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Commercial Property Standard Enquiries (CPSE)

Updated: Jul 5, 2020

With the introduction of Structures and Buildings Allowances and their inclusion in CPSE general pre-contract contract enquiries for commercial property transactions, capital allowances are likely to come under increased scrutiny in 2020.

Sellers that fail to understand their historical claim positions or plan for what maybe legitimately expected in terms of enquiries could find themselves with unwanted delays, higher legal costs and even an unsuspecting tax bill.

Buyers that do not deal properly with capital allowances will not only impede their own claim position but will likely restrict future owners if they decide to sell. The message is clear; plan and take advice early.

The latest SBA changes will also affect certain non-taxpayers in providing information they are not used to collating.

What is the purpose of a CPSE and DDQ?

CPSE and Due Diligence Questionnaires (“DDQ”) (Scotland’s equivalent) are designed to help the Buyer make informed decisions about the property that it is proposing to buy.

The standard questions included in both are prepared by leading solicitors and normally initiated by the Buyer’s solicitors as part of their normally enquiry process. The use of CPSEs is endorsed by the British Property Federation.

The seller is not under any duty to give replies but is under a legal duty to disclose latent defects affecting the property. Offering full replies helps to ensure that the seller has discharged its duty.

Why are capital allowances included?

HM Revenue & Customs (“HMRC”) does not want to pay capital allowances more than once for the same real estate asset*. This is achieved by requiring Buyer’s to have a clear understanding of all capital allowances claims inherent in the property before making a claim to avoid “double allowances”.

The most common type of capital allowances claim on commercial real estate is plant and machinery allowances (“PMAs) and specifically, fixtures such as, heating, lighting, lifts, air-conditioning, sprinklers, alarms, sanitaryware, kitchens and other installed furniture or equipment.

Other types of capital allowances include research and development allowances (“RDA”), business premises renovation allowances (“BPRA”), hotel building allowances (“HBA”) and industrial building allowances (“IBA). Although BPRA, HBAs and IBAs are all now withdrawn, historical claims can still restrict owners of properties constructed before relief removal.

Some enquiries may result in the need for a capital allowances election (e.g. for PMA fixtures claims) and in others confirmation of types of claim, qualifying expenditure and tax written down or disposal values.

The rules for Buyers can be draconian. Failure to properly investigate and obtain the

appropriate information and/or elections (when relevant) can result in an automatic restriction to nil.

Sellers can also suffer an unsuspecting clawback of allowances if HMRC believe they have brought in a disposal value not reflective of the sale proceeds and without the proper elections. Therefore, understanding and agreeing the capital allowances position at the time of sale can be in everyone’s interests.

* the capital allowances rules treat the acquisition and disposal of chattels (i.e. non-PMA fixtures) differently.

What are structures and buildings allowances

Structures and Buildings Allowances (“SBAs”) were introduced for construction contracts entered into, on or after, 29 October 2018. SBAs will be available for most commercial properties (excluding residential use) and allow owners (including leaseholders) to claim a 2% annual allowance based on their original qualifying cost for up to 50 years.

When the relevant freehold or leasehold is sold the balance of any SBA may be passed to the Buyer. There is no adverse tax consequence on the Seller but if the Buyer cannot get an “Allowances Statement” from the Seller they will automatically be restricted to nil.

The information needed in an Allowances Statement includes:

  1. the name and address of the building project,

  2. date of earliest written construction contract,

  3. amount of qualifying expenditure, and,

  4. date upon which the property was first brought into non-residential use.

A single property may have multiple Allowances Statements (e.g. for original build, fitting-out, conversion etc.). Unlike other forms of capital allowance, it does not necessarily matter if the Seller is not a UK taxpayer. Government bodies, the Crown and non-uk tax residents selling a property with a valid construction contract will still have to provide a valid Allowances Statement to a Buyer for it to avoid the nil restriction. This is going to be a completely new obligation on such entities.

What is the value of capital allowances?

Every £100 of capital allowance has the potential to generate tax savings of up to £19 for companies and £45 for individuals. They are one of the ‘safer’ and few forms of tax relief available to business to offset capital real estate costs.

Some capital allowances can provide an absolute tax saving (e.g. PMAs) and some a cash flow timing advantage until sale (e.g. SBAs).

A commercial property may contain a mix of claim types with upside and risk in both landlord and tenant works. Only a full understanding, which may include understanding what a past owner/occupier did, will result in a successful claim.

At Furasta we have significant experience in capital allowances due diligence, including advising solicitors and clients on all aspects of capital allowances in real estate transactions, and if you have any questions, please do not hesitate to contact us.


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