Most dentists or their accountants have, for too long, been complacent about claiming the capital allowances to which they are entitled in relation to their trading properties. Indeed, this issue may only arise when properties are being sold and the buyer’s solicitors request that an HMRC section 198 election is put in place – to agree the amount of the purchase price applicable to expenditure qualifying for capital allowances.
Successive amendments to the capital allowance legislation over recent years have created opportunities to make claims in relation to historic property purchases but have also introduced more onerous requirements in terms of record keeping and the way in which tax computations are presented to HMRC.
Capital Allowances Act 2001 entitles a purchaser to claim tax relief in respect of the proportion of the expenditure that relates to eligible assets – known collectively as fixed 'plant and machinery'.
Plant and machinery is allocated to the 'main pool' and attracts writing down allowances (WDAs) at 18% per year on a reducing balance basis. A 'special rate pool' is created for integral features and thermal insulation added to existing buildings, which attract WDAs at 8% per year – also on reducing balance basis.
It's up to you to claim
Capital allowances are not given automatically, the taxpayer must claim the annual WDAs within their tax computation to reduce their taxable profits and ultimately the tax due.
Making a claim is sometimes seen as being of little value; perceived as risky or too complicated; and a common misconception is that claiming reduces the capital gains tax base cost – potentially creating future issues – which is not the case, where properties are sold on for a profit.
The full force of these changes had an impact on all property sales from April 2014. It was no longer acceptable to keep the sale contract silent on capital allowances. Although the amount of the election is open to negotiation, it is typically in the seller’s interest to apportion a nominal amount, say £2, to fixtures, being £1 to those in the 'main pool' and £1 to the fixtures in the 'special rate pool'.
The buyer, on the other hand, is likely to want to negotiate a figure as close to the tax written down value or even the full quantum of qualifying expenditure as possible. As a result, the election figure is often influenced by the parties’ respective tax positions and commercial objectives.
An HMRC opportunity
One of the opportunities around HMRC section 198 elections is that, for properties held since before the introduction of integral features (April 2008), purchasers may still be able to claim capital allowances over and above the election figure in respect of assets that did not previously qualify.
It is important to take timely advice on this issue and not only if you are looking at buying or selling a practice. Speak to your accountant to ensure that your claims have been optimised.
Jeff Wlliamson FCA is a partner at PFM Townends LLP, which provides a service exclusively for dentists. http://pfmdental.co.uk