In 2024, HM Revenue & Customs (HMRC) has been sharpening its compliance focus on capital allowances for commercial real estate and infrastructure deals with a new 'Schedule of Information' that is quickly becoming standard practice in scenarios that are not covered by a Capital Allowances Act (CAA) 2001 s198 election and need a valuation for the fixed plant and machinery (‘fixtures’) acquired as part of land and buildings instead.
In this article we explore the background to the enhanced focus as part of routine compliance checks, the areas of scrutiny and what you should be prepared to ask from whoever prepares your capital allowances claims.
The new approach is clearly designed to make taxpayers think twice and flush out spurious claims or claims submitted without robust analysis of the tax legislation, case law and valuation guidance. If you have any doubts about the ability to provide the details requested in the example Schedule of Information or defend the assumptions in a report you should raise these concerns with your adviser immediately.
Anyone familiar with working with us will be aware that our capital allowances reports include full details of entitlement, ownership history, tax law restriction application and valuation basis reflective of VOA methodology.
We operate under the principle of full disclosure and discuss each claim with our clients, including their tax team or advisers, in advance of submission to make sure everyone is comfortable. We also keep detailed electronic records to support.
Background to HMRC Compliance Focus Capital Allowances
Concerns have been growing on the quality and standards of tax advice in the UK for some time with lots of new entrants offering ‘expert’ advice on how to save tax or get cash back from HMRC, switching between a breadth of different tax reliefs to support their business models purporting 100% success rates, no win no fees and tie-ins which can quickly lead to taxpayers paying over the odds for tax advice.
Unfortunately, capital allowances are a tax incentive that has attracted a range of unscrupulous providers over the years. Taking advantage of HMRC’s light touch approach, pushing the boundary to what is acceptable and in extreme cases disregarding established law, risking clients’ reputations and exposing them to unsuspecting tax bills and penalties.
Burden of Proof Rests with the Taxpayer not HMRC
Contrary to the marketing literature, claims for capital allowances on ‘fixtures’ are not new or mysterious and there is a long history supported by legislation, guidance, and case law which HMRC will expect to see followed.
The modern CAA 2001 (and 1990) Acts were designed to simplify and consolidate what qualified as P&M with special rules for ‘fixtures’ to stop HMRC paying out twice on the same expenditure. The requirements for due diligence on past owner entitlement go back to 24 July 1996.
In 2008, HMRC sought to simplify claims by legislating the introduction of ‘integral features’, a defined category of P&M found in most buildings that would now qualify regardless of trade (notably general electrical and cold-water systems which would often only qualify on a ‘piecemeal’ basis which means only certain parts should ever qualify in an overage claim). The computational trade-off was the splitting of the ‘general pool’ to ‘main rate’ and ‘special rate’ to enable different writing down rates and smooth the effect on HM Treasury.
However, evidence was still emerging of taxpayers submitting claims for fixtures where a past owner could have been entitled to claim. This was the backdrop to the Tapsell & Lester v HMRC [TC01231] case which held that the taxpayer had failed in the ‘burden of proof’ associated with determining past ‘fixtures’ restrictions. HMRC won and will often cite this case in correspondence.
Another important decision is Bowerswood v HMRC [TC04299] which concerns the established ‘just and reasonable’ apportionment rules that require a capital allowances valuation in accordance with Valuation Office Agency (VOA) guidelines when a legitimate entitlement exists. The taxpayer failed to properly support their claim (a swimming pool within a retirement home purchase) which ended up substantially reduced by the VOA in Tribunal.
In Finance Act (FA) 2012, these overlapping cases and decisions resulted in the fixed value and pooling requirements we have today (CAA 2001 s187A): -
Fixed Value: - This is designed to encourage Buyers (taxpayers and non-taxpayers) from April 2012 to get s198 elections (or disposal value statements) from Sellers who are entitled to claim and agree disposal values (the fixed value) in writing or appeal to Tribunal for a determination. No election or statement, where applicable, results in Buyer(s) automatically being restricted to nil.
Pooling: - If a Seller is entitled to claim allowances on the ‘fixtures’ after 1 April 2014 and fails to do so, future owners are automatically restricted to nil.
Both these measures are designed to protect HM Treasury and ease the burden on HMRC in compliance with its primary aim of ‘not paying out more than once on the same asset’, or not at all when a taxpaying Seller fails to claim.
Not All Sales Require a S198 Election
The challenge for HMRC is that not every asset is owned by a taxpayer and sales between (or from) non-taxpayers can frequently either fall outside CAA 2001 s187A with no s198 election or disposal value statement or fall partially within resulting in a combination of restricted/unrestricted claims. There also remains some legacy claims for certain ‘integral features’ introduced in Finance Act 2008 where no past owner was entitled to claim.
