Talking to your clients – Capital allowances for fixtures

Tax is an ever changing world but some changes are more important to clients than others.

Whilst you will be aware of the technical issues it is easy to forget, and find the time, to focus on explaining these to clients. Taking extracts from our Finance Act 2012 course notes, we have prepared a series of tax tips to assist you when 'Talking to your clients' to provide proactive, responsible and timely advice therefore saving you time.

Capital allowances for fixtures

A fixture is an asset which is installed in a building so that it becomes part of that building or land in law e.g. a boiler or water filled radiator.

Special legislation for fixtures was introduced in 1985. Broadly, it lets allowances go to a person who incurs expenditure on the provision of a fixture, either on installation or by acquiring an interest in the building or land to which the fixture is attached, provided that allowances do not go to more than one person at the same time.

Similar rules apply where a lessee pays a premium that is capital expenditure for a lease of land that includes a fixture. The lessor and the lessee can make an election if the lessor was entitled to PMAs on the fixture. The election transfers deemed ownership, and thus entitlement to allowances, from the lessor to the incoming lessee. The fixture is treated as disposed of by the lessor and acquired by the lessee for the part of the premium that relates to the fixture.

Current law on second hand fixtures

Where a building containing second hand fixtures is sold, the normal rules provide that a 'just and reasonable' apportionment should be made in order to determine the part of the sale price of a property attributable to fixtures.

There are rules requiring the cost of the fixtures on which the new owner is entitled to claim capital allowances to not exceed the disposal value that the previous owner is required to bring into account for those fixtures.

Where the vendor has claimed capital allowances for the machinery or plant within a property then, irrespective of whether or not the purchaser will make a claim, the vendor and purchaser can jointly elect (within limits) to apportion the sale price of the property to the machinery or plant.

Equivalent provisions apply to an incoming lessee paying a premium for the grant of a lease.

HMRC issues

'In practice, however, sellers and purchasers (perhaps especially when both are smaller, unrepresented businesses) may neglect to agree a single disposal/acquisition value as the part of the sale price that should be apportioned to the fixtures, and may insert quite different values for the same fixtures in their respective capital allowances pools and calculations. This practice is not in accordance with the legislation.'

Also, there is no time limit on when expenditure on plant or machinery, including fixtures, needs to be pooled, which means that expenditure on fixtures can be pooled some years after the fixtures were acquired.

'This facility to make 'late' claims, several years after a property acquisition - at a time when there is likely to be a dearth of relevant information about the previous owner - has led to an increase in some specialist capital allowances advisers encouraging the owners of second hand fixtures to make substantial late fixtures claims. In some cases, it appears highly likely that the previous owner would have claimed allowances on the fixtures, and that (perhaps because of the age of the fixtures) the bulk of the expenditure would most probably have been written-off already.'

Change of rules

A Consultation Document was issued in May 2011 to tighten the rules for claiming capital allowances for fixtures in buildings but the new rules are less draconian than those originally proposed.

A new s187A CAA 2001 is introduced to deal with changes of ownership of fixtures. It applies if :

• a current owner incurs capital expenditure on acquiring a property containing fixtures from another person for the purposes of a qualifying activity ('new expenditure');

• that other person, or a previous owner, is treated as having been the owner of the fixtures at a relevant earlier time as a result of incurring other expenditure (historic expenditure) for the purposes of a qualifying activity; and

• that other person, or a previous owner, was entitled to claim plant and machinery allowances in respect of the historic expenditure

but the new section does not apply if that other person was only entitled to relief by virtue of the contributions legislation (s538 CAA 2001).

If there is more than one 'past owner', the new law applies to the person who was entitled to claim most recently in respect of that amount.

The qualifying expenditure incurred by the new owner will be treated as nil if:

• the pooling requirement is not satisfied; and either

• the 'fixed value requirement' applies but is not satisfied; or

• the 'disposal value statement requirement' applies but is not satisfied in relation to the past owner.

HMRC state that the fixed value requirement will apply in the vast majority of cases and the disposal value statement requirement is likely to apply infrequently.

None of these conditions affects the disposal value that the past owner must bring into account.

