3/3/2020 CAPITAL ALLOWANCES 3 MARCH 2020 1 WHAT ARE CAPITAL - - PDF document

▶
3 3 2020
SMART_READER_LITE
LIVE PREVIEW

3/3/2020 CAPITAL ALLOWANCES 3 MARCH 2020 1 WHAT ARE CAPITAL - - PDF document

Jan 07, 2023 339 likes •470 views

3/3/2020 CAPITAL ALLOWANCES 3 MARCH 2020 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; not automatically given

slide-1
SLIDE 1

3/3/2020 1

CAPITAL ALLOWANCES

3 MARCH 2020

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

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

1 2 3

slide-2
SLIDE 2

3/3/2020 2

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 (@ 19%) £190,000

CASH BENEFIT OF £1M QUALIFYING EXPENDITURE RECENT CASE STUDY – OFFICE ACQUISITION

  • PP: £3.9m (April 2019)
  • CAs: circa £1.9m
  • Tax Cash Saving: £360k

Tax Planning Claimed on sellers original acquisition but required contract provision to agree to sign a s198 election plus claimed “overage” for integral features

4 5 6

slide-3
SLIDE 3

3/3/2020 3

RECENT CASE STUDY – BTR DEVELOPMENT

  • Forward funded: circa £35m
  • CAs: circa £5m
  • Tax Cash Saving: £950k

Tax Planning Maximise the valuation of “common area” plant and machinery and addressing the residential dwelling restriction to HMRCs satisfaction

RECENT CASE STUDY: HOTEL CONVERSION

  • Build cost: circa £90m
  • CAs: circa £50m
  • Tax Cash Saving: £9.5m

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

HOW TO UNLOCK THE BENEFIT

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

Tax Free Fixtures Non Qualifying Capital

7 8 9

slide-4
SLIDE 4

3/3/2020 4

MAIN TYPES OF CAPITAL ALLOWANCES  18%

Plant & Machinery Allowances

 6%

Integral Features and Thermal Insulation (6% from April 2019)

 100%

Enhanced Capital Allowances (abolition April 2020)

 100%

Annual Investment Allowance (£1,000,000 to 31 Dec 2020)

 2%

Structures and Buildings Allowances (post 29 October 2018)

 150%

Land Remediation Relief

STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Contracts Entered Into after 29 October 2018  Available on Purchases and new build, refurbishments, fit outs and capital

contributions

 Excludes residential (incl Student Accommodation, BTR), but allows hotels,

care homes

 2% per annum for 50 years  Cannot claim Annual Investment Allowance on SBA  Applicable from later of date of first use or date expenditure incurred  CGT liability on sale – increases sale proceeds STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Sale of Unused Building (other than by developer)

  • Qualifying Expenditure is lesser of purchase price & construction cost

 Sale of Unused Building by Developer

  • Qualifying Expenditure is purchase price

 On Sale amount of SBA to Purchaser is Nil Unless Allowance Statement is met

  • Date of earliest written date of contract
  • Amount of qualifying expenditure
  • Date brought into use

10 11 12

slide-5
SLIDE 5

3/3/2020 5

STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Excluded Expenditure:  Acquisition of Land and associated costs, SDLT  Land Remediation  Landscaping (other than to create a structure)  Costs in Connection with Planning permission  Items qualifying for Plant and Machinery  Items that may be allowed as a deduction in calculating profits  Fees relating to any excluded expenditure STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)

  • Industrial Build Cost

= £10,000,000

  • P & M and Integral

= £1,000,000

  • SBA

= £9,000,000

  • SBA per annum

= £180,000

  • Cash benefit pa at 19%= £34,200
  • After 10 years

= £342,000 Tax Planning Claim plant and machinery and integral features first to accelerate rate of tax relief and minimise clawback on disposal

