TAX - 01.10.2020

Rented premises - is your business missing out on tax relief?

You’re renting your firm’s premises on a short-term arrangement. You’ve spent a few thousand pounds on new fixtures. Your bookkeeper says you may not get a tax deduction for the expenditure. Why and what steps can you take to ensure that you do?

Capital allowances

If your business buys plant and machinery (equipment) which it uses in its trade it is entitled to a tax deduction. But because the expense is for a capital item, i.e. something that is expected to last two or more years, the deduction is given according to the capital allowances (CAs) rules rather than those for day-to-day business costs. The CAs rules are tricky where you rent your business premises.

What’s mine is yours

Equipment that’s permanently fixed to a rented building (fixtures), e.g. lighting, heating, ventilation systems, is the property of the landlord when the lease or other rental agreement ends. In fact, the landlord has a stake in the equipment as soon as it’s fitted to the property. This is usually significant for CAs purposes because the general rules say that anyone with a right to ownership of equipment is entitled to the tax deductions for it. This can lead to disputes, but for equipment fixed to buildings a special rule usually prevents problems.

Rented property

Special rules deem the owner of fixtures for CAs purposes to be the person (or company) with the “lowest interest” in the property. That means they alone qualify for CAs. This allows all parties to know where they stand so that they can plan expenditure on equipment knowing who’ll get the tax relief.

Example. Acom Ltd owns the freehold of a shop which it lets on a long lease to Bcom Ltd, which grants a sublease to Ccom Ltd. Because Ccom’s sublease is the lowest interest in the shop, for CAs purposes it’s treated as the owner of any fixtures regardless of which company pays for and installs them.

Trap. If Ccom was relying on the lowest interest rule to claim CAs, it could be in for an unpleasant surprise. HMRC doesn’t treat all rental arrangements as an “interest” in a building. A property occupied under a licence instead of lease might not count as an interest in a property. Licenses to occupy are more common but not limited to subleases and short-term lets.

When is a licence an interest?

If you have a licence for a building which gives you the sole right to use it, HMRC says that this will be sufficient for it to qualify as an interest in the property and therefore make you the owner of any fixtures for CAs purposes. If your business plans to occupy a property under a licence and you want to ensure that you and not the landlord obtain tax relief for expenditure on fixtures, there are a couple of steps you should take.

Tip. Establish whether the licence gives you an interest for CAs purposes in the property. If your licence agreement doesn’t count as an interest in the property, consider arranging with the person who has the interest for CAs purposes to install the fixtures. Make an agreement to reimburse them the cost. In that situation a separate rule (the contribution rule) overrides the ownership rule and entitles you to the CAs (see The next step ).

For information about the contribution rule, visit https://www.tips-and-advice.co.uk , Download Zone, year 22, issue 01.

If you occupy a property under a licence rather than a lease, say for short-term arrangements or subleases, the landlord and not you is entitled to the tax deductions for fixtures you add. In that situation, ask the landlord to install the fixtures and reimburse them. A special rule then entitles you to claim the tax deduction.

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