This week's APC advisor has some taxing questions
This week’s question focuses on capital allowances (T008 Capital Allowances), the range of allowances that are available and poses a scenario at Level 3 to test the candidate’s ability to offer reasoned advice to a client.
Question Can you explain to me what you understand by capital allowances and how they relate to clients and projects?
Answer The candidate should seek to demonstrate a basic understanding of what capital allowances are and to whom they are applicable. Key points to cover are:
- Capital allowances are a form of tax relief. They are offset against an investor’s tax liability which arises from the profits of their business activities. In effect, they reduce the amount of tax paid by the investor.
- The main forms of allowances currently available are enhanced capital allowances, plant and machinery allowances, industrial buildings allowances and hotel buildings allowances. Enhanced capital allowances are available for energy efficient and environmentally beneficial technologies.
- The rates applicable to each type of allowance vary from a rate of 100% per annum for enhanced capital allowances to 4% per annum for industrial buildings and hotel buildings.
- In order to be eligible to claim capital allowances the investor must be subject to UK tax, have incurred capital expenditure on qualifying assets and use the qualifying assets in the course of their trade (which can include property letting as well as property occupation). Allowances can be claimed on refurbishment works, new-build projects and property acquisitions.
- Claims are made to HM Revenue & Customs in support of the investors tax computation. Claims are subject to enquiry and negotiations with HM Revenue & Customs and/or the Valuation Office Agency.
Question If you were asked to undertake a capital allowances analysis of a completed project, what information would you require and how would this information be used in the analysis?
Answer The candidate should demonstrate knowledge of the information required to prepare a claim and the types of expenditure which they would identify within the claim as qualifying for allowances. Points to cover for claims on construction expenditure projects include:
- A copy of the final account would be required, including breakdowns of the agreed contract sum and all variations to identify qualifying expenditure
- Other project information including as built drawings and as built mechanical and electrical specifications should also be obtained. The M&E specifications are particularly important to be able to identify enhanced capital allowances.
- The above information would be sourced from the project team, including the cost consultants, architects and M&E engineers.
- Other client direct expenditure details would be required, including consultant professional fees and fixture and fittings outside of the main contract. These items can also attract allowances. For example, project preliminaries and professional fees can be apportioned over qualifying and non qualifying costs.
- The contract documentation would be analysed for qualifying expenditure and presented in a claim format that clearly identified the different types of allowances available.
- Items qualifying for enhanced capital allowances include energy efficient lighting and rain water harvesting installations. Full details of qualifying items are available on the ECA website.
- Assets qualifying for plant and machinery allowances would include air conditioning systems, heating, sanitary goods and lifts.
- Industrial buildings allowances and hotel buildings allowances are available for industrial and hotel properties in qualifying use. For example, this would include an industrial building used for manufacturing.
- Where appropriate, revenue expenditure should be separately identified within the claim. Examples of revenue expenditure include repairs to existing structures and redecoration works.
Question A client has a new build office project on which they believe they can claim allowances. They have retained you to prepare a claim for allowances for submission to HM Revenue & Customs, which must then be negotiated to reach agreement to the allowances claimed. Which key areas would you consider to determine the extent of the service required and particular points that will need attention during the work?
Answer The candidate should be able to demonstrate a good understanding of the relevant issues to address prior to preparing the claim, be able to discuss the service provision required and demonstrate an understanding of the likely areas that will feature in the HM Revenue & Customs negotiations. Candidates should also be aware of forthcoming changes in legislation that may affect the claim.
The response to this scenario could vary depending on the candidate’s experience but issues that could be raised would include:
- The first point to establish is the client’s eligibility to claim allowances. This would involve establishing whether they are a UK registered company, paying corporation tax, or a partnership or private individual and subject to income tax.
- It would also be necessary to establish the nature of the interest they hold in the property and that that interest is the relevant interest on which to claim capital allowances.
- Assuming the property has yet to be constructed, it would be important to establish the construction period and how this fits against the client’s financial year ends. This information would enable the candidate to establish the timing of the claim and any requirement for submission of interim claims for allowances within the relevant years in which expenditure was incurred.
- The client’s preferred route of contact with HM Revenue & Customs would need to be established. It would also be important to ask the client if they have any existing pre-agreements regarding the treatment of expenditure. Additionally the client may have existing tax advisors or internal guidelines which would dictate how certain aspects of the claim should be prepared.
- If the advice was given early in the development programme then opportunities should be sought to influence the M&E specification to maximise the opportunities to claim enhanced capital allowances, provided that this did not detract from the project objectives. This could take the form of a cost benefit analysis to ensure any additional cost of installation was offset by the earlier 100% allowance achieved.
- Engagement would be required with the professional team during the course of the project to ensure that information is obtained to fully substantiate the claim during any HM Revenue & Customs negotiations.
- Common issues that may be subject to HM Revenue & Customs negotiations would include items such as the electrical distribution installations, cold water installations and the apportioned professional fees and preliminaries.
- There were a number of changes to the capital allowances regime notified in the 2007 budget, some of which involve the phased withdrawal of particular allowances. Several of these changes significantly alter the regime and the candidate should be able to demonstrate a reasonable level of knowledge of the areas of change and the impact on clients.
Building's APC advice is intended as a guideline only and should not replace your own study.