When you spend money buying or improving a property, HMRC allows you to offset some of that expenditure against your profits or general income for tax purposes. This tax break is called capital allowances, with the money you spend on buying or improving your business premises referred to as capital expenditure.
The majority of businesses, or at least their accountants, will know that tax relief is available on investment into ‘plant and machinery’ for use in the business. What the majority don’t realise is just how broad the definition of “plant and machinery” actually is, or that the new Finance Act 2012 has made consideration of capital allowances more important than ever.
What can you claim on – the meaning of “plant and machinery”
The legislation has led to some interesting debates over the years as to what can constitute plant and machinery. Machinery is fairly self-explanatory (mechanical items used within the business) and it stretches to cover items that people may not necessarily expect – mechanical doors, lifts and air conditioning equipment.
Plant, on the other hand, is an extremely broad term and may mean different things for different businesses. Qualifying items have to be assessed on a case-by-case basis and examples of successful past claims range from demountable partitions, sports surfaces and suspended ceilings to amusement park rides and artwork on office walls.
As many as 90% of property owners currently fail to take full advantage of capital allowances on their commercial property, so consulting an expert could save you a packet.
How it works
In principle, claiming capital allowances is a simple process. Your property must be examined by a qualified surveyor and your capital expenditure analysed to calculate any qualifying items and their claimable value. A report is then created in a specific format for you or your accountant to file with HMRC.
HMRC will use this report and your tax status (eg. have you paid tax, are you paying personal tax or corporation tax and at what level) to calculate what money you will get back in the form of a tax rebate and / or tax relief going forwards.
It’s important to note that capital allowances will only be given on existing fixtures once.
Why capital allowances are more important than ever
The 2012 Finance Act brought about a sea change in the way capital allowances operate. Under the new rules, whenever a commercial property is bought or sold, there will be an obligation on the seller and the buyer to consider capital allowances and file a return with HMRC, identifying the value of allowances within the property.
The changes will be phased in over a two-year period, coming into full effect for everyone in April 2014. A transitional period is currently in operation with its own rules in place. If a property is sold more than once in this period then it is caught by the new rules.
Keep in mind that an owner need not wait until they sell to consider claiming capital allowance. In fact, it is more beneficial to claim now to avoid the benefit being eroded by inflation.
Why act now?
The changes will not impact everyone at this stage but advisors will start factoring in the new regulations now to ensure a smooth changeover to the new regime.
Capital allowances can be worth more than 30% of the purchase price of the building in tax relief and, if fully realised, could really be Britain’s biggest tax break.
Photo by Misserion