What are Embedded Capital Allowances?
Capital allowances are an important yet sadly underclaimed form of tax relief available to UK businesses. Capital allowances reduce the tax liability for a UK business on their profits for an accounting period; they are available at a value equal to the cost of the qualifying capital asset. Depending on when the asset was acquired, the relief could be available in full or be claimed over several years. For example, a restaurant owner could purchase a new range of commercial kitchen equipment totalling £10,000. They could then claim capital allowances tax relief on this expenditure and reduce their taxable profits by £10,000 which, for a higher rate taxpayer, would generate a tax saving of £4,000. However, the real value lies in the items of fixed plant that were acquired as part of a property purchase, most of which are embedded in the property itself. A commercial property acquired for £500,000 could possess a value qualifying for embedded capital allowances in the region of £100,000 to £150,000. These are not insignificant amounts of benefit; the potential tax savings can be substantial.
Is this not something my accountant should be doing for me?
Typically, capital allowances are easily identifiable for accountants on individual assets purchased during the year. For example, a new computer would qualify in full for capital allowances, so an accountant can allow for this when completing their client’s tax return. They will be provided with an invoice or receipt from which they can obtain the cost of the asset to be added to their calculations. However, when considering the acquisition of a building, not all of the cost will qualify for embedded capital allowances. When the property is acquired, it does not come with a breakdown of each component to allow the accountant to extract the portion of the expenditure which qualifies. This does not mean the accountant is doing anything wrong by ignoring the property purchase for embedded capital allowances purposes; it merely means that they don’t have the specialist knowledge required to value the qualifying assets to a level of accuracy deemed acceptable by HMRC. To demonstrate this further, consider a GP. If you have a problem with your back, you may be referred by your local GP to a chiropractor who specialises in that particular part of the body. This is not to say your local GP has failed you; they have acted in your best interests by referring you to a specialist who is an expert in this specific area. This is the same with embedded capital allowances. Maximising the tax relief requires the input of a capital allowances expert, like Catax, who has the tools, knowledge and experience necessary to complete the exercise on behalf of the client and advisors.
Qualifying Installations
Not all components which make up a building qualify for embedded capital allowances tax relief, but a significant amount do. In basic terms, anything fixed to the property which doesn’t offer a structural function is likely to qualify for embedded capital allowances. So, elements such as the walls, roof, windows, doors, stairs, and the land itself do not qualify. However, installations such as heating, lighting, electrics, sanitary ware, plumbing, lifts, etc., do qualify. These items, when put together, can add up to a substantial tax saving.
Large Hotels and Care Homes
The level of qualifying plant within a commercial building varies depending on the type of commercial property and when it was acquired, with the qualifying percentage of the purchase price ranging generally between 10% and 30%. We would expect large hotels and care / nursing homes to be at the top end of this range or above, given the high level of trade-specific installations typically found in properties of these types. Standard installations such as heating, lighting, ventilation and waste water systems are found in most commercial properties in order for them to function as a building, however, when considering large hotels and care homes, you can begin to factor in installations such as lifts, kitchens facilities, internal communication systems, fire alarm systems, sanitary hardware, en-suite facilities, corridor handrails, security measures, and non-slip flooring. The full list of qualifying items is comprehensive.
Case Studies
In December 2019 Catax completed a Capital Allowances Valuation Report on a single-storey care home located in Warrington. The property was acquired in January 2019 for £2,585,000 and generated a claim of over £560,000, which included many of the installations noted above. The client was able to reduce its tax liability by over £100,000. In November 2019, Catax carried out a claim on a three-storey nursing home in Selby, owned by a Limited Company. This facility was purchased in September 2013 for £490,000 with Catax being able to identify over £150,000 of unclaimed capital allowances, resulting in a tax saving of almost £30,000. As the floor space was spread over three levels, as well as the expected installations, the building also benefitted from an electric passenger lift which itself formed over 20% of the qualifying costs.
Build Projects
Significant embedded capital allowances claims are not just restricted to property purchases. They can also be made on property constructions, extensions and refurbishments.
In fact, these types of projects can yield proportionately higher claims than that of a purchase, given that the cost of the non-qualifying land rarely forms part of the build project expenditure.
Summary
The ongoing Covid-19 pandemic has had a devastating impact on society as a whole, so any financial advantage available to commercial property owners will be well received, and a claim for capital allowances could result in a tax rebate which can increase the cash flow for the business to be potentially re-invested in the business. The process in establishing if there is an eligible claim is reasonably straight forward and can require minimal input from the client to finalise the Valuation Report. Catax operates on a no-win / no-fee basis, where we will only charge for our work if there is a viable claim to be made. If there is no claim available, we will not charge a fee regardless of how much work we have carried out to date. This reassurance means there is nothing to lose in finding out if there is a viable claim to be made, but plenty to gain if there is.
To find out more, email york@catax.com or call 0330 223 1257.
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