3/20/2019 CAPITAL ALLOWANCES 19 MARCH 2019 1 WHAT ARE CAPITAL - PDF document

3/20/2019 CAPITAL ALLOWANCES 19 MARCH 2019 1 WHAT ARE CAPITAL ALLOWANCES  Government tax incentive – not a “scheme”  Determined by legislation and 100 years of case law  Interpreted and claimed by tax payers but not automatically given  If not claimed then the tax payer misses out but can look back  HMRC check claims are correct 2 WHAT IS THE BENEFIT OF CLAIMING CA  Deduction against corporation or income tax  Available on certain assets including property  Creates a cash flow benefit and increases return on investment  Lower tax rate environment, but increased proportion of tax to pay  Only form of tax relief against property capital expenditure 3 1

3/20/2019 HOW IT WORKS Basic Without With Tax Return Capital Allowances Capital Allowances Rental Income / Profit £2,000,000 £2,000,000 Deduct Allowable Costs (£1,000,000) (£1,000,000) i.e. Debt Finance Capital Allowances No Claims (£1,000,000) Profit Subject to Tax £1,000,000 0 Tax to Pay (@ 20%) £200,000 0 4 CASH BENEFIT OF £1M QUALIFYING EXPENDITURE 5 MAIN TYPES OF CAPITAL ALLOWANCES  18% Plant & Machinery Allowances  8% Integral Features and Thermal Insulation (reducing to 6% April 2019)  100% Enhanced Capital Allowances (applicable until April 2020)  100% Annual Investment Allowance (£1,000,000)  100% Research & Development Allowances  2% Structures and Buildings Allowances (contracts entered into after 29 October 2018)  150% Land Remediation Relief 6 2

3/20/2019 HOW TO UNLOCK THE BENEFIT Hold as investment Non Incur capital Tax Free Qualifying Fixtures Capital expenditure Own the relevant interest in land 7 CLAIM OPPORTUNITY 1 - ON ACQUISITION  Claim on second hand fixtures  Who has entitlement, one claimant per fixture  Valuation exercise of building, land and P&M Tax Planning Have two years to agree value of Capital Allowances, contract provision critical to enable purchaser to address post completion 8 CLAIM OPPORTUNITY 2 - ON DEVELOPMENT  Available on certain qualifying fixture  Based on actual costs incurred  Apportion certain allowable costs Tax Planning Accelerate basic rates of tax relief for energy efficient plant & machinery, must be certified at the time of expenditure 9 3

3/20/2019 CLAIM OPPORTUNITY 3 - ON LEASE INCENTIVES  Type of lease incentive  Who pays for what  Structure agreement Tax Planning If contribution paid towards expenditure qualifying for capital allowances, tenant can treat as non taxable income receipt 10 CLAIM OPPORTUNITY 4 - REFURB OF CORES  Capex reviews, capital vs revenue  Assist cost feasibility  Recovery via the service charge Tax Planning Consider empty voids where landlord contributes to service charge pot 11 CLAIM OPPORTUNITY 5 - FULL REFURBISHMENT  Main structure already in place, higher qualifying %  Claim incidental expenditure under s25  Capital vs revenue considerations Tax Planning Allowances available where the thermal qualities of a building are improved 12 4

3/20/2019 LAND REMEDIATION RELIEF CLAIMS  Available for clearing contamination e.g. asbestos, gases, Japanese knotweed  Qualifying expenditure attracts 150% tax relief  UK Corporate tax payer only with available tax credit Tax Planning Available to both investors and developers 13 ACQUISITIONS – KEY TERMINOLOGY IN SIMPLE TERMS S198 Election £2 v £TWDV Fixed Value Requirement a) Tax Paying Vendor s198 Election or Tribunal b) Non Tax Paying Vendor Written Statement Pooling Requirement Insert in Accounts 14 ACQUISITIONS - ESTABLISH LEGAL ENTITLEMENT Who is Vendor? Taxpayer / Pension / Local Authority / Offshore? Interest Acquired Freehold / Leasehold? Prior Claim History Back to First Use Historic Expenditure Timing of and By Whom Structures & Buildings Allowance Record Keeping & Basis 15 5

