The new rules on capital allowances in commercial property are now in effect with the passing of the 2012 Finance bill. These rules will greatly affect commercial property owners, leaseholders and importantly, their lawyers.
The central change is the introduction of mandatory pooling of capital allowances at point of sale, which is to be phased in between now and 2014. Although this transitional phase is a two-year period, now is the time to put into operation a process that will deal with the changes and produce the best possible results for your clients.
What has changed?
The practical implications of the new rules are as follows:As a quick recap, capital allowances can be claimed on the expenditure on plant and machinery existing within a commercial property or when a property is refurbished. The result can be considerable tax mitigation and often a refunding of overpaid tax in prior years.
- There will be a legal obligation for the mandatory pooling of expenditure on fixtures to be carried out in order to keep capital allowances alive for claiming. This will be phased in over a transitional period from April 2012 to April 2014.
- The new rules require that the seller pool any fixtures prior to the sale of the property. This means that a capital allowances report will be required at the point of sale to ensure that there is a proper audit trail and that an equitable agreement on the allocation of the claim is reached between the seller and purchaser.
- The seller and the buyer have a time limit of two years from the date of the sales transaction to agree the value and apportionment of the allowances within the property. However, this agreement is likely to be reached prior to completion as it forms part of the negotiating process.
- An election by the seller and the buyer as to the apportionment of capital allowances will have to be made using the current Section 198 (owners) and Section 199 (leaseholders) election processes. These processes also have a time limit of two years from completion for submission to HM Revenue and Customs to be valid.
A commercial property owner or leaseholder has a legal right to claim capital allowances and professional advisors have an obligation to make them aware of this. Unfortunately though, current awareness levels mean that capital allowances are often overlooked, misunderstood and undervalued. Expertise from a number of fields is required to compile a report that will provide the maximum permissible allowances under complex tax legislation.
A lawyer should be armed with as much information as possible when advising clients. The advice should be accurate and timely and enable the client to make an informed decision on their legal right to claim. Anything less than this and the risk of a negligence claim on you or your firm is very real.
Before the bill - current practice
From our experience, Commercial Property Standard Enquiries documentation and Sections 198 and 199 of the Capital Allowances Act 2001 are areas that are often misunderstood and wrongly completed. There are low awareness levels among lawyers, who often have little realisation of the commercial ramifications of questions on CPSE documents or S198/199 elections that are incorrectly or inaccurately answered. Until now this practice has been accepted as the norm and has seldom been questioned by the client on either side of a commercial property sale or indeed by their respective advisors, but this will not be allowed to continue under the new rules.
The changes in the 2012 Finance bill make it vital that CPSE documents and S198/199 elections are correct and contain sufficient detail. Elections must be submitted in the proper format and within the specified timeframe. HM Revenue and Customs' tolerance for accepting inaccurate, incorrect or incomplete S198/199 notices will be radically reduced following the introduction of the new legislation.
We are not in the business of scaremongering, but if a lawyer is responsible for inaccurate or inadequate information on the documentation then they are in real danger of exposing their clients to financial problems or loss including a possible effect on future property values. Rigorous legal opinion indicates that it is highly unlikely that tax exclusion clauses in a lawyer’s terms of business will mitigate the risk of negligence claims.
The risk of negligence also increases markedly not only when clients are advised incorrectly but also if capital allowance claims and S198/199 submissions are not made in a correct and timely manner. So with the 2012 Finance bill there is a much higher requirement for the lawyer to be more expert in these areas.
Although the full effect of the changes won’t be felt until 2014, it is strongly recommended that approaches to capital allowances are examined now. Implementing a process that will allow for the new rules during this transitional period will allow you to mitigate negligence and add value to your work. In addition, the client benefits as the seller can get the allowances now and they are not eroded by inflation and the buyer can potentially negotiate a portion of the allowances for take up post sale.
The best outcome for both seller and buyer in the negotiation and agreement on capital allowances apportionment will result if this is all dealt with very early in the pre-contract stages of the sale process. This is true during the transitional period as well as post 2014, so solicitors should be assessing their systems now and implementing a smooth and reliable process for dealing with capital allowances.
Peter Wright, Senior Technical Advisor at Portal Tax Claims