The next step

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Is this the end of the capital allowances loophole?

Hidden extras

The Taxman has proposed some changes to close a loophole in the capital allowances (CAs) system - the tax equivalent of depreciation. He’s worried over the right businesses have to claim CAs for the fixtures included in the cost of a business premises. These are often overlooked at the time of purchase but are made years later when it’s difficult to check how valid they are.

Example. In 2006 Acom Ltd bought its business premises from Bcom Ltd for £175,000. As far as Acom’s directors are concerned the purchase price is a Capital Gains Tax expense that can only be taken into account when it sells the property. But recently a tax specialist suggested he might be able to get Acom a deduction for some of the cost from its profits and so reduce its Corporation Tax (CT) bill. He surveys the building and identifies fixtures such as lighting and water systems, partitions, safety equipment etc. which existed when the property was purchased. He values these as at 2006 at £20,000 and Acom adds a CAs claim for these in its 2011 CT return form. As these assets weren’t separately valued at the sale, the Taxman can’t say whether the tax expert’s valuation is accurate.

Double allowance

Not only is the £20,000 value placed on the fixtures uncertain but Bcom ought to have taken this into account as taxable income in its own CA computations. But of course it couldn’t because the valuation wasn’t made until well after it had sold the property, and if Bcom had valued the fixtures it might not have arrived at the same figure estimated by Acom’s tax expert. This is doubly bad news for the Taxman as it’s too late for him to challenge Bcom’s accounts, and it’s difficult for him to argue against Acom’s claim.

Valid claim

Acom’s current point of view is that because it paid for some fixtures as part of the premises purchase it should be entitled to a tax deduction unless Bcom has already made a claim, and there’s nothing to prove that it has. The Taxman is equally in the dark, which is why he’s proposing changes to the CAs system.

Main suggestions

The Taxman’s recent consultation document (see The next step) suggests that:

• in future a time limit, probably two years, be placed on any claim for CAs in respect of fixtures sold as part of a building
• also within two years of a property sale the buyer and seller must agree a figure for the value of fixtures.

Trap. The consultation also hints that a time limit may be put on as yet unclaimed for CAs on fixtures; perhaps two years from the date the new rules come in. However, it’s likely to be next year before the Taxman’s suggestions become law.

Tip. It’s a certainty that many businesses are operating from properties which include fixtures on which no tax deduction has been claimed. While we don’t advocate making speculative CA claims, if you’ve not considered this point, do it now before the Taxman slams the door on these for good. Start by consulting with your accountant.

For a weblink to the Taxman’s consultation paper, visit http://tax.indicator.co.uk (TX 11.19.02).