3/20/2019 ACQUISITIONS – BUYER TO ESTABLISH ENTITLEMENT HOT Stage Never assume no Capital Allowances available Review legal entitlement to claim on property Review CPSEs (don’t provide all the answers) Don’t be silent – ask questions Insert appropriate contract wording to facilitate future claim Post Completion Prepare claim and finalise s198 election with Vendor 16 MISSED CLAIM OPPORTUNITIES ON ACQUISITIONS No CAs Available £2 s198 Election Not Applicable Timing of Expenditure Pre / Post April 2008 Capital Contributions Fall Outside of s198 election Non Tax Paying Tenants s181 - Claim on tenants fit out Properties Acquired Vacant / Part Vacant Potential claim on retained fixtures Unclaimed Allowances Lack of Due Diligence 17 CASE STUDY - OFFICE ACQUISITION MISSED CLAIMS £750,000 of Lost Capital Allowances Due to Incomplete / Poor DD By Sellers Property Transfers Capital Allowances Position A Office developed 1990s s198 election on sale £1 B Fund ‘A’ acquired June 2013 Carry out air con works s198 election on sale £490,000 (A/C works only) C Fund ‘B’ Acquired November 2016 Accept election; fail to identify unclaimed CAs D Client Acquires Q1 2019 Inherit unclaimed allowances £450,000 T oo late to claim ‘lost’ £750,000 18 6

3/20/2019 CASE STUDY - INDUSTRIAL ACQUISITION Barrier: Vendor Believed No CAs Available and Advised ‘Not Applicable’ Value: £3,900,000 Client: UK Investor Background: Vendor acquired in 2016 with £2 election Vendor didn’t make own enquiries Claim based on Vendor purchase price £380,000 Capital Allowances 19 CASE STUDY - COMPANY ACQUISITION Barrier: CA Position Silent and No Info Provided Value: £50,000,000 Client: Overseas Investor Cash Saving: £1,500,000 20 MISSED CLAIM OPPORTUNITIES Think it is too late / No record of costs Accountant Annual Investment Allowance – confusion if applies to elections Non Recoverable VAT – Interaction with CAs not understood Capital Perception need to own property Client QS Allowances Not profit making but have future tax liabilities Failure to Structure Grants / Contributions Lawyer Client assumes accountant addressing it / tick list exercise 21 7

3/20/2019 CASE STUDY - DOCTORS SURGERY EXTENSION Barrier: Advised CA value too small Received Grants = 90% of Final Account NHS - £500,000 Pharmacy - £670,000 Value: £1,300,000 Final Account Client: GP Partnership (Partners not VAT registered) Cash Saving: £205,000 22 CORPORATION TAX REFORM  Increased future tax liability for Offshore Companies April 2019 CGT applies. Most effect in 3-4 years time April 2020 Tax rate reduced from 20% to 17%, but Restriction on deductible interest to value of £2m across Group  Capital Allowances will become more important to offshore investors What Next? Plan for future tax liabilities. Claim now and build up allowances 23 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Announced in budget from 29 th October  Capital Allowance on all buildings and structures  Commercial property, excludes some residential  2% per annum of cost for 50 years  Costs include build costs and professional fees  Fixed amount per year for each owner  New build, refurbishments, extensions and fit outs 24 8

3/20/2019 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Office Build Cost = £10,000,000  P & M and Integral = £4,000,000  SBA = £6,000,000  SBA per annum = £120,000  Cash benefit pa at 19%= £22,800  After 10 years = £228,000 Tax Planning Claim plant and machinery and integral features first 25 TOTAL CAPITAL ALLOWANCES – TIMING OF 4.5 4 3.5 3 2.5 £million 2 1.5 1 0.5 0 1 2 3 4 5 6 7 8 9 10 Years SBA 2% Integral 6% Plant&Mach 18% AIA£1million Enhanced 100% Land Remed 150% 26 TOTAL TAX SAVINGS – TIMING OF 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - 1 2 3 4 5 6 7 8 9 10 Tax saved 27 9

3/20/2019 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS) 20 October 2018 Technical note 31 January 2019 Consultation Spring 2019? Draft Legislation Summer 2019? Legislation 28 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Excludes residential, but allows Hotels, Care Homes  Contracts after 29 October 2018, proof?  On sale new owner carries on claiming 2%  Cannot use Annual Investment Allowance  Information flow for 50 years!  CGT liability  New build, refurbishments, extensions and fit outs 29 CASE 1 – GRAIN SILO – WHAT IS PLANT 30 10

3/20/2019 CASE 1 – GRAIN SILO – WHAT IS PLANT  HMRC allowed 20% of value for ventilation  HMRC – internally a good case but to “hold the line”  Definition - a building / a facility / a silo  Was the storage temporary?  Function and trade  Tax payer wins 31 CASE 2 –HYDROELECTRIC DAM – WORKS TO LAND 32 CASE 2 –HYDROELECTRIC DAM – WORKS TO LAND  SSE claimed £260million, HMRC accepted £34million!  Alteration of land for plant, the concrete structure  The concrete structure was not plant  The aqueduct, drill and blasted and shotcrete was plant  Since ruling new legislation was brought in! 33 11