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 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 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
3/3/2020 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 (@ 19%) £190,000 0 4 CASH BENEFIT OF £1M QUALIFYING EXPENDITURE 5 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 6 2
3/3/2020 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 7 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 8 HOW TO UNLOCK THE BENEFIT Hold as investment Non Tax Free Qualifying Incur capital Fixtures Capital expenditure Own the relevant interest in land 9 3
3/3/2020 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 10 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 11 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 12 4
3/3/2020 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 13 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 14 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 15 5
3/3/2020 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 16 ACQUISITIONS –VALUATION OF CAPITAL ALLOWANCES Site Survey Measurement & Costing from 1 st 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 17 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 / Loss Making 18 6
3/3/2020 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 19 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 20 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 21 7
3/3/2020 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 22 CASE STUDY - COMPANY ACQUISITION Barrier: CA Position Silent and No Info Provided Value: £50,000,000 Client: Overseas Investor Cash Saving: £1,500,000 23 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! 24 8
3/3/2020 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 25 OFFSHORE – USING CAPITAL ALLOWANCES 26 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 27 9
3/3/2020 CASE STUDY Development/acquisition Cost: £10million Hold period: 5 years Total Income years 1-5: £3million Anticipated sale price: £12million Capital Gain: £2million 28 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 29 OFFSHORE – FUTURE CAPITAL / TOTAL RETURNS Tax Calculation No Capital Allowances With Capital Allowances Rental Income £3m £3m Capital Gain £2m £2m T otal 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 30 10
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