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Capital Allowances Made Simple

10 October 2017

• Who can claim and the benefit

• Which properties qualify and which items

• Buying and selling

• Missed Claim Opportunities

• Case studies

• 2017 / 18 – Current Issues?

Contents

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What are they?

• Government incentive for investment

• Legislation and case law

• Interpreted and applied by tax payers

• HMRC check claims

Why are CAs important?

• Deduction against corporation or income tax

• Available where incur expenditure on commercial property

• Cash flow benefit

• Higher Equity / Lower L to V

• Only form of tax relief against property capital expenditure

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How it WorksTax Return Without Capital

AllowancesWith CapitalAllowances

Rental income/Profit £1,000,000 £1,000,000Deduct allowable costs i.e. debt finance

(£500,000) (£500,000)

Capital Allowances 0 (£500,000)Profit subject to tax £500,000 0Tax to pay (@20%) £100,000 0

Who can claim?YES

Institutions Property Co'sOverseas Investors Private IndividualsOthers

£36bn

NO

Pensions

£9bn

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Who can claim? Common Misunderstandings

Traders, ie Retailers v Trading Stock

Capital Expenditure v P & L Expenditure

Overseas Companies v Overseas Properties

What Triggers Entitlement to Claim

Incur Capital Expenditure

Own Relevant Interest

Held as Investment

Capital Contribution

Make a Claim

Freehold vs Leasehold

Not Held as Trading

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Capital Contribution Claims

• Type of lease incentive

• Who pays for what

• Structure agreement

Tax PlanningIf contribution paid towards expenditure qualifying for capital allowances, tenant can treat as non taxable income receipt

Service Charges & Dilapidation Payments

• Claim if met by the service charge?

• Is the service charge taxed as income?

• Claim on receipt of a dilapidations payment?

Asset Management Budget

Landlord Tenant

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Qualifying Property Types

Common Misconception / ErrorCan’t claim at all on ‘residential’ property

Typical Qualifying AmountsType Developments Acquisitions• Shopping Centre 30% - 60% 2% - 35%• Care Home 35% - 60% 6% - 35%• Office 35% - 50% 5% - 32%• Hotel 40% - 65% 2% - 35%• Car Dealership 25% - 40% 2% - 20%• Health Centre 30% - 45% 3% - 25%• Student Accommodation 7% - 15% 2% - 6%• Industrial Warehouse / Retail Parks 5% - 40% 1% - 30%• General Fit-outs / Refurbishments 55% - 95% n/a

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Main Types of Allowances1. On reducing balance basis

18% Plant & Machinery8% Integral features & Thermal Insulation

2. In year of Expenditure (First Year Allowance)100% Annual Investment Allowance (£200,000)

Enhanced Capital Allowances150% Land Remediation Relief

Examples of Plant & Machinery

18% writing down allowance pa

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Examples of Integral Features

8% writing down allowance pa

Tax Relief for Energy Efficiency Expenditure

100% or 8% writing down allowance pa

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Land Remediation Relief 150%

• Developers & investors• Land in the UK• Contaminated at acquisition• No subsidy or contribution• Polluter cannot claim• Relevant interest in the land• Tax credit

Claim Prep/ Rebuild & Land Value

How to Make a Claim

Client ReviewPortfolio Report

Advice on Disposal Agree Claim with

HMRC

Collate DocumentsEntitlement to

ClaimSurveyIncur

Expenditure

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Case Study – First Tier Tribunal

Expenditure: £30m

Claim Value: £6m

Client: Overseas Fund

Cash Saving: £1.2m (4%)

Case Study – Retail Refurbishment

Expenditure: Retail Refurbishment

Project Value: £13m

Client: UK REIT Plc

Cash Saving: £7m (£6.3m)

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Buying and Selling

• What do I need to do and when?

• Who should be aware of CAs and who should address the CAs?

• What are the angles?

• The seller says there are no allowances to pass across? What next?

Key CA Terminology in Simple Terms

• S198 election £2 v £TWDV

• Fixed Value Requirement Agree CA position

• Pooling requirement Insert figures in accounts

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Acquisitions – Legal entitlement?

