Capital Allowances (CAs) are a well-known form of tax relief in accountancy practice but not all businesses are born equal when it comes to the potential benefit.
When considering a commercial property, accountants will be aware that CAs are available on fixed plant such as basic electrics, lighting, heating, sanitary equipment, kitchens, and associated plumbing. These are the most commonplace physical assets in nearly all commercial properties. In many cases, however, considering just these items may only be scratching the surface. The risk for accountants is that they may overlook the availability of significant additional CAs that can be offset against their client’s taxable profits.
Here we take an in-depth look at the sectors typically attracting the highest CA claims in relation to purchase/construction price, and later on we’ll also address the potential pitfalls of property history and ownership:
High-end hotels will benefit from substantial amounts of sanitary and associated plumbing due to the number of en-suite bedrooms. Other fixtures include fitted bars & seating, reception desks, commercial kitchens, keycard access systems, lifts, air-conditioning, ventilation, building management systems, carpeting, fire alarms, and CCTV.
Care homes are also likely to have large quantities of en-suite bedrooms together with the associated fixed plant, but there’s usually a great deal more than that too. These buildings also have sluices, a nurse call system, nurse stations, specialist baths, hoists, lifts, stairlifts, handrails in the corridors and door entry systems.
Here you have a high concentration of identical rooms that will likely contain a substantial level of qualifying fixtures in each. Many of the consultancy and treatment rooms require a wash basin (with associated water and disposal installations), fitted cabinetry and emergency call-buttons. A GP or dental practice will also benefit from fitted seating, a reception desk, and induction loops as well as air-conditioning, ventilation, fire alarms, intruder alarms and CCTV.
Even a standard office space can offer additional qualifying assets. For example, a stand-alone multi-storey office building in a business park will incorporate lifts, air-conditioning, ventilation, building management systems, carpeting, fire alarms, intruder alarms, access control systems, CCTV, carpeting and IT/data points.
Large warehouses with ancillary office space will often contain radiant heating, a sprinkler system, roof fitted smoke ventilation and dock levellers, in addition to the office assets listed above.
Potential traps and pitfalls
These attractive qualifying plant-rich scenarios won’t be the setting for all commercial properties, however. Some offer very little in the way of qualifying plant & machinery, and it’s important to determine at an early stage whether the exercise will be cost-effective.
Some types of commercial property are renowned for resulting in distinctly underwhelming CA claims, even to a point where the cost, time and effort required outweigh any tax benefit in claiming at all.
Classic examples include tenant fitted-out high street retail units with non-qualifying residential apartments above, and Houses of Multiple Occupancy (HMOs) where only the communal areas qualify as being in commercial use. Relatively small light-industrial units can also disappoint when it comes to the quantity of qualifying assets installed.
Another factor to consider is ownership history, especially in this new post-2014 Pooling Requirement era and the associated restrictions it brings with it. If previous owners were prevented from claiming CAs because they were non-taxpaying entities (e.g. a charity, a local council or pension fund) or didn’t maintain a qualifying activity (e.g. a developer) then the current owner could be confident that any claim they made would not duplicate an existing claims or require any assistance from the vendor.
It is also worth noting that build projects have no past owners, thus entirely avoiding the need for any historical due diligence.
A final consideration is the entity that owns the commercial property. The CA benefit and tax savings for individuals or partnerships paying Income Tax can be much higher than that of a company paying Corporation Tax. This is because they will benefit at a rate of 20%, 40%, or even 45% compared to the 19% (and soon to be 25% or 26.5% effective rate) that companies paying Corporation Tax would benefit from.
Also, if the Income Tax paying claimant is trading, rather than operating as a rental business, the tax relief can be enhanced even further due to the equivalent reduction in Class 4 NIC at 9% or 2%. Beware of Income Tax paying owners charging a connected party tenant either below-market rent or no rent at all as it could reduce the claim or render it invalid completely due to a lack of qualifying activity.
The benefits of claiming CAs on the fixed assets contained within a commercial property are not a universal constant. They can vary significantly depending on the type of property, the vendor’s tax position, and the owning entity’s tax rate and these factors must be addressed when considering a claim for CAs.
Byline by Mark Anthistle, senior capital allowances analyst at specialist tax consultancy Catax