONS – KEY TERMINOLOGY IN SIMPLE TERMS S198 Election £2 v £TWDV Fixed Value Requirement a) Tax Paying Vendor s198 Election or Tribunal b) Non Tax Paying Vendor Written Statement Pooling Requirement Insert in Accounts 14 ACQUISITIONS - ESTABLISH LEGAL ENTITLEMENT Who is Vendor? Taxpayer / Pension / Local Authority / Offshore? Interest Acquired Freehold / Leasehold? Prior Claim History Back to First Use Historic Expenditure Timing of and By Whom Structures & Buildings Allowance Record Keeping & Basis 15 5
3/20/2019 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 16 MISSED CLAIM OPPORTUNITIES ON ACQUISITIONS No CAs Available £2 s198 Election Not Applicable 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 Lack of Due Diligence 17 CASE STUDY - OFFICE ACQUISITION MISSED CLAIMS £750,000 of Lost Capital Allowances Due to Incomplete / Poor DD By Sellers Property Transfers Capital Allowances Position A Office developed 1990s s198 election on sale £1 B Fund ‘A’ acquired June 2013 Carry out air con works s198 election on sale £490,000 (A/C works only) C Fund ‘B’ Acquired November 2016 Accept election; fail to identify unclaimed CAs D Client Acquires Q1 2019 Inherit unclaimed allowances £450,000 T oo late to claim ‘lost’ £750,000 18 6
3/20/2019 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 19 CASE STUDY - COMPANY ACQUISITION Barrier: CA Position Silent and No Info Provided Value: £50,000,000 Client: Overseas Investor Cash Saving: £1,500,000 20 MISSED CLAIM OPPORTUNITIES Think it is too late / No record of costs Accountant Annual Investment Allowance – confusion if applies to elections Non Recoverable VAT – Interaction with CAs not understood Capital Perception need to own property Client QS Allowances Not profit making but have future tax liabilities Failure to Structure Grants / Contributions Lawyer Client assumes accountant addressing it / tick list exercise 21 7
3/20/2019 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 (Partners not VAT registered) Cash Saving: £205,000 22 CORPORATION TAX REFORM Increased future tax liability for Offshore Companies April 2019 CGT applies. Most effect in 3-4 years time April 2020 Tax rate reduced from 20% to 17%, but Restriction on deductible interest to value of £2m across Group Capital Allowances will become more important to offshore investors What Next? Plan for future tax liabilities. Claim now and build up allowances 23 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS) Announced in budget from 29 th October Capital Allowance on all buildings and structures Commercial property, excludes some residential 2% per annum of cost for 50 years Costs include build costs and professional fees Fixed amount per year for each owner New build, refurbishments, extensions and fit outs 24 8
3/20/2019 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS) Office Build Cost = £10,000,000 P & M and Integral = £4,000,000 SBA = £6,000,000 SBA per annum = £120,000 Cash benefit pa at 19%= £22,800 After 10 years = £228,000 Tax Planning Claim plant and machinery and integral features first 25 TOTAL CAPITAL ALLOWANCES – TIMING OF 4.5 4 3.5 3 2.5 £million 2 1.5 1 0.5 0 1 2 3 4 5 6 7 8 9 10 Years SBA 2% Integral 6% Plant&Mach 18% AIA£1million Enhanced 100% Land Remed 150% 26 TOTAL TAX SAVINGS – TIMING OF 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - 1 2 3 4 5 6 7 8 9 10 Tax saved 27 9
3/20/2019 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS) 20 October 2018 Technical note 31 January 2019 Consultation Spring 2019? Draft Legislation Summer 2019? Legislation 28 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS) Excludes residential, but allows Hotels, Care Homes Contracts after 29 October 2018, proof? On sale new owner carries on claiming 2% Cannot use Annual Investment Allowance Information flow for 50 years! CGT liability New build, refurbishments, extensions and fit outs 29 CASE 1 – GRAIN SILO – WHAT IS PLANT 30 10
3/20/2019 CASE 1 – GRAIN SILO – WHAT IS PLANT HMRC allowed 20% of value for ventilation HMRC – internally a good case but to “hold the line” Definition - a building / a facility / a silo Was the storage temporary? Function and trade Tax payer wins 31 CASE 2 –HYDROELECTRIC DAM – WORKS TO LAND 32 CASE 2 –HYDROELECTRIC DAM – WORKS TO LAND SSE claimed £260million, HMRC accepted £34million! Alteration of land for plant, the concrete structure The concrete structure was not plant The aqueduct, drill and blasted and shotcrete was plant Since ruling new legislation was brought in! 33 11
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