27/02/2012

By Anne Eager, Tax Partner, RJP Accountants

Tax planning is an important issue to bear in mind when small and medium sized enterprises (SMEs) are considering their business strategy to ensure that the business operates in the most tax efficient way.

This is why getting to grips with upcoming changes following the release at the beginning of December of draft legislation for Finance Bill 2012, is of the utmost importance.

Capital allowances

One of the measures in the Bill concerns claiming capital allowances for fixtures included within the acquisition of a property - something which was the subject of a consultation during 2011.

Changes introduced in the Bill, which take effect on April 1 2012 for corporation tax purposes or April 6 2012 for income tax purposes, may impact any business disposing of, or acquiring, a property containing fixtures which qualify for capital allowances

Currently the rules effectively give a two year window to make a capital allowances claim in these circumstances, although there is flexibility to claim the capital allowances in any later year’s tax return as long as the asset it still owned in that later tax year.

The claim is calculated using a ‘just and reasonable’ apportionment of the purchase price of the asset.

In HMRC’s view there has been a significant increase in the number of people making these (substantially late) claims, encouraged by the prospect of the sizeable tax savings available.

HMRC have concluded that a sizeable number of these claims are incorrect with the result that capital allowances are wrongly being claimed twice — something which has the potential to the cost the Exchequer significant money. As HMRC lack the resources to be able to check all the claims being made, it is, instead, changing the rules (in its favour of course!)

New Rules

Capital allowances will be available to a buyer as long as two conditions are met:

- expenditure on qualifying fixtures is pooled before a subsequent transfer onto another person;

- the buyer and seller use one of two agreed procedures to agree the value of fixtures transferred within two years of the transfer. (NB In exceptