Reclaiming your capital

If I told you that HMRC owes billions of pounds to commercial property owners in unclaimed capital allowances you probably wouldn’t believe me. Though extraordinary as it sounds, it’s true. Covering a wide range of commercial property from hotels, retail, industrial and multi-let properties, Capital allowances are costs that a business incurs that can be reclaimed against tax as defined by the Capital Allowances Act of 2001.

Astonishingly we estimate that 96 percent of all UK commercial property and furnished holiday lets could be entitled to a tax relief and very often these tax reliefs will run in to tens of thousands of pounds per property. Capital allowances are one of the most beneficial tax claims in the UK, but unfortunately they are also one of the most overlooked ­– currently most commercial property owners are unaware they are eligible to make these claims.

One reason these allowances aren’t claimed for is that often people assume capital allowances are the preserve of large industrial complexes and that the benefit will only be felt for premises costing in excess of five or £10m. The truth is that allowances for smaller properties can also be significant.

Capital allowance is not a contentious tax avoidance scheme or loophole, but it’s based on established UK statutory law, the primary aim of which was to allow commercial property owners to improve their property.

With significant sums to be reclaimed, why aren’t more people taking advantage of these allowances? As stated above often people are simply unaware they are eligible, but there is one other key contributory factor: the legislation and rules of computation are complex. This puts many people off, as often owners think it not financially viable to make such a claim. But when specialists often identify between 20 – 50 percent of the original purchase price as capital allowances this is a claim, no matter how complex, that is definitely worth pursuing.

How does Capital Allowance work?
Essentially, capital allowance can be seen as the writing down of long-term assets used in a business. One reason why claiming the allowance is complicated is that individuals cannot claim a specified percentage of the total value of the building – instead, they must identify and claim capital allowance on items that are known as ‘second fix’. While ‘first fix’ comprises all the work required to take a building from the foundations to the application of plaster on the internal walls. In other words, ‘first fix’ includes walls, floors, ceilings, inserting cables for electrical supply and inserting pipes for the water supply. Capital allowance can’t be claimed against this.

However, ‘second fix’ comprises all the work after the building has been plastered. This includes connecting electrical fixtures to cables, connecting sinks and baths to pipes, fitting doors into doorframes, lighting, installing cookers and washers, flooring, alarm systems, machinery, furniture and air conditioning units. It’s these expenses that can be claimed for. These items are also known as ‘moveable’ items.  You can’t move the foundations, but you can move your electrical fixtures.

‘Second fix’ expenses can be deducted from taxable income. As these assets will typically be used for several years, the cost of the asset is spread over its expected useful life. Across is a list of the top 10 ‘second fix’ expenses that go unclaimed for:

1. Air Conditioning
2. Lifts
3. Heating
4. Lighting
5. Car park security
6. Power
7. Switchgear
8. Transformers
9. Fire Alarms
10. Suspended Ceilings

How do you make a claim?
The good news is that there is no time limit for making capital allowance claims. The process for making a claim is actually fairly simple. First, surveyors or valuers need to identify those items that can be claimed for and produce a detailed report stating clearly why the items are eligible. In addition to being accurate, the report must also be in a format approved by HM Revenue & Customs. From here on in any professional advisor who is familiar with the process should be able to make a satisfactory claim on behalf of the commercial property owner within a matter of weeks. To save time and hassle we would advise using a specialist company and ideally one that offers a no report no fee service as the costs of pursing a case that delivers no value can be expensive.