HM Revenue & Customs (HMRC) has updated its Capital Allowances Manual (CA12300) which reminds Tax Inspectors that they must not agree open ‘market value’ or ‘net sale proceed’ calculations when a taxpayer ceases to own a qualifying building or asset that is subject to a Research & Development Allowances (RDA) claim.
The responsibility for negotiation and agreement of all such valuations must be done in consultation with the Valuation Office Agency (VOA). Taxpayers are required to present their apportionment or valuation calculations (along with other core details) to HMRC to support their disposal value for onward scrutiny by the VOA.
It also reminds Tax Inspectors that Seller’s who fail to get a compliant Capital Allowances Act (CAA) 2001 s198 or s199 election for fixed Plant and Machinery (P&M) or are required to bring a ‘market value’ disposal value into account (e.g. because of an alternate disposal event) must also follow the same procedure through the VOA.
Because the outcome of such VOA investigations can sometimes result in a different disposal value that may have been agreed between a Buyer and Seller (e.g. contract allocation) and therein affect more than one party, HMRC and the VOA will require details of all affected parties for negotiation.
Why are disposal values important?
Disposal values are used to calculate how much of any RDA or P&M allowances you may have claimed that you are required to pay back. This is called a ‘balancing charge’ and can result in an unexpected tax bill if not planned for properly. The lower the disposal value the smaller any tax clawback.
In normal sale circumstances, Sellers will be required to bring a disposal value that reflects the ‘net proceeds’ of sale for the qualifying RDA portion. This is a similar calculation to what a Buyer would have to do calculate their qualifying expenditure element if they also wished to claim RDAs.
If the whole building qualified for RDA then the value will focus on the split between land and buildings. If only part of the building qualifies then the valuation will likely need to identify a range of parts (i.e. RDA areas, Plant and Machinery, Land etc).
This is a specialist area of valuation and should only really be conducted by experienced capital allowances experts with both surveying and tax expertise. The statutory basis for such ‘apportionment calculations’ is set out in CAA 2001 s562 and there is well established methodology and VOA approved formula. The Courts do not look favourably on taxpayers who have not followed the correct protocols if an unresolved dispute arises.
In some cases, it may be possible to bypass the above complexity (e.g. when the building with the RDA claim has no economic value and is being sold for development) and a more pragmatic approach may be taken (i.e. it’s a land sale with nominal or nil building proceeds). Whatever the circumstance however, expert capital allowances advice should be taken.
Loss of the building by demolition or destruction
If you need to demolish your RDA building and do not receive any insurance monies or any other ‘capital’ compensation payment, then your disposal value is likely to be nil (i.e. no balancing charge).
Another disposal event
If you cease to own the asset by any other event that does not fall into the above categories you may be required to bring an overall ‘market value’ disposal value into account for the purposes of any balancing charge calculation which again must be referred to the VOA by HMRC for approval.
Connected party and related transfers
In situations where the parties meet the connected party ‘control’ tests they can elect to treat the sale as an alternative amount which for RDA purposes is nil when claimed; and if not, the qualifying expenditure.
This can have the effect of rolling over any potential balancing charge to a subsequent sale by the Buyer which is a useful planning concession. It is worth noting however, if the sole or main benefit of the sale is to create a ‘tax advantage’ (e.g. to get a greater RDA or avoid a balancing charge) then a CAA 2001 s569 election is likely to be challenged and disregarded.
At Furasta Consulting we have significant experience of preparing valuations to withstand HMRC and VOA scrutiny (including negotiations where needed) and if you would like further details please contact us.