In 2019, HMRC also lost an important decision on a long standing dispute into fixtures purchases under the ‘old rules’ (sales pre FA 2012) where the Seller’s £2 disposal value bared no relation to the disposal value they were required to bring into account under CAA 2001 s196/s562 using the formula guidance. HMRC lost its long-standing argument on symmetry between Seller disposal and Buyer claim values and was left on the hook for paying out twice on the same assets.
So, whilst most asset deals will not require specialist capital allowances valuations there will be legitimate circumstances where one is needed.
Scenario | Valuation Status | Special Notes |
Acquisitions from a developer | Likely needed | Ensure confirmation of trading stock status and 'relevant interest' ownership. |
Acquisitions from non-taxpayer(s), including charities, pension funds, the Crown and government departments, where they have always held the property. | Likely needed | Ensure written confirmation of tax entitlement status and 'relevant interest' ownership. |
Acquisitions form a non-taxpayer who acquired it from a developer or a series of other non-taxpayer owners back to 24 July 1996. | Likely needed with research | As above with clear past ownership analysis |
Acquisitions form a non-taxpayer who has substantially altered the property since acquisition post April 2012. | Likely needed with care | As above with copies of any past s198 elections and careful restricted/new work analysis. |
Acquisitions from a non-taxpayer who purchased the property before April 2012 from an ordinary tax paying business who had either not claimed or protected their position with a valid s198 election. | Possibly needed with care and caution | Such claims are riskier than the above and have a heavy burden of proof which require a clear understanding of all claims including past owners which can include going back to24 July 1996. |
Acquisitions where none of the past owners were entitled to claim on some of the ‘integral features’ introduced in 2008, commonly referred to as an ‘overage’ claim because it can sometimes accompany a s198 election or restriction to nil. | Possibly needed with care and evidence | A common mistake in these claims is to overlook the fact parts of the electrical and cold-water systems already had an entitlement to claim on a piecemeal basis. The overage assets must also still be present. |
A market value disposal event. | Likely needed | Remember CAA 2001 s187A only applies to the defined disposal events (not all) |
A dispute between taxpayers to agree a reasonable apportionment or appeal to Tribunal. | Likely needed | In practice, it is very unusual to see a valuation here because most parties reach a commercial agreement on the s198 value as part of the wider deal. |
What Accountants and Tax Advisers Need to Know
Advisers are central to guiding businesses through compliance checks and HMRC’s scrutiny often extends to reviewing how advisers supported the accuracy of any claims made.
Gone are the days of summary capital allowances reports with only high-level details on claim assumptions or valuations and you should expect to see full details of entitlement, ownership and claim history with a valuation basis for all claims made.
If you have any doubts about the ability to provide the details requested in the Schedule of Information or defend the assumptions in the report you should raise these concerns with your clients and capital allowances adviser immediately. HMRC has also not given up on its symmetry argument and puts a very high burden of proof on past claimants’ history for properties acquired pre-2012.
You should also bear in mind that some of the information included in the above schedule will need to be managed carefully. For example, CPSEs are not normally legally binding and can cover a wide range of tax issues, not just the capital allowances.
HMRC will usually segregate the tasks of entitlement, valuation, and application of restrictions to different people within it and the VOA. This means you will have both tax and surveying experts pouring over the details of your claim which can lead to debate on both asset eligibility and valuation with separate teams with different responsibilities and objectives.
This can create added risks to taxpayers because tax law and valuation expertise are frequently intertwined in assessing capital allowances valuations and it’s easy to overlook or make mistakes in isolation. Also, just as two builders are unlikely to give you matching quotes for that house extension do not expect the VOA to tie in exactly with your own, the most important question is often – what is ‘just and reasonable’?
Unfortunately, there remain a lot of firms offering these types of capital allowances claims with no formal valuation, estimating or even tax qualifications so as well as a strong track record, look for capital allowance’s experts or teams in firms with recognized and respected dual qualifications on the skill sets needed (e.g. RICS, ATT, CIOT etc.) because you will need this combination to successfully negotiate with HMRC and the VOA.
Also, be mindful to check whether your accountant or tax adviser outsources this work to others where there is no direct contact or engagement (e.g. white labelling) to make sure responsibilities for liability, compliance, record keeping and dealing with any compliance checks are all clearly understood.
Don’t be afraid to ask an adviser to justify their claim assumptions or discuss the content of their report. Be wary of anyone who is reluctant or says ‘we’ve always done it this way’ or ‘we have a 100% track record with HMRC’ – times are changing.