New restrictions took effect from the start of April 2012 for buyers seeking to claim capital allowances on fixtures included in buildings acquired secondhand. Section 198 elections are now essential for buyers who should focus more on capital allowances at the time of purchase, to avoid missing out on potentially valuable tax reliefs.
The draft legislation for these changes was issued in December 2011 and was included in the recently published Finance Bill for this year. The new rules took effect on 1 April 2012 (for those within the charge to corporation tax) or 6 April 2012 (for those within the charge to income tax). Some of the changes are delayed until April 2014. It is interesting to note that the final changes are not as extensive as those the Government proposed during its consultation exercise in summer 2011 (see Hot Property – June 2011 edition).
By way of a reminder of the basic rules, businesses can claim capital allowances as a deduction from their tax calculation on the expenditure they have incurred on fixtures in a building, including for example hot and cold water systems, air conditioning, heating systems and lifts. Capital allowances are claimed over a number of years as a percentage of the expenditure on a reducing basis. Where a building is sold then the buyer can claim capital allowances on the part of the price that relates to fixtures, so long as the buyer is carrying on a qualifying activity for capital allowances purposes.
Prior to April 2012 where a building contained fixtures, the parties could fix the part of the price apportioned to the fixtures by agreeing what is known as a section 198 election. Alternatively if no apportionment was agreed, the buyer could make its own apportionment on a just and reasonable basis.
Now the rules are more restrictive. The buyer of a secondhand building will only be able to make a claim for capital allowances if it can show that two new requirements are met. These are:
- The pooling requirement
- The fixed value requirement
Note, the pooling requirement will only be imposed from April 2014, whereas the fixed value requirement has taken effect immediately from April 2012.
The pooling requirement is that the seller must have pooled its expenditure on fixtures in a chargeable period before the building is sold. Pooling expenditure means either making a claim for capital allowances, or notifying the Revenue of the amount of the qualifying expenditure and adding it to the pool without actually making any claim. The 2011 consultation exercise proposed a restrictive deadline for pooling expenditure of only one or two years, but in fact the actual change they are introducing is only that the pooling must have been done before the sale of the building.
The fixed value requirement is that the part of the price apportioned to fixtures in the building must be fixed either by:
- The seller and buyer agreeing and entering into a section 198 election at the time of the purchase (or within up to two years)
- Application for a determination by the First Tier Tax Tribunal within two years of the purchase
Our view is that the practical impact of the fixed value requirement is to make it essential for the parties to enter into a section 198 election, when the building is sold if the buyer is to be able to make any claim for capital allowances on fixtures in the future. Buyers should avoid the cost and uncertainty of Tribunal applications, and realistically, if the parties have been unable to agree a section 198 election at the time of a sale it is unlikely they will so do afterwards.
Businesses buying buildings second-hand should take a more proactive approach to capital allowances at the time of the purchase, and seek to agree a section 198 election for a fair apportionment with the seller. Their advisers should ensure that the correct enquiries are made (and followed up) relating to capital allowances to ensure that any section 198 election that is entered into is correct and can be relied upon in future. Buyers can no longer sit back and rely on getting specialist capital allowances advice after the event. Of course on some purchases buyers may have to take a pragmatic view about the potential worth of capital allowances. A buyer of a 25 year-old building that has never been refurbished for example, may be more relaxed about the seller failing to provide any information about capital allowances than the buyer of a three year old building.
Sellers holding commercial property who may wish to sell, should take this opportunity to make sure as part of their corporation tax compliance that they can properly evidence from April 2014 that the “pooling requirement” is met. Sellers should also be aware that buyers are likely to be more aggressive in negotiating on capital allowances. It will be interesting to see whether sellers who have the records to fully evidence the capital allowances position so that they can pass the value on to buyers can command a better price. It may become standard practice to deal with this in the heads of terms.
Finally, one of the proposals in the 2011 consultation was that the part of the price apportioned to fixtures should not be less than the tax written down value of the fixtures in the hands of the seller. This would have meant the end of sellers asking buyers to enter into section 198 elections for just £1. However, the actual changes being introduced now do not set any minimum amount to be apportioned to fixtures. Sellers who want to retain and accelerate the benefit of capital allowances in the building, or who know little of the capital allowances position, can still seek to require a buyer to enter into a section 198 election for £1.