Updated: Jul 5, 2020
A residential care home owner succeeds in claiming plant and machinery allowances on over 14% of its property purchase in 2011 and overturns a hardened stance commonly used by HM Revenue & Customs (“HMRC”) at that time.
The case of GLAIS HOUSE CARE LIMITED v THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS  UKFTT 0059 (TC) held that the Buyer’s capital allowances claim for fixtures should be based on the disposal value that the Seller had been “required to bring into account” under statute (£205,912) and not the amount it actually brought into account (£1) or allocated in the contract (£1).
Kappians Care Homes (“KCH”) acquired a residential care home in 2005 and claimed plant and machinery allowances (“PMAs”) of £68,500 for the fixtures (e.g. heating, hot water, sanitaryware etc) installed. It extended the property and made additional claims in its periods ended 28 February 2006 to 2009 of £170,412 (i.e. a total PMA claim of £238,912).
In the accounting period ended 28 February 2010, the residual value of the KCH’s main pool was £85,504. Around this time the Seller went into administration. No PMAs were claimed for the accounting period ended 28 February 2011.
In May 2011, Glais House Care Ltd (“Glais House”), purchased the business and assets of the residential nursing home, including the property, from the administrators of KCH for a total consideration of £1.7m.
The sale agreement included a purchase allocation for fixed plant and machinery of £1 and £35,000 for loose equipment which were used by the administrators of KCH to calculate the disposal value in the period ended 28 February 2011 and resultant balancing allowance of £50,803 (the parties agreed there was a transposition error of £300 in the calculation which was ignored).
On 26 March 2014, Glais House submitted a claim for capital allowances in respect of the fixtures included in the acquisition of £318,972.
HM Revenue & Customs (“HMRC”) accepted the total PMA value on a “just and reasonable apportionment basis” was £318,972 but sought to restrict the claim for the fixtures to £1 (i.e. the disposal value brought into account by the administrators of KCH) in accordance with the Capital Allowances Act (“CAA”) 2001 s185.
The purpose of CAA 2001 s185 is to limit claims to the original cost of the first claimant. It does this by setting a “maximum allowable amount” referenced to the disposal value which the Seller is “required to bring into account”.
In recent years, HMRC has argued that there should be symmetry with the Sellers disposal value and any Buyer’s claim to prevent allowances being paid out more than once. It has also put a greater “burden of proof” on taxpayers to fully understand the exact details of all claims made.
Indeed, Tax Inspectors are instructed to reject any claim where the tax history and disposal value is not known. This “burden of proof” on the Buyer was discussed and supported in HMRC’s favour in “The Granleys”  UKFTT 376 (TC).
Tax Tribunal over ruled HMRC on the need for symmetry with the Sellers disposal value and specifically that CAA 2001 s185 refers to the value that KCH was “required to bring into account” and not necessarily the amount actually brought into account by KCH. Details of KCH’s original claim (£220,454) emerged through the litigation process and Tax Tribunal found that this included claims which it felt were not plant; namely, cold water (£15,000) and electrical systems (£18,458).
Tax Tribunal held that Glais House was entitled to claim PMAs of £205,912 (the original cost of the fixtures claim excluding ineligible plant) plus £30,232 (the “just and reasonable apportionment” value for previously non-qualifying cold water and electric systems) and an amount for loose equipment which should not exceed £18,458 (subject to a further s562 apportionment).
Whilst HMRC succeeded in getting the original claim reduced by around 26% to reflect the correct disposal value and “maximum allowable amount” they will be disappointed that the claim proceeded at all without exact details of the Seller’s claim and application of CAA 2001 s185.
Claims that seek to challenge low disposal values are not new and at Furasta Consulting we have had considerable success on arguing this very point; however, since the “The Granleys” decision, HMRC has been known to take a much tougher stance on purchase claims generally. If you acquired a property before April 2012 the above judgement could provide a useful starting point for fresh investigation (the rules changed after this date) of unclaimed allowances.
If you are reliant on a contract allocation to protect your “fixtures” capital allowances claim position – beware. The only mechanism to put disposal values beyond doubt for fixtures is a valid capital allowances election.
If you would like further details, please do not hesitate to contact us.