Capital allowances on fitting out works
When a tenant spends money on fitting out a property there are a number of issues that need to be looked at in order to establish the tax relief available through capital allowances;
Often a tenant will be offered some form of inducement to take the lease. Consequently, when negotiating such a deal it is essential the tax implications are fully considered before anything is agreed.
Capital contributions - If a tenant is receiving a capital contribution from the landlord or a monetary grant from an external source, then this subsidy has to be taken into account when computing the capital allowances available. In the case of capital contributions it is vital the terms of any agreement are investigated as it may entitle the Contributor to claim capital allowances on any contribution they make. Some agreements set out specifically what the contribution is for and others are more general. This can significantly affect what both parties can claim. See CAA 2001 sections 537 & 538.
Usually a capital contribution will be a taxable receipt, however, if the tenant receives a contribution towards qualifying plant and machinery then the capital receipt is not taxable. This means there is no overall loss of benefit by allowing the landlord to have the capital allowances.
Rent free periods - a rent free period is not a subsidy for capital allowances purposes and so will not affect a tenant’s claim. It should be noted, however, that the tenant will still get a tax deduction for “notional rent” paid during the rent free period even though no rent is being paid.
Capital allowances should be considered during the design stage of any works. This is especially important where the mechanical and electrical works are concerned as some items could qualify for the 100% First Year Allowance – see below.
Other items of plant and machinery can be identified by reference to CAA 2001, Section 23, list C which sets out the main qualifying categories. The rate at which these items can be claimed will depend on the nature of those assets, as follows;
Secondly, once the items have been established the costs of the works have to be calculated. Often these works will be within the substructure or superstructure elements of the works or could just be within much larger lump sum costs.
Obtaining copies of the construction drawings, before and after photographs and well as close liaison with the building contractor are all key to preparing a detailed claim for incidental works. This can be time consuming but section 25 works can often add up to more than 50% of the overall claim so the investment can really pay dividends.
One further point on incidental items, is that they should be allocated to the relevant pool based on the assets they relate to. For example a new lift shaft would be in the special rate pool for integral features.
In April 2008 an Annual Investment Allowance (AIA) was introduced which entitled every business to claim a 100% First Year Allowance on a prescribed level of their expenditure on all qualifying plant & machinery. With effect from April 2014 the level of AIA has been temporarily set at £500,000.
Business Premises Renovation Allowances (BPRA’s) is an initiative designed to bring back into use derelict or unused properties within specified disadvantaged areas. A disadvantaged area is one now set out in the Assisted Areas Order 20014. There is a useful post code checker to see if a property qualifies that can be found at:
Qualifying BPRA expenditure is that involved in converting, renovating or repairing a commercial building in a disadvantaged area that has been unused for at least a year. The last use cannot have been as a dwelling. Extending a building or developing land next to a qualifying building does not qualify for BPRA’s.
The allowances may only be claimed by the person who incurred qualifying expenditure and has the relevant interest in the qualifying building. This means that BPRA’s are only available to the person who undertakes the conversion or renovation works. It does mean, however, that more than one person can have a claim entitlement on the same building.
- Expenditure on energy saving or water saving technologies that meet the specific Enhanced Capital Allowances regime – 100% first year allowance
- General plant and machinery fixtures – 18% on a reducing balance basis.
- Integral features and Long Life Assets – 8% on a reducing balance basis.
Despite the list, there are still some “grey” items. For example, de-mountable partitions, which HMRC will only allow if there is clear intention to move them as part of the trade. Most businesses install demountable partitions to enable them to alter offices layouts to suit future business needs but don’t record this fact.
Planning ahead is, therefore, essential so that documentary evidence such as instructions to the design team can be given to HMRC in support of the claim.
There is, another difference with fitting out schemes in that items of a structural nature that would not usually be allowable, can be claimed if the works are “incidental” to the installation of the plant or machinery within an existing building - see CAA 2001, section 25.
Typical items that could be classified as incidental works include;
- Installing a new lift shaft
- Demolition and rebuilding of walls to gain access for large items of plant or machinery
- Construction of steel or concrete platforms to support plant items
- Strengthening of existing floors to take increased loadings due to plant installations
- Drainage installations where new kitchens or toilets have been installed
The main problem with claiming “incidental works” is one of identification.
Firstly it is necessary to have a close understanding of the project works so that any potential items can be investigated.
Additionally, the legislation applies to part of a building in exactly the same way as it does to a whole building. As such, a claim can be made on any part of a building that meets the qualifying criteria even if the entire property does not.
Any unrecovered VAT on qualifying works can also be added to the BPRA claim. Conversely though, if a grant or subsidy is received, then this could now deny any claim at all on the entire project.
Normally there is an initial allowance given equal to 100% of the qualifying expenditure. If the initial allowance is not claimed in full, then a 25% writing down allowance is given on a straight line basis.
Finally, if the property is sold or a long lease granted within seven years of the first use of the building, or the building becoming unavailable for use, after conversion or renovation then there is a balancing adjustment which could result in some or all of the allowances being clawed back.