Capital Allowances

Capital Allowances (CA) reduce profits chargeable to tax, so therefore create lower tax bills. CA allow UK taxpayers to write off large portions of the cost of certain capital assets within their property expenditure to keep their taxes as low as they can be, whilst encouraging and incentivising investment and improvement in the commercial property sector.

CA is a UK legislated tax relief (Capital Allowances Act 2001 https://www.legislation.gov.uk/ukpga/2001/2/contents) available to businesses that spend capital on buildings, either new, refurbs or extensions & improvements and the fixtures within – this is most commonly referred to as the provision of plant and machinery. 

The Act has seen several alterations since, and now more recently in the Autumn Statement 2023 when Full Expensing was brought into the equation. It is complex and has many areas that require expert knowledge and application when making CA tax relief claims.

Who qualifies for CA Tax Relief?

Briefly, the minimum criteria to potentially qualify for a CA claim are:
1. The business is a registered UK business
2. Pays UK Corporation Tax or Income Tax
3. The business is the current owner (or lessee in certain instances) of the property.
4. The property concerned is a commercial property

What qualifies for CAs?

The Qualifying Expenditure of the acquisition, fit-out or refurbishment of a commercial property determines the value of potential tax relief, subject to various applicable tax rates. Plant replacement works, new machinery and improvements to the structures supporting such machinery are part of the QE.

There are many rules and regulations as to what portion of the property and what costs qualify, dependent on when the acquisition or build took place (variable regulations pre 2008, pre and post 2014 amongst other specific dates), and what was declared in the S198 Election Notice. This is why a specialist CA practice that combines both surveying and tax legislation is required to complete a successful claim.

Some examples of qualifying property types are: Industrial sites / Factories, Shopping centres, Restaurants, Office blocks, Hotels & B&Bs, Student accommodations, Care homes & Medical centres ... most commercial buildings qualify!

What tax relief is applied?

It depends on the property and what it facilitates. An easier way of imagining the potential value of a claim is by checking the property itself, the more “stuff” inside it the higher the value e.g. a warehouse is normally just a basic construction with large floorspaces and perhaps a mezzanine floor, as opposed to a commercial office block with lifts, gyms, restaurants and medical facilities on the ground floor … the more “stuff” there is the larger the claim is likely to be.

It is quite common for commercial properties to achieve an average increase of 30% of their costs qualifying for CA tax relief, with some reaching up to 80% (such as hospitals or data centres by using CA specialists). As an example, if your property cost £1m to construct and fit-out, and the Qualifying Expenditure for the Capital Allowances exercise was say £500k and your CT tax rate was 25%, your business would gain a tax deduction on your profitable income of £125k. 

How do I claim?

CA claims are not automatic, a business has to make a claim in their annual tax return. Due to the nature of the claim, a combination of Corporation Tax knowledge and Quantity Surveying is required in order to get the full benefit of a Capital Allowances claim. The specialist CA consultancy will always work with your accountants in this process.

The process:

1. SCG will facilitate an initial scoping call – this is where we qualify the potential CA claim and then introduce the client to the selected specialist practice where they will engage the client via a Letter of Engagement – the contract between the property owner and themselves, setting out the scope of work and fee structure.
2. The specialists will do a full Entitlement Check – ensuring that the property is owned by the claimant and falls within certain legislative qualification criteria.
3. The specialists obtain the relevant financials from the business or their appointed accountant, do a Site Survey & Analyse the applicable tax applications – assessing the value of the potential claim in definitive detail.
4. A full tax compliant report with relevant tax computation is produced, ready for the client to use with their tax return and submit it to the client or accountant and complete the service. When required, the specialists will assist the client or their accountant with the relevant application of the tax relief in their tax returns.

What does it cost?

Fees charged by the specialist consultants are normally based on a contingent fee basis i.e. a percentage of the QE identified in the CA report. This fee percentage may vary depending on the complexity or size of the project but averages around 6 - 7% of the QE for projects below £10m, with larger projects having a lower % fee basis negotiated. Some practices have on occasion set a stated fixed amount fee, which is a welcome returning trend, dependent on the client and project involved. SCG would ensure the fee is presented, discussed, market competitive and agreed upon at commencement of the project.

The fees are normally fully inclusive of all costs of preparing the CA claim report i.e. quantity surveyors, analysts and administrative work are included. Should there ever be a HMRC enquiry into the CA claim, the selected specialists provide full support as may be required. It should also be noted that in most instances, if no QE is identified, for whatever reason, there is no fee ... so nothing ventured, nothing gained and nothing lost.