Capital allowance clawbacks

Significant tax relief is available on expenditure for the purchase, construction, insulation, improvement and refurbishment of property. By way of example, many owners of shops, restaurants and street level office property, are not aware that much of the capital cost of converting the first and/or second floor space above into flats for sale or rent could attract 100 percent capital allowances.

Businesses can claim tax allowances, known as capital allowances, on certain purchases or investments. A proportion of these costs can then be deducted from the taxable profits to reduce their corporation tax bill. Depending on the building and its use, tax repayments can amount to between 10 and 100 percent of the purchase or construction cost.

In the past (prior to 31st March 2008) many similar costs did not qualify for these capital allowances. Now, not only do business purchases made since that date qualify but there may be the opportunity to claim relief on historic expenditure where previously there was no relief resulting in a potiential tax repayment. Many businesses may not have appreciated the significance of the recent changes and are simply unaware of the impact they can have on reducing the overall corporation tax liability of their business.

If we look at the out-of-town retail shift, we see towns and cities, where there is a plethora of deteriorating, empty shops. The residential or office space above the vacant shops is often producing no return for the owner either. The depressing climate this creates on the high street disinclines landlords to invest in repairs or modernisation and the cycle of deterioration continues. These properties are often ripe for improvement or conversion to residential letting use.

Demand rising
At present, due to the problems in getting a competitive mortgage and static property prices, there is growing demand for rented property in many areas.  If commercial landlords realise that a significant part of their re-development or conversion costs can be written off against tax, it makes a huge difference to the rental equation. Furthermore, the conversion or improvement of the property and subsequent letting can, in turn, make a significant difference to its saleability or value, so the benefit of the tax relief is amplified even further.  We can see fresh life being breathed into these properties, funded from reliefs against returns which they would not otherwise make.

There have been 21 changes to the capital allowances regime in the last two years. The most recent amendment stated that additional allowances can become available as relief against tax on profits. This included items such as; wiring, electrical systems, some short life cycle capital items as well as structural and improvement expenditure on property.

In most cases, the ceiling on these allowances is £100,000 (£50,000 before April 2010) per company or group. By claiming under specific provisions, allowances can be as much as 150 percent, which is a significant benefit in these difficult times.

With a bit of digging into the purchase files over the past couple of years, we’re finding that many of our clients can claim additional allowances which have the potential of generating a tax refund in current or previous accounting periods. These are sums which are, or will be, sitting in the exchequer’s coffers which could be on the company’s bottom line.

As times are tough, businesses are placing more emphasis on the importance of cash flow and the need to minimise tax bills where possible. Therefore they need to ensure they are claiming the maximum entitled tax relief in every way possible.

It’s not a case of business owners failing to claim; rather they don’t know they can claim it back on current and past expenditure. As soon as they realise there is relief available, they should be quick to take advantage.

Significant amounts
Our team has recently been busy working with quantity surveyors and rereading reports on behalf of businesses which we then submit to HMRC. It is vitally important to provide the required substantiation and documentation with the claim.

My advice to anyone in business who owns any type of commercial property is to take advice. They should ask themselves if spending up to £100,000 on bringing the property into use – or increasing its value or usefulness by re-equipping it – makes sense when perhaps all of the expenditure can be reclaimed against current or future profits.