The pooling requirement

The pooling requirement is satisfied if the past owner pools the relevant expenditure in a chargeable period beginning on or before the day on which the past owner ceased to own the fixture, or the past owner claimed an FYA on the expenditure (or any part of it). If neither condition is satisfied, no subsequent owner will be able to claim capital allowances in respect of that asset.

The fixed value requirement

The 'fixed value requirement' applies where the past owner has made a claim in respect of the historic expenditure and is or has been required to bring the disposal value of the plant or machinery into account under certain disposal events under s196 CAA 2001. Broadly, the disposal events include the:

• sale of the interest in the fixtures;

• grant of a lease at a premium where the lessee becomes the owner of the fixtures; and

• permanent discontinuance of the qualifying activity which gave rise to the entitlement to plant allowances followed by the sale of the interest in the fixtures.

The fixed value requirement can take one of two forms. The first is that a relevant apportionment of the sum has been made. This could be satisfied if either:

• the Tribunal has determined the part of the sale price that constitutes the disposal value of the fixtures, on an application made by one of the affected parties within two years of the purchaser's acquisition; or

• there has been a joint election, under ss198 or 199 CAA 2001, between the past owner and the purchaser within two years of the acquisition/grant of the lease.

HMRC believe that the vast majority of commercial transactions involving second-hand fixtures will involve a relevant apportionment and are likely to involve a joint election to avoid the costs of going to Tribunal.

The second form of the fixed value requirement is that the current owner has obtained statements, or copies of them, directly or indirectly from the persons who made them and the case is one where the purchaser from the past owner or, as the case may be, lessee was not entitled to claim allowances in respect of capital expenditure incurred on the fixture.

This is designed to deal with situations where a non-taxpayer is in the chain of owners. If the current owner obtains a written statement made by the 'purchaser from the past owner' (e.g. a charity) that the relevant apportionment condition was not and cannot now be met, and also a written statement made by the past owner of the actual amount of the disposal value that the past owner, in fact, brought into account, then the fixed value requirement would be regarded as met.

The 'disposal value statement requirement'

Exceptionally, where the vendor has already brought a disposal value into account (for example, because he permanently ceased his business some time before selling the building), he may simply give the purchaser a written statement of the amount brought into account - the 'disposal value statement' requirement.

This is designed to cater for disposal events that may have occurred, other than by a sale or grant of a lease, by a person carrying on a qualifying activity. HMRC state:

'The requirement would apply if, for example, a past owner had previously permanently ceased his business activity, finalising his cessation accounts and tax return, in which he would have been required to bring the market value of the fixtures, at that time, into account...If, some years later, he then decided to sell his former business premises with its fixtures to a purchaser, 'the disposal value statement requirement' would apply.'

The requirement is satisfied by:

• the past owner making a written statement of the amount of the disposal value of the fixtures brought into account within two years of the date of ceasing to own them; and

• the current owner obtaining this statement, or a copy of it, either directly or indirectly from the past owner.

Other points

It is for the current owner seeking to claim allowances to demonstrate whether the fixed value requirement or the disposal value requirements apply and, if so, are satisfied. Also, they have to provide a copy of any relevant Tribunal decision, election or statement, satisfying the relevant requirement, to HMRC on request.

The legislation does not apply where there has been a sale of an asset that is no longer a fixture at the time of sale, unless that sale is to a connected person.

HMRC example

'Company A owns a building, containing an antique copper water heater, which it strips out and sells to an architectural salvage dealer.

Company B, not connected with company A, buys the copper water heater from the dealer and installs it in a property it owns. Company B is not required to establish the disposal value brought into account by Company A and is not precluded from claiming allowances based on what it paid for the asset.'

When does the new legislation take effect?

The new legislation takes effect for expenditure incurred by the current owner on or after 6 April 2012 for income tax (1 April 2012 for companies).

Where a past owner's period of ownership was entirely before 1/6 April 2012, neither the pooling requirement or requirement to fix formally the value of fixtures apply in relation to such a period of ownership.

In addition, the pooling requirement is disapplied if the period for which the plant or machinery is treated as having been owned by the past owner ends no later than the end of the two years beginning with the above dates i.e. where the period of ownership of a past owner (who was entitled to claim) ends no later than a period ending on 5 April 2014 for income tax purposes (31 March 2014 for companies).

Key point

Make sure that affected clients are aware of these important changes.