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Capital Allowance Review For Your Cash Flow

Claim capital allowances so your business pays less tax when you buy assets – equipment, fixtures, business cars, plant and machinery, annual investment

Capital Allowances Overview

What Are Capital Allowances?

Every businessman who has ever looked at a Profit & Loss Account will be familiar with the term of Deprecation. Depreciation is defined as:-

‘A reduction in the value of a business asset with the passage of time,
due in particular to wear and tear.’

Where a business purchases a capital item it is allowed to depreciate it in its accounts at an annual rate that should roughly correspond with the reduction in value of the item due to age and wear and tear. Back in 1878 the tax authorities in the UK decided that they didn’t like depreciation as it was becoming increasingly difficult to check since different assets deprecate at different rates.

In 1878 the treasury introduced Capital Allowances which in simple terms is the Governments standard rate of depreciation that it applies to all business assets to allow it to control the rate they are set against tax. The current rate that UK businesses are allowed to claim capital allowances is between 8% – 100% per annum depending on the type of item.

Whenever you see Capital Allowances you now know this means the Governments standardised rate of depreciation.

How Do Capital Allowances Relate To Property?

In most cases, you cannot claim capital allowances against the purchase price of land, buildings or property. This is because often the value of property increases overtime and therefore isn’t subject to depreciation.

Is It Too Late to Claim Capital Allowances?

The claim for Capital Allowances is calculated based on the price of the property at the point of purchase and there are no limitations as to how far back in time a retrospective Capital Allowances claim can be made.

How Do I Claim Capital Allowances?

The process of making a claim for Capital Allowances can be divided into imperative stages and generally isn’t something you will be able to do yourself. Due the intricacies involved in the area of taxation it is advised to appoint a specialist capital allowances company to undertake the work.

How Do Capital Allowances Relate To Property?

In most cases, you cannot claim capital allowances against the purchase price of land, buildings or property. This is because often the value of property increases overtime and therefore isn’t subject to depreciation.

The majority of businesses who purchase a commercial property for £1 Million will
show it on their balance sheet as:-

Property £1,000,000
—————–
Total £1,000,000
—————–

capital

However, the property contains lots of Integral Features such as plumbing, heating systems etc. that do depreciate and can be used to claim Capital Allowances against. Although every property is different we have found that on average in the SME sector these integral features make up 16% of the purchase price of the property and therefore the purchase should have been shown as:-

Property £ 840,000
Fixtures & Fittings £ 160,000
—————–
Total £1,000,000
—————–

Although capital allowances cannot be claimed in respect of the £840,000 investment in property, full allowances can be claimed against the £160,000 invested in the Fixtures and Fittings. These Capital Allowances translate directly into either a tax refund or future tax that you will no longer need to pay. The actual amounts depend on your circumstances, but the table below is a guide to what the allowances are worth based on varying tax rates.

Is It Too Late to Claim Capital Allowances?

The claim for Capital Allowances is calculated based on the price of the property at the point of purchase and there are no limitations as to how far back in time a retrospective Capital Allowances claim can be made.

From April 2014, the vendor of any building sold after this date will need to pool the Capital Allowances prior to the point of sale. The vendor and purchaser need to establish a ‘fair value’ for the fixtures contained within the property the within the two-year period from the point of sale and complete an S198 election. Failure to do so within the two-year window will mean that the purchaser’s claim to capital allowances in the future will be blocked – in fact, not only the current purchaser, but all subsequent purchasers will lose their right. Therefore Section 198 elections should become a standard provision of all sale and purchase agreements for a commercial property interest.

Legislation in regard to Tax is constantly changing so it is always better to act sooner rather than later.

How Do I Claim Capital Allowances?

The process of making a claim for Capital Allowances can be divided into imperative stages and generally isn’t something you will be able to do yourself. Due the intricacies involved in the area of taxation it is advised to appoint a specialist capital allowances company to undertake the work.
A specialist capital allowance company will usually complete the following steps.

Step 1 Due Diligence

Ensure the property has not been claimed on before and the client is eligible to claim e.g. tax paying entity.

