Few areas of taxation are so misunderstood as the position regarding capital allowances on fixtures attached to buildings. The problem is particularly acute in respect of care homes and hotels, and has become more pressing as a result of a proposed change to the system that will dramatically slow down the rate at which tax relief is obtained for such fixtures.
I spend a fair amount of my time advising care home and hotel owners about claims for tax relief on fixtures that their advisors have failed to identify. The reasons for this failure are largely to do with the following factors:
1. Failure to separately identify and value fixtures in sale and purchase agreements.
2. Lack of expertise in identifying, or opportunity to identify, fixtures within a property.
3. Lack of familiarity with the complex tax regime relating to the valuation of fixtures on acquisition of a property.
We deal with the problem at 2 by using a firm of expert capital allowances surveyors to carry out a detailed review of a property and produce a report identifying and valuing all relevant fixtures within that property.
There has always been a significant absolute and cash flow advantage to identifying, for tax purposes, expenditure relating to fixtures attaching to a property. At present a 50% allowance for cost is available in the year of expenditure, with the balance written off at 25% per year on a reducing balance basis. The alternative with a care home was to obtain no relief at all, or with a hotel to claim only 4% per year over a 25-year period. Even if the expenditure is identified too late for the 50% allowance to apply, the 25% rate is still highly advantageous.
However, proposed changes announced in the March Budget make the importance of identifying fixtures still greater in cash flow terms. The proposal is, with effect from April 2008, to reduce the rate of allowance for fixtures attaching to buildings to 10% per year.
Given that 2007-08 will thus be the last tax year for which the current regime will apply, this means that claims for relief on relevant expenditure will need to be made by 31 January 2010 for sole traders and partnerships, and by 2 years after the end of the accounting period ending in that tax year for companies. Thus all care homes and hotels need to be considering whether it would be possible to make a claim, and if so identifying the scale of the claim by reference to expert advice.
Mark Simpson
3 July 2007
Comments