HMRC waiting to catch sellers without valid elections
Updated: Jul 5
If you bought or sold a commercial property this year don’t forget to ensure that any capital allowances election agreements are both signed and submitted to HM Revenue & Customs (HMRC) within the time limits.
Far too often, elections and even contractual obligations to complete, remain lost in property purchase or sale agreements which can result in unnecessary contractual and tax risks.
Whether you are Seller or Buyer, if you wish to benefit from the protection of a s198 or s199 capital allowances election for any fixed plant or machinery claim (e.g. lighting, heating etc.) you must meet the procedural requirements which include submission to HMRC within two years from the date of sale and inclusion in the first tax return in which any election amount is sought to be claimed.
Avoid a costly clawback or restriction
Tax Inspectors are entitled to challenge Sellers who bring in a nominal disposal value (e.g. £1 or £2) without a proper election in place. When successful, Sellers can suffer a clawback of allowances with interest and penalties.
Because a Buyer in such a circumstance also won’t have a valid capital allowances election, they will automatically be restricted to nil for the items the Seller was entitled to claim (i.e. it’s a win-win for HMRC).
Without a valid election, disposal values require to be calculated by reference to the net proceeds of sale in accordance with the Capital Allowances Act (CAA) 2001 s562; tax written down values or net book values are not relevant.
Unless a property is being sold on for its development potential it is very likely that the correct ‘net proceeds of sale’ will be higher than a nominal value.
Disposal values without an election
Your Inspector of Taxes is obliged to refer such cases to the Valuation Office Agency (VOA) to determine a more realistic value in line with its ‘apportionment formula’. If you wish to challenge a VOA valuation it would be wise to appoint an independent capital allowances expert familiar with such calculations and negotiations to assist you.
Capital allowances valuation requires a combination of both tax law and surveying expertise and at Furasta Consulting we have significant experience of such claims (including successful negotiation with both HMRC and the VOA).
Interaction with short life assets elections
If an eligible taxpayer believes they will sell their property within 8 years they may have already submitted a short life asset (SLA) election for the non ‘special rate pool’ fixtures such as fire alarms, sprinklers etc. The consequences of a SLA election mean that the taxpayer will suffer either a balancing allowance or charge depending on the disposal value. In these circumstances, the Seller will almost always wish to ensure they have a valid s198 or s199 election.
There are special conditions attached to the use of SLA elections and specialist advice should always be sought.
If you have any questions, or would like more details, please do not hesitate to contact us.