Step 3 Forensic Valuation

The claim for Capital Allowances is made based on the date on which you purchased the property so all the Integral Features that have been found as a result of the Forensic Survey now need to be valued at that date e.g. if you purchased the property in 2001 then the central heating boiler, radiator and piping all needs to be valued based on the replacement value in 2001.

The specialist Capital Allowance companies who undertake these claims have detailed tables of typical costs for all possible Integral Features in each year going back for decades, and will apportion appropriately.

Once the Forensic Valuation has been completed then this is compiled into a report detailing the above and serves as the basis for the claim.

 

Step 2 Forensic Survey

A detailed survey of the property to identify all of the qualifying integral features which were in the property at the time of purchase and improvement works to the property which may also qualify as capital expenditure and therefore items that can be claimed as capital allowances. The schedule produced will detail all the qualifying fixtures including everyday items and also integral items e.g. electrics.

Examples of the types of items which are often found are as follows:-

  • Lifts
  • Electrics
  • CCTV
  • Fire Alarm Systems
  • Heating
  • Kitchens

The Forensic Survey should be undertaken by a professional surveyor.

Step 4 Making the Claim

The specialist Capital Allowances Companies will prepare all the paperwork to claim the Capital Allowances and liaise with your own accountant in order to ensure the sign off on the report and submits the allowances within the your tax computations.
The claim is submitted and once approved by HMRC you will receive a cheque for the Tax Refund you are due within 4-6 weeks.

The whole process typically will take between 4-6 months depending on the size and complexity of the building.

The process involves some complicated and specialist work, but this will normally be undertaken by a specialist. The whole process is not likely to impact on your time or the running of your business to any great extent.

Is This A Tax Scam?

No this is absolutely not a tax scam or some clever scheme that gets around the rules. Capital allowances are something that the property owning entity is entitled to under UK legislation CAA2001. There is no DOTAS number to enter on the tax return as this is not a tax avoidance scheme. Capital Allowances are a legal entitlement which you can set against your profits to reduce your tax bill.

Commercial property owners are encouraged to claim these allowances by HMRC as the tax rebates and deductions can encourage future business investment.

Contrary to popular belief the job of HMRC isn’t to make sure we pay the most tax, it’s to make sure we all pay the correct tax and not claiming these allowances means your business isn’t paying the correct tax.

Has My Accountant Already Claimed This?

Since 94% of commercial properties haven’t yet had their Capital Allowances situation assessed then the answer is probably no. To find out just ask your accountant if they split the purchase price of the commercial property into Building and Fixtures & Fittings in the companies’ accounts. If the answer is yes then ask for the breakdown of figures, in the case of a building used in the care industry the average split is:- Buildings: 84%
Fixtures & Fittings: 16%

Every building is different so the split for your property won’t be exactly the same. If
there is not a split and 100% of the purchase priced has been apportioned to land and buildings then the allowances probably haven’t been claimed.

If you find that Capital Allowances haven’t been claimed then this doesn’t mean your accountant has done anything wrong. Identifying Capital Allowances involves a forensic survey of your building which has to be undertaken by a specialist property surveyor and then calculations worked out in a forensic valuation. If this information wasn’t given to your accountant it would have been impossible for them to claim the Capital Allowances on your behalf.

Don’t worry as there is no time restriction on the property purchase it’s not too late, you can start the process of making a Capital Allowances Claim.

How Do I Get Started?

We are happy to be able to offer you a FREE Capital Allowance audit.

The first part of the audit is an online questionnaire for you to fill in, it will take less than five minutes and then we will let you know if you have a qualifying Commercial Property.

The second part of the audit is a 20 min phone call with one of our Capital Allowance Experts to talk through the details of the buildings. At the end of this call we will give you an indication of how much you might be able to claim.

Find the Best Information on Capital Allowances

Review Your Cashflow with Capital Allowances

Exciting Futures was created as an all-in-one solution by bringing together the tools or service including Capital Allowances for cashflow you may review to run your business! When your business model is mapped out, cashflow is a massive part of your day to day business, Capital Allowances may be one of the overall cash flow importance needed to review t& streamline costs further

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