Updated: Jun 15, 2020
A percentage agreement can save a business valuable time and money in calculating it’s capital allowances claims.
If your business has incurred large amounts of repetitive expenditure that has still to be analysed for capital allowances purposes it may be possible to agree a sample based approach with HM Revenue & Customs (HMRC) that results in a percentage agreement for the current period thereby limiting the level of detailed analysis required. In some cases the results can also be used for later years.
Similarly, if you have already incurred and analysed significant expenditure for capital allowances purposes in earlier periods it may be possible to use this historical data to reduce the level of analysis for future years.
Sampling is particularly relevant for businesses involved in the retail, hotel, pub, restaurant and leisure sectors that have multiple premises and fit them out in a largely uniform manner or corporate style to ‘create a standard type of shop/outlet’.
HMRC will only accept sampling as a basis of claim for new expenditure on fixtures. It will not normally accept percentage agreements for property acquisitions.
Finding the common ground
A successful and reasonable percentage agreement can not only benefit taxpayers but also HMRC in terms of reduced compliance time.
Confidence is key for all parties. As a result, early engagement with HM Revenue & Customs (HMRC) to agree the size of the sample and expenditure to be analysed can be very important. A successful percentage agreement is a progressive and iterative process that only stops once both parties are confident in the analysis and results involved.
HMRC are entitled to seek a statistically relevant sample size with 95% confidence intervals so it is very important that taxpayers plan their approach in advance of initial discussions.
Where there is diversity across the population (for example high street stores, new builds, extensions, re-fits and superstores) sub-categorisation (or stratification) will be needed to ensure consistency of results.
Interaction with accounts
A common mistake in percentage agreements is to look at the total project expenditure in isolation of its accounting treatment.
Accounting ledgers provide the record of payments to the suppliers involved in the delivery of any project (e.g. contractors, professional advisors etc.) and a failure to consider how any agreement should be applied to how the businesses actually records its expenditure can lead to significant complications and errors.
Capital allowances remain one of the few areas of tax law where the tax legislation governs when expenditure is incurred for the purpose of any claim and this can be particularly important for project expenditure that overlaps accounting periods.
If you would like more details on how a percentage agreement could benefit your business, please do not hesitate to get in touch.