• Vendor – tax payer / pension / LA / offshore?

• Freehold / Leasehold Acquired?

• CPSEs

• Prior Owners Claim History

• Contract Wording – HOT stage?

Company Acquisitions

• Review for unclaimed historic expenditure

• Capital Contributions

• Capex reconciliations

Common Misconception / ErrorTime restriction to review historic expenditure

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Missed Claim Opportunities

Capital ContributionsTiming of ExpenditureCapital Contributions

Market Value v Actual Value

Non Tax Paying Tenants

Properties with Vacant Space

£2 s198 election

Incorrect s198 elections

Not ApplicableNo CAs Available

Missed Claim OpportunitiesDon’t understand benefit

Think it is too late / No record of costs

Loss making or low tax rate

‘Too much effort’

Perception need to own property

Client assumes accountant or someone addressing it

Capital Allowances

Accountant

QS

Lawyer

Client

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Missed Claim Opportunities

Never Assume……..

Ask The Right Questions to Establish Most Favourable Position• Tenants, past and present• Timing of expenditure and by whom• Irrecoverable VAT• Future Tax liabilities • Basis for inherited s198 elections / claims. • Incidental expenditure. Correct pool allocation • Not only maximise but accelerate• Claimed? Cost info requested? Property visited?• Grant / Contribution payments structured?

Case Study – Company AcquisitionBarrier: CA position silent

Value: £50m

Client: Overseas Investor

Cash Saving: £1,500,000

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Case Study – Shopping Centre AcquisitionBarrier: No information from Receivers

Value: £23m

Client: Overseas Investor

Cash Saving: £850k (3.7%)

Case Study – Office AcquisitionBarrier: Advised No CAs available

Value: £5,000,000

Client: Overseas Investor

Cash Saving: £310,000 (6%)

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Case Study – Doctors Surgery Extension

Barrier: Advised CA value too smallReceived Grants = 90% of Final Account

NHS - £500,000Pharmacy - £670,000

Value: £1,300,000 Final Account

Client: GP Partnership

Cash Saving: £205,000

Capital Allowances – 2017 / 2018?

• Authorised Contractual Scheme

• Energy Efficiency Requirements / Lease Breaks

• UK Corporate Tax Reform

• Capital Allowances Consultation Paper

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2017 / 2018 – Authorised Contractual Scheme

• Tax Transparent Fund Structure; Multiple Funds under one umbrella

• Taxed at investor level; CGT doesn’t apply to fund or non UK investors

• Operators of ACS able to elect to calculate

• Complexities calculating CA values

2017 / 2018 – Energy Efficiency / Lease Breaks

• Energy efficiency regulations passed 26 Mar 2015

• Properties below ‘E’ energy rating by April 2018 unmarketable

• Acquiring non-compliant occupied properties – 6 months to comply

• Penalties range from £5,000 to £150,000

• Significant Capital Allowances potential

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2017 / 2018 – UK Corporate Tax Reform

• Restriction of Carried Forward Losses to set against taxable profits

• Restriction to deduct interest expense and other financing costs

• Non-Resident Companies to be within scope of Corporation Tax?

2017 / 2018 – Capital Allowances Consultation

• Office of Tax Simplification – review CAs then CT

• July 17 report on current system

• Spring 18 further report on accounts depreciation• Deprecation rates• Cost to tax payers• Costs to exchequer• Mirror current incentives• Transitional• International

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Clive CurdDip Prop Invest, MRICS, MCIOBclive.curd@veritasadvisory.co.ukDDI: 0203 7937 154Mob: 07502 376 973

Nolan MastersMRICS, ATT, BSc (Hons)nolan.masters@veritasadvisory.co.ukDDI: 0203 7714 315Mob: 07502 376 204

David GibsonMRICS, ATT, BSc (Hons)david.gibson@veritasadvisory.co.ukDDI: 0203 7714 316Mob: 07502 376 957

46 Blandford Street, W1U 7HTTelephone: 0203 1300 293www.veritasadvisory.co.uk