Updated: Feb 3, 2021
Co-operation and planning with fixtures sales are essential to make the most of any capital allowances in the deal involved.
If a business buys a second hand chair or desk for use in the business from an unconnected third party, the chances are it will be entitled to claim plant and machinery allowances (PMAs) on the price paid for the asset, and if the business has unused annual investment allowance, be entitled to deduct the full cost for tax purposes in year 1.
However, if the business buys a second-hand fixture – “plant or machinery that is so installed or otherwise fixed in or to a building or other description of land as to become, in law, part of that building or other land” – its ability to deduct anything will be determined by the circumstances of the past owner(s) and the special rules contained in Ch 14, Pt 2, Capital Allowances Act 2001 (CAA 2001).
These are designed to prevent double claims on PMA fixtures, but the rules can also result in no one being entitled to claim. This is why capital allowances are included in most buyer solicitor’s Commercial Property Standard Enquiries (Due Diligence Questionnaire in Scotland) to illicit the core details necessary to support any claim and inform future action.
Buying from a taxpayer
If the seller is a taxpayer, the buyer will need the seller’s co-operation to make any PMA fixtures claim and the seller may need the buyer’s to avoid an unsuspecting clawback of allowances.
The ‘mandatory pooling’ requirement which came into effect in April 2014 (s187A(4), CAA 2001) requires PMA fixtures to be identified and claimed by sellers who are entitled to them (i.e., most business taxpayers) in order for any benefit to be passed on to a future owner. If they do not claim, future owners are automatically restricted to nil.
The tribunal can determine a fair disposal value when there is a dispute between a buyer and seller (eg, enforced £2 elections) but it can only do so when a claim has been made and details of it are known.
Whether the seller makes a claim or not is down to them. It is worth remembering that if they bought the property and haven’t incurred any new expenditure there could be an existing election agreement or nil restriction limiting their ability and any new buyer’s claim.
If they do make a claim and sell the asset, they will need to bring a disposal value into account, reflective of the net sale proceeds for the qualifying items. The s198, CAA 2001 election rules allow the buyer and seller to bypass the complex Valuation Office Agency (VOA) apportionment calculation and agree a value between themselves.
In these circumstances it is in both parties’ interest to co-operate. A seller that fails to get a valid s198 election risks being challenged by HMRC on their disposal value calculation, which, if found to be too low could result in an unsuspecting tax bill with interest and penalties. A buyer that fails to get a valid s198 election will automatically be restricted to nil.
If the seller owned the property before the introduction of ‘integral features’ in April 2008 the buyer might be entitled to a small VOA apportionment claim for parts of the electrical and cold-water systems. Another hidden opportunity can be with sellers who made other types of capital allowances claims (eg, hotel allowances) on fixtures incorporated into buildings.
Occasionally buyers will ask sellers to make sure they have claimed their full entitlement and even offer to quantify missed claims on their behalf. Sellers need to remember that they are ultimately responsible for their tax computation and any claims made. Claims made in error can affect risk ratings and lead to more frequent and detailed compliance checks.
Unusual disposal events
In some cases, a disposal event may have occurred where a ‘disposal value statement’ is needed from the past owner instead of a s198 election. These include sales of qualifying interests at less than market value; cessation of ownership under s188, CAA 2001 where qualifying interest continues or would but for merging with another interest; and, when a seller’s qualifying activity is permanently discontinued but there is no immediate change of ownership of the fixture.
In all these circumstances the buyer must obtain a written statement from the past owner of the disposal value they were required to bring into account. Failure to do so will trigger a nil restriction.
Distressed asset sales
One of the challenges in distressed asset sales is getting the co-operation of the seller to satisfy either the fixed value or disposal value statement requirements set out in s187A, CAA 2001.
Unless the value of the allowances can be quantified and reflected in the price of the asset or reduce tax bills for the seller, an Insolvency Practitioner is unlikely to cooperate. If the property has been seized or repossessed by a court order, the person selling the asset may not have the authority/right to make claims or sign any elections on sale.
Knowing who you are dealing with and the current status of the past claimant is important; for example, a Law of Property Act (LPA) receiver may be appointed by a lender in respect of the property on which the lender has a charge. The LPA receiver then sells the property on behalf of the owner.
Only the owner can enter into a s198 election to fix the value of the fixtures and if they do not co-operate, the election cannot be made. Neither does an LPA receiver have any direct power to ensure that the seller pools any qualifying expenditure in a chargeable period beginning on or before the date of sale.
Buying from a non-taxpayer
If the seller is not within the charge to UK tax (eg, charity, pension fund, local government) and owned the property from new, or from 24 July 1996, the buyer should be entitled to claim PMAs on any fixtures included in the sale price.
The PMA value should be calculated on a just and reasonable apportionment basis in line with published VOA guidance. Contract allocations or other methods (eg, percentage estimates) are not valid. HMRC tax inspectors are instructed to refer such calculations to the VOA for approval.
If the seller acquired the property after April 2012 from a taxpayer, the buyer will need to determine the application of the fixed value requirement and disposal value statement provisions contained in s187A, CAA 2001. If the buyer cannot do this any fixtures claim will likely be restricted to nil.
If the seller acquired the property before April 2012 but after 24 July 1996 the buyer will still need to check the tax status of any previous owner(s) to satisfy s185, CAA 2001, and if there is a taxpayer owner, research their potential claim position before proceeding with any claim – a restriction is likely.
Regardless of the tax status of the property owner, if the property has a tenant who has substantially altered the property to meet their own requirements there is a chance many of the qualifying PMA assets will not be ‘owned’ by the seller for the purposes of a fixtures claim.
If the tenant is a non-taxpayer, ownership and entitlement to claim PMAs will normally pass with a freehold sale because they will not have a prior right to the fixtures (s181(3), CAA 2001). However, if the tenant is a taxpayer the buyer will need to understand both the nature of the expenditure incurred under their lease ( s176, CAA 2001) along with any claim made, so that it can be excluded from any just and reasonable valuation where applicable.
Specialist fixtures and loose PMA assets (i.e. non background P&M) that are provided by a landlord and leased to a tenant can also fall foul of the long funding lease rules (s70A, CAA 2001) which can result in a different analysis and tax treatment.
Another feature of tenanted properties is a landlord’s contributions towards tenant fit-out works. If the landlord is a taxpayer, they may have been entitled to claim contribution allowances for qualifying fixtures. These are governed by separate rules (s538, CAA 2001) and buyers will normally ‘walk into the shoes’ of any existing claim.
Whether a business is buying or selling a property, co-operation and planning on capital allowances is almost always needed to make the most of their availability (or not) in the deal.
For further details on this, or any other related topic, please do not hesitate to contact us.