Understanding capital allowances for businesses purchasing commercial property
In April 2014 the government introduced new rules about claiming capital allowances on commercial property purchases. We take a look at them and ask what you can do to maximise your tax relief.
What are capital allowances?
Capital allowances are deductions you can make to business assets which allow you to deduct their value from your profits before you pay tax. Capital allowances apply to plant and machinery, such as equipment and business vehicles, which you buy as part of a commercial business transaction and which are integral to its effective functioning. By claiming capital allowances, you are able to take advantage of tax relief on the items’ depreciation over a number of years, effectively writing them off eventually.
The 2014 legislation
The new rules were designed to help improve cash flow for businesses, to make the process more transparent and to avoid tax relief being claimed multiple times on the same asset. But claiming capital allowances is a complex issue and often depends on both vendor and purchaser properly understanding the rules.
Capital allowances have to be specifically claimed in order to reduce taxable profits and quite often they are not. This may be because the process is seen as too complicated, few records are kept, or that the results yield little value to the business owner. Sometimes the potential claimant simply doesn’t know that they are entitled to claim, and in other instances their tax advisors have not informed them.
Put simply, if a vendor is selling a commercial property which includes plant and machinery and has not previously claimed for plant and machinery capital allowances, the purchaser will not be entitled to claim tax deductions in the future either.
What you must ask
If you’re looking to purchase a commercial property and intend to claim capital allowances, it is vital that you establish the status of the seller – whether they have claimed in the past so that you are able to do so in the future. During the due diligence phase of your purchase you should ask to see the vendor’s tax records and notes regarding their expenditure while they have owned the property.
In some circumstances, it is still possible, during the purchase process, for the vendor to submit a tax allowances claim, and, if they wish to negotiate the best possible price for their property, they will see the importance of co-operation in this matter. As a potential purchaser of a commercial property without adequate capital allowances having been claimed, you are in a strong position to request a relevant amount be deducted from the sale price as compensation for future tax losses. The onus is firmly on the vendor to put their tax affairs in order so as to not negatively impact on future owners of the business.
If you’re considering purchasing a commercial property and are unsure of the tax status of the vendor, or have other issues regarding commercial property purchasing which you need assistance with, speak to one of the Eddisons’ team. Our advisors can offer up-to-date, professional and confidential advice about all aspects of the process.
Written by: Steven Jones on Friday 27/05/2016