Capital allowances: a step-by-step guide

The award-winning team of experts from Capital Allowance Review Service explain how to claim capital allowances, what qualifies – including recent regulatory changes – and how to avoid some common pitfalls

What qualifies for capital allowances?

If your client has spent capital buying, and/or improving commercial property, they may be entitled to tax relief. Property acquisition expenditure can be divided into the proportion which is qualifying embedded fixtures and fittings (this is over and above chattels). A breakdown of the qualifying embedded fixtures and fittings is often information which is missing from the property’s completion statement and sales agreement, and the rules governing it can be fiendishly complicated. Property embedded fixtures and fittings of different kinds are covered by a complex web of legislation and often governed by time limits for making claims. Chris Roberts, director of Capital Allowance Review Service, explains: “Our focus is highlighting items that enables the building to function as a building, and not just the wall, floor and ceiling. It’s items like heating systems, electrical systems and wiring, and lifts.” These also include relatively small fittings, such as door hinges, which may be easy to overlook. Door hinges, for example, can come under the category of Plant and Machinery because of their function.

Note that even if your client is only renting a property, they may still be able to claim capital allowances through Leasehold Improvements that are carried out.

How the process works

Step One

Capital Allowance Review Service works with accountants. With their support and guidance, the accountant can identify if their client has spent capital buying or improving commercial property, and also if they can benefit from a Property Capital Allowance Review. “It’s crucial to determine if and how a client could benefit from any Capital Allowances secured on their behalf before the claim process is started,” says Mike Reynolds, a chartered accountant who works at Capital Allowance Review Service. Your clients’ plans are important – while they may be entitled to make a claim, this is only worth doing if they are paying tax or expecting to do so. It is at this stage the viability of a claim is considered by Capital Allowance Review Service the accountant and client to ensure reputations and relationships are maintained.

See a step-by-step guide here

Step Two

Once the potential for a claim has been established, the process of calculating the claim is started. Capital Allowance Review Service will perform a site survey and take an inventory of everything in, on and around a premises. Their team of chartered accountants, tax specialists, qualified surveyors, valuers and property experts will assess each item and what kind of claim it qualifies for. “While an accountant will understand the opportunity, they quickly realise the requirement for a multitude of disciplines in order to prepare a full and accurate claim. Our reputation has been built due to having all the required disciplines needed to create a technically sound approach,” Chris Roberts says.

Formulating the claim value is far from straightforward. A key component is valuing the cost to buy and install each item that is to be included in the claim.  The right legislation must also be applied to each claim that is submitted.

Step Three

The claim is now applied to the client’s tax profile. Capital Allowance Review Service’s team will amend any previous tax returns, and apply to HMRC for the relevant refund. The team will take over from the accountant in liaising with HMRC, including in the event of an enquiry. “Over the past 17 years, we have never lost a case,” Chris Roberts points out. These enquiries occasionally take place due to the large sums of tax recovered by Capital Allowance Review Service.

Step Four

Capital Allowance Review Service then produces a report, which shows how the figures have been calculated and includes copies of any amended tax returns. “Accountants really like the fact that they are not tasked with any part of our claim process and are kept informed throughout the process with a report for their records once completed,” says Chris Roberts. The report includes the invoice from Capital Allowance Review Service. If the team of experts find unclaimed Capital Allowances, the client will typically be charged a percentage of the secured claim, but if nothing is found, they will not be charged. Frequently, the client recovers enough tax for this to cover all fees. If this is not possible, this is raised at step one before the claim process starts.

And finally…

Further support is provided, so that if the client goes on to sell their property in the future, they will receive legal support and advice to ensure the remaining allowances are dealt with in a manner that best suits the client position.

What kind of values are typically found?

On average, 25% of a property purchase cost will have unclaimed embedded fixtures and fittings that qualify for tax relief. This can vary according to the type of property and its use. For instance, a care home may contain up to 35%, while an industrial building is likely to be at the lower end of the scale.

The average on property improvements is 50%.

Capital Allowance Review Service has acted for properties of all types, from a chain of karaoke bars for which capital allowance savings of £412,791 were made, to a property which a landlord rented out for which unclaimed capital allowances were identified to the tune of 22% of the property cost. More than £160,000 was identified for one client in unclaimed capital allowances on a London based property which they leased, despite a common misconception that it is only possible to claim for property which is owned rather than rented.

Some recent regulatory changes to consider

Capital allowances have been subject to a series of changes in legislation in recent years. These include the following:

Integral Features

A new rate, effective from April this year, of writing down allowances on the special rate pool of plant and machinery has been reduced from 8% to 6%.

Enhanced Capital Allowances (ECA)

Plant and Machinery that is deemed energy efficient and environmentally friendly attracts 100% tax relief through a first-year allowance called Enhanced Capital Allowances (ECAs). However, these are being phased out by 2020, with 2021 expected to be the last year clients can claim for them.

Annual Investment Allowance (AIA)

From January 2019, the first-year allowance has been increased from £200,000 to £1,000,000 for two years. This is a generous increase which may have been intended to compensate for the phasing out of ECAs and the reduction in Integral Features allowances. The two-year timeframe puts pressure on ensuring that the full property expenditure is reviewed in a timely manner – however, this is often highlighted when a retrospective claim is made.

Structural Buildings Allowances

Structural Buildings Allowances (SBA) are available for any expenditure incurred after October 29 2018. The aim of SBAs is to relieve the cost of constructing a new building from scratch when it is intended for commercial use. That includes the conversion of some existing structures. This does not apply to Integral Features such as lighting or heating systems.

• If you think you have a client who may be able to claim capital allowances and would like a free initial assessment before pursuing it any further, contact the Capital Allowance Review Service team of specialist advisors on 01782 749842 or email [email protected]