Property owners can claim tax relief, known as capital allowances on qualifying plant and machinery when they purchase a building which incorporates such plant and machinery
The tax legislation refers to such plant and machinery as fixtures. The allowances range from 100 percent for expenditure on environmentally beneficial plant to 8 percent on expenditure on integral features, such as electrical systems.
Depending on the nature of the building and the tax-rate involved, the savings on the acquisition of a building can be significant.
Failure to take the capital allowances position into account can have serious consequences both for the seller and the buyer.
If capital allowances are relevant then the contract should provide a mechanism for apportioning the price between the land and the fixtures.
Pre 1 April 2012 position
For properties acquired before 1 April 2012, all the buyer had to do was show that he had incurred capital expenditure on qualifying expenditure. He/she could then claim capital allowances on 'a just and reasonable apportionment' of the expenditure he/she incurred.
In some cases the contract set out an agreed apportionment between the parties. This was not binding on the Revenue and could be challenged if the apportionment did not, in the Revenue's opinion, reflect the value of the relevant plant and machinery.
Alternatively, since 1997 the seller and the buyer could make an election to apportion the price for capital allowances purposes. This election would bind the Revenue and establish the disposal value of fixtures on which the buyer could claim capital allowances. The election value could not exceed the original capital expenditure incurred by the seller or the disposal value. It did not apply to fixtures on which the seller had not claimed capital allowances, where the buyer could continue to claim capital allowances on a just and reasonable basis.
Post 1 April 2012 position
With effect from 1 April 2012, and subject to transitional rules, the seller must have claimed capital allowances on fixtures in a chargeable period before the sale in order for the buyer to be able to claim capital allowances.
In addition, either an election must have been made within two years of the sale or an application must be made to the first-tier tribunal (FTT) to determine the disposal value of the fixtures ('fixed value requirement').
In practice, it is likely that the parties will sign an election, as they will not want the expense of going to the FTT.
There is a narrowly defined exemption to the fixed value requirement, which applies where the seller of the property has included a disposal value for the fixtures, but the purchaser has not complied with the fixed value requirement. In this case, the purchaser should provide a written statement that the value of the fixtures was not agreed and that the time period for so doing has expired, as well as a written statement from the seller of the disposal value brought into account. It is thought that this is aimed at non-business purchasers.
This means that in future it will be of paramount importance for the contract to clearly set out what procedure is to be followed in establishing the allowances. If this is not done, not only will the buyer be unable to claim capital allowances on fixtures, but if he/she sells the property nor will his/her buyer - which is likely to adversely affect the price of the property.
A buyer purchasing property during the period 1 April 2012 to 31 March 2014 (for corporation tax) and 6 April 2012 and 5 April 2014 (for income tax), will not need to satisfy the new requirements if the seller has not claimed allowances. In these circumstances the buyer should obtain contractual confirmation that the seller has not, and will not, claim allowances in respect of the fixtures, and information on the capital allowances history of the property (so as to be able to make capital allowances claims and/or be able to ensure that a future buyer may make allowances claims).