Updated: Jul 5, 2020
The Office of Tax Simplification (“OTS”) has published a document setting out the scope of a new review into simplifying claims and elections for UK tax relief.
All tax systems include tax reliefs, which in many cases are an essential part of defining the scope and structure of tax by providing rules which establish where the tax burden is and is not intended to fall.
The UK has over 1,100 tax reliefs and it is not always clear why there is a need to make a specific or separate claim or election in order to benefit from a relief or exemption, and this can lead to some of those who are entitled to benefit missing out.
The OTS review will seek to establish the broad numbers and types of claims and elections across the main UK taxes, and then focus on a range of the claims and elections that are more significant or more frequently used by individuals, partnerships and companies.
Almost every UK business claims capital allowances and the cost to HM Treasury exceeds £22bn each year. Because of its significance it comes under regular review and most recently by the OTS in 2018 when replacement with accounting depreciation was investigated and ruled out.
This latest review is expected to build on the insight gained from previous analysis and has provisionally identified the following for investigation:
Capital allowances, including issues arising when these are subject to specific claims rather than handled within tax returns.
Section 198 elections (for allocating property sale proceeds between buildings and fixtures), taking forward a recommendation in the OTS’s 2017 report on simplifying the corporation tax computation.
Claims for capital allowances
Capital allowance claims (including amended claims and withdrawal of claims) must be made in a company’s return, or in an amended return, for the accounting period for which the claim is made (apart from a few exceptional cases).
Taxpayers can usually decide to claim the full amount of allowances available in the chargeable period involved or reduce their claim to a lower amount. The main exception to this is for Real Estate Investment Trusts (REITs) who are required to claim the full amount under the ‘shadow’ regime.
The claiming provisions were introduced to protect HM Treasury and encourage taxpayers to claim their full entitlement to relief. Capital allowances claims are excluded from overpayment relief so if you make a mistake outside normal filing deadlines which results in an overpayment of tax it is unlikely you will be allowed to correct it. Depending on the type of allowance, you may be entitled to make a claim in a period after the original expenditure was incurred.
Elections for capital allowances
The capital allowances rules contain a variety of elections which include: Short Life Assets, Ships, Long Funding Leases and Fixtures. It is the fixtures elections (s198 and no doubt s199) that OTS has identified for investigation.
The current version of the s198 Capital Allowances Act (“CAA”) 2001 election procedure dates from 2014. The main advantage for all parties, including HMRC, is certainty.
The vendor and the purchaser agree the tax value at which assets pass between them. The election is an agreement on what part of the overall sales price should be attributed for tax to qualifying assets, distinguishing between the various asset pools. Crucially, the elected amount cannot be greater than the lower of:
The amount the vendor has brought into the pools. It is therefore related to historic costs, not to the present value of the assets in the hands of the purchaser or the vendor, and
The actual sale price.
There is therefore considerable latitude on the sum agreed and negotiating the s198 election is an important part of the overall deal process. It is at this point that the vendor may seek specialist capital allowance advice to ensure that the amount brought into the pools is maximised, for if assets are not reflected in a s198 agreement the purchaser, and any subsequent purchaser cannot claim CAs in respect of them at any point in the future.
The importance of s198 elections has been driven by government policy (fixed value requirement in 2012 and ‘mandatory pooling’ in 2014). Tax computations rarely track
plant and machinery allowances claims per property therefore, separate records need to be maintained. For older claims this is not always available which means there can be difficulty in identifying what has been claimed previously and what is a fair disposal value. This can result in nominal elections for £2 or no provision in sale agreements at all.
Elections that are entered into must be sent to HMRC within 2 years from the date of sale and submitted with the relevant tax return for the first period of claim involved. This is not always done in practice. In a dispute, taxpayers may be able appeal to Tribunal for an ‘alternative apportionment’.
We await the forthcoming details from OTS with interest and if you have any questions, or would like more details, please do not hesitate to contact us.