CASH FLOW BENEFIT OF £1M OF CAPEX

  • Benefit claimed over a number of

years

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

allowances

  • Utilise AIA of £1m on expenditure

up to 31 Dec 2020 Tax Planning Building contracts priced lump sum, requires a detailed valuation exercise to claim the relief at the highest writing down allowances available

13 14 15

slide-6
SLIDE 6

3/3/2020 6

ACQUISITIONS – LEGAL ENTITLEMENT TO CLAIM

  • Prior Entitlement To Claim?
  • S198 election / Tribunal / Written Statement
  • Office of Tax Simplification – Elections Under Review
  • Relevant interest acquired?
  • Historic Property Ownership
  • Timing of Historic Expenditure
  • CPSEs / Questions / Contract Wording
  • Allowance Statement - SBAs

ACQUISITIONS –VALUATION OF CAPITAL ALLOWANCES

  • Site Survey
  • Measurement & Costing from 1st principle
  • Value Qualifying Assets as New / Market

Value

  • Residual Land

Valuation

  • HMRC Apportionment Multiplier

Purchase Price x Plant and Machinery Land + Building + Plant and Machinery 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 Lack of Due Diligence / Loss Making

No CAs Available £2 s198 Election Not Applicable

16 17 18

slide-7
SLIDE 7

3/3/2020 7

CASE STUDY – MISSED CLAIMS ON ACQUISITIONS

Client: Offshore Investor with £1bn portfolio Background: Historically claimed Capital Allowances Not aware of opportunities to claim on Capital Contributions, s181 works or vacant property Cash Saving: £1,700,000

MISSED CLAIMS OPPORTUNITIES ON CAPEX SPEND Case Study - £1.3m GP Practice Extension

  • Grants received
  • NHS

£500,000

  • Adjacent Pharmacy

£670,000

  • Perceived negligible claim available by CA advisor & Accountant

Areas of Consideration

  • Allocation of Grant Monies
  • Irrecoverable VAT
  • S25 Expenditure
  • Revenue v Capital

Outcome

  • £205,000 tax saving split between 5 Partners

BENEFIT OF ‘CLAIMING’ EVEN IF LOSS MAKING

  • 1. Use the Annual Investment Allowance to Increase Losses

Example: Co Undertakes Refurbishment or Acquires Building £1,000,000 Capital Allowances Loss Making but forecast will be subject to taxable profits in two years time Option A - Claim In Year Expenditure Incurred Year 1 Annual Investment Allowance £1,000,000 x 19% = £190,000 increased losses Option B - Claim In Year Come Into Profit Year 1 Capital Allowances (18% or 6% wda) £120,000 x 19% = £22,800 tax saving £167,200 more can be offset immediately when come into profit! Any unused relief carries forward to following year

  • 2. Disclaim Allowances to Increase Future Pool

19 20 21

slide-8
SLIDE 8

3/3/2020 8

HISTORIC EXPENDITURE REVIEW

  • No time restriction to review historic expenditure
  • Perceived Barrier to Claim – lack of detailed cost information
  • Schedule of Property Expenditure & Prices Paid (acquisitions & capex spend)
  • Amend Prior

Years returns to benefit from more than 1 years worth of allowances

  • Loss making companies, offshore entities, property owners, sitting on unrelieved tax savings

CASE STUDY - COMPANY ACQUISITION Barrier: CA Position Silent and No Info Provided Value: £50,000,000 Client: Overseas Investor Cash Saving: £1,500,000 CASE LAW – INSUFFICIENT EVIDENCE – HMRC ENQUIRY

  • Hora T

evfik v HMRC

  • HMO (Houses of Multiple Occupation) Claim rejected
  • HMRC raised enquiry even though normal time limits had expired
  • HMRC has power to make ‘discovery assessments’ – 4 years after

tax year

  • Burden of proof on taxpayer to establish expenditure is qualifying
  • Report from recognised CA advisor provides added certainty
  • All Capital Allowances reports should be submitted to HMRC!

22 23 24

slide-9
SLIDE 9

3/3/2020 9

OFFSHORE – CHANGES IN TAX RULES  April 2019 – Capital Gains Tax apply to offshore  April 2020 - NRL to Corporation tax  Corporate Interest Rate Relief Restriction (CIRR)  Corporation tax loss relief rules

 Land Remediation Relief available

OFFSHORE – USING CAPITAL ALLOWANCES LAND REMEDIATION RELIEF

Removing Contamination say £1m Trader x50% = £500,000 (£95,000) Investor x150% = £1,500,000 (£285,000) At Disposal Trader - no disposal value Investor – CGT on £1,000,000

25 26 27

slide-10
SLIDE 10

3/3/2020 10

CASE STUDY

Development/acquisition Cost: £10million Hold period: 5 years Total Income years 1-5: £3million Anticipated sale price: £12million Capital Gain: £2million

OFFSHORE – FUTURE INCOME POSITION

Allowance Value 1 2 3 4 5 TOTAL AIA 100% £1m £1,000,000

  • £1,000,000

MP 18% £1m £180,000 £147,600 £121,032 £99,246 £81,382 £629,260 SRP 6% £2m £120,000 £112,800 £106,032 £99,670 £93,690 £532,192 SBA 2% £5.5m £110,000 £110,000 £110,000 £110,000 £110,000 £550,000 NQ 0% £500k

  • Total

£10m £1,410,000 £370,400 £337,064 £308,916 £285,072 £2,711,452

OFFSHORE – FUTURE CAPITAL / TOTAL RETURNS

Tax Calculation No Capital Allowances With Capital Allowances

Rental Income £3m £3m Capital Gain £2m £2m T

  • tal Income

£5m £5m Less management costs, interest £3m £3m Profit subject to corporation tax £2m £2m Less Capital Allowances ex SBA

  • £2,161,452

Taxable @ 19% £380,000 £0 Net Return after tax £1,620,000 £2m

28 29 30

slide-11
SLIDE 11

3/3/2020 11

OFFSHORE – ACTIONS

 Acquisitions, historic due diligence required  No time limits on Developments, refurbishments, extensions, fitouts  Timing – use £1million AIA, amend accounts  Disposal – retain claimed (IF,PM,LRR), pass remainder (CC, SBA)

Introduction

  • How CGT changes affect offshore structures
  • Why Jersey/Guernsey Property unit Trusts still work
  • Summary of the new Substance Rules in the Channel Islands

32

CGT Changes to Offshore Structures

  • Non-resident landlords within Corporation Tax scope from April 2020
  • Level playing field for onshore and offshore Real Estate holding structures
  • Introduces some additional complexity to what was a simple and easy way to
  • wn UK Commercial property
  • Collective Investment Vehicles (CIVs) can make certain elections

33

31 32 33

slide-12
SLIDE 12

3/3/2020 12

Why Jersey/Guernsey Property Unit Trusts still work

  • Tax Transparent (Essential for Tax Exempt Investors)
  • Simple, Flexible and Familiar
  • Transparency Election for closely held CIVs (JPUTs/GPUTs)
  • Exemption election for widely held CIVs (REITs)

34

New Substance Rules in Jersey

  • Background in OECD BEPS initiative
  • White listed by EU in March 2019
  • Demonstrate Core Income Generating Activity (CIGA)
  • Changes to tax returns for Jersey corporate vehicles

35

Clive Curd Director clive.curd@veritasadvisory.co.uk DDI: 020 3793 7154 Mob: 07502 376 973 Nolan Masters Director nolan.masters@veritasadvisory.co.uk DDI: 020 3771 4315 Mob: 07502 376 204 David Gibson Director david.gibson@veritasadvisory.co.uk DDI: 020 3771 4316 Mob: 07502 376 957

30 Newman Street, London, W1T 1PT T elephone: 020 3130 0293 www.veritasadvisory.co.uk

Paul Lawrence Chief Executive Officer Paul.Lawrence@belaskoadmin.com DDI: 01534 603166 Mob: 07464 444361

34 35 36