If you have client businesses that own their own land or property, it is worth thinking about whether they are squeezing all the value they can out of these assets.
Buying, restoring and maintaining land and buildings usually requires major investment, so it makes sense to extract as much value as possible from these assets and activities.
Here we explore the different ways businesses can recover some of this spending by using their property assets to reduce their corporation tax bills.
Remediation of contaminated land
If a business has purchased land or property and invested in clearing it of potentially harmful materials in order to bring it back into use, then that business can claim tax relief.
Remediation of Contaminated Land Tax Relief allows businesses to claim relief of 150% of the cost of cleaning the site against their corporation tax bill.
Introduced in 2001, the tax relief was introduced to reward and encourage companies to clear and restore brownfield and commercial sites rather than building on greenbelt or undeveloped land.
Just 1,500 companies claimed land remediation tax relief in 2017/18 according to HMRC, which is a drop in the ocean when one considers how many redevelopments are potentially eligible.
To qualify, the land or building must be owned by a limited company at the time the remediation work is carried out and it must be owned either as a freehold or a leasehold of at least seven years.
The items cleared must have the potential to ‘damage’ buildings, cause ‘serious harm’ to people or the environment, or pollute water courses.
Some examples of what land remediation tax relief can be claimed for are:
- Asbestos removal or capping in roofing panels
- Removal of sulphate contamination in soil and concrete
- Clearing hydrocarbon contamination in things like disused tanks
- Removal of Japanese knotweed
- Radon protection measures
- Arsenic clearance
The tax relief can be claimed on the costs associated with work to clear the land or buildings of pollutants, such as the cost of the equipment and materials used and subcontractor costs.
The claim can also include staff wages and NICs where more than 20% of their time is focused on the remediation work. Claims can be made up to two years after the work was carried out.
Loss making companies can claim remediation tax credits from HMRC in return for surrendering their losses in that tax year, which will affect how much they can offset in future years.
This is a very generous form of tax relief which can save companies tens or even hundreds of thousands of pounds, but businesses must be careful that their claims meet all HMRC’s requirements. Make sure you do your research on the criteria or seek advice from a specialist tax consultant.
Capital allowances tax relief offsets the hidden expenditure in your commercial property against your tax bill. Any UK taxpayer who owns commercial property, personally or through a limited company, may be eligible to claim capital allowances, which were created by HMRC to incentivise greater investment in commercial property.
Most business owners have heard of capital allowances and, if they own commercial property, will likely claim in some form. However, the vast majority still fail to claim anywhere near as much as they could. This is because even business people with a general understanding of capital allowances rarely have a really detailed knowledge of this complex and constantly changing area of tax.
With different types of capital allowance assigned to different assets, all attracting different degrees of relief, it is not surprising that there remains a lot of confusion, with many executives still unsure what does and does not qualify.
A quarter of companies that own commercial property are not even aware they can claim them, our own research showed1. Since the average capital allowance claim we see is worth £49,000 per year, these companies are missing out on a major revenue boost.
Capital allowances tax relief usually applies to spending on permanent fixtures within the building such as air conditioning, electrics, heating and lighting but in some cases can even extend to windows or project management costs. These costs can be deducted from a company’s profit, reducing its tax bill.
This basic principle is simple enough. However, the eligibility and value of the claim depends on numerous criteria which are constantly being altered.
Here is a quick breakdown of the different forms of capital allowances which should help accountants advise clients on how to get the most benefit from capital allowances.
Annual investment allowance (AIA)
The most valuable form of capital allowance, AIA enables companies to offset the full cost of most plant and machinery items against their profits in the year during which the expense was incurred. The annual limit for AIA is constantly being altered – it has changed several times in the last 10 years alone – so stay up to date with HMRC.
AIA is available for virtually all plant and machinery used in a business such as general equipment, computers and vans as well as some fixtures such as fitted kitchens. It can also be claimed on alterations made to install plant and machinery and the costs associated with demolishing and removing them.
Cars are not included under AIA. Nor are items which were originally purchased for another reason before they were used in a business or items given to a business, for example, a printer used at the business owner’s home which is then transferred to their office.
The government temporarily hiked AIA from £200,000 to £1million between 1 January 2019 and 31 December 2020. This was a clear move to encourage businesses to invest in plant and machinery rather than hold off on major spending due to political uncertainty. It may be beneficial to make the most of this enhanced relief and buy expensive items while more can be claimed back.
AIA offers a higher rate of relief than other forms of capital allowance, so it is worth ensuring that every item that can be categorised under AIA is accounted for. Often things are missed because businesses do not realise they qualify. A detailed survey of the commercial property and inventory by someone with expertise in AIA eligibility is essential.
Writing down allowances
If a business exceeds the AIA annual limit or has items that fall outside of AIA, it can claim writing down allowances. These allow the business to deduct a percentage of the value of an item from their profits each year.
The percentage value that can be deducted varies with different items between 18% and 6%. All plant and machinery should be categorised in the higher rate pool of 18% unless it can be considered an integral feature of the building like a lift or air conditioning system, items with a ‘long life’ of 25 years or more, and thermal insulation. For cars, those with CO2 emissions of more than 130g/km must claim at the lower rate of 6%.
A detailed understanding of what must be considered ‘integral features’ and what can remain in the higher rate pool of 18% will mean companies can maximise their claim, while meeting HMRC’s rules.
First year allowances
This type of capital allowance can be claimed alongside AIA and does not count towards the AIA limit.
First year allowances can be claimed on certain low CO2 emission cars, energy and water saving equipment, gas, biogas and hydrogen refuelling equipment as well as zero emission goods vehicles.
If a company doesn’t claim all the first year allowances it is entitled to, it can claim part of the cost in the next accounting period using writing down allowances. This is something that is often overlooked.
Accountants must guide their client businesses through a proper assessment of their potentially eligible assets. A full on-site survey paired with a thorough understanding of HMRC’s specifications should mean businesses are properly rewarded for their property investments.
By Mark Tighe, founder and managing director at specialist tax consultancy Catax