How clients can avoid missing valuable relief for fixtures
Scenario
Your client is a company that manufactures electric car charging points and has seen significant growth over the past couple of years. It is now expanding its operations. The company is purchasing a warehouse with office space for £1 million, and extending an existing factory for £250,000.
The capital allowances section of the purchase contract includes a fixtures election. Not knowing the rules or the significance of fixtures, your client has come to see you for advice. But what exactly are fixtures and how can they reduce your client’s corporation tax (CT) bill?
Fixtures
When it comes to the purchase of commercial property, for tax purposes it can be broken into three elements: the building itself; the land that the building sits on; and the fixtures attached to the building. Section 173 Capital Allowances Act 2001 (CAA) defines a fixture as “ plant or machinery that is so installed or otherwise fixed in or to a building... as to become, in law, part of that building ”. Examples would therefore include plumbing, wiring, signs, lifts, sanitary ware, etc.
Pro advice. There is a distinction between the accounting terminology of “fixtures and fittings”, which includes movable chattels such as tables and chairs, computers, etc., and the tax term fixtures which applies only to items that are part of the building.
Fixtures can make up anything from 5% to 45% of a property depending on the nature of the building.
Example. If fixtures represent 20% of the property purchase, £200,000 of capital allowances could potentially be claimed on purchase, saving CT of £38,000 (£1m x 20% x 19%).
The requirements
As the fixtures may be of significant value, it is important that your client understands how to unlock the allowances. The rules for claiming fixtures allowances on commercial property purchases changed significantly with Finance Act 2012 . There are now two fundamental requirements that need to be satisfied, both of which involve the seller taking some action. The first is known as the “pooling requirement” and the other is the “fixed value requirement”.
Pro advice. If either requirement is not satisfied, the expenditure incurred by your client on the fixtures is deemed to be nil and the ability to claim allowances will be lost forever, not just for your client, but for any subsequent purchaser of the property.
Pooling. The pooling requirement is contained in s.187A(4) CAA 2001 but only took effect from April 2014. It states that in order for allowances to pass over to the buyer, the seller must have “pooled” their expenditure in their capital allowances computation. This means the seller must have included the expenditure as an addition in the computation.
Fixed value. The fixed value requirement is contained in s.187A(6) CAA 2001 and took effect from April 2012. It requires that the value at which the fixtures will pass from seller to buyer be agreed between the two parties and documented in a fixtures election. The procedure for making an election is summarised in HMRC’s guidance in CA26850 (see Follow up ).
Integral features
Before your client can agree to how much of the purchase price represents fixtures, they will need to understand the different types of fixture and the rates of tax relief available. Fixtures will either fall into the category of integral features or non-integral features. Integral features were introduced from April 2008 and are listed in s.33A CAA 2001 .
- an electrical system (including a lighting system)
- a cold water system
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system
- a lift, an escalator or a moving walkway
- external solar shading.
Pro advice. Integral features go into the special rate pool and will receive writing down allowances of 6%, and if a fixture is not an integral feature it will go into the main rate pool with 18% writing down allowances. The annual investment allowance (AIA) will, however, be available for both types of asset in the year they are purchased.
Negotiations
Now that your client understands the potential value of property fixtures and the tax reliefs available, they will be able to negotiate the amount of the purchase price which is to be attributed to them.
Pro advice. The value attributed to fixtures can be as little as £1 per pool and a maximum of the seller’s original cost.
From the seller’s point of view, they will want to keep the value to a minimum so as to retain all of the allowances previously claimed, but this will mean little or no tax relief for your client. The starting point for negotiations will therefore often be the seller’s tax written down value of the fixtures, as this will allow the seller to retain all allowances previously claimed but will give your client a higher amount on which to claim allowances.
Super-deduction?
Two new first year allowances were introduced in Finance Act 2021 for companies incurring expenditure on plant and machinery between 1 April 2021 and 31 March 2023. A super-deduction of 130% for main pool items and a 50% deduction for special rate pool items. Unfortunately for your client, the allowances are only for new plant and machinery and so will not apply to the fixtures in second-hand property.
However, if your client proceeds with the extension of the existing property, the fixtures installed into the building will be new and so the allowances will be available. It may be beneficial to claim the super-deduction instead of the AIA as relief will be at 130% rather than at 100%, but the AIA will still most likely be more beneficial than claiming the 50% first year allowance.
Pro advice. Refer to our previous article on the super-deduction (see Follow up ) for a full discussion, including situations where it is more beneficial to claim the AIA instead.
Existing property
Once you have provided the advice on the new property purchase you should turn your attention to your client’s existing property. Your client purchased this ten years ago for £400,000 but as this was before the introduction of the pooling and fixed value requirement, the topic of capital allowances did not come up and so no allowances for fixtures have been claimed.
To determine the level of qualifying expenditure present in the property at the time of purchase, a reasonable apportionment of the purchase price will need to be made under s.562 CAA 2001 . A suitably qualified surveyor will need to be engaged for this purpose, but if, say, 20% can be apportioned to fixtures, this will mean £80,000 of qualifying expenditure can now be claimed as an addition in the capital allowances computation.
Pro advice. Even though the existing property was acquired ten years ago, and it is not possible to go back and re-open the tax return and computation for the year of purchase, it is possible to include any eligible expenditure in your client’s current (or previous year’s) tax computation.
Pro advice. The AIA is not available on claims for historic expenditure, only writing down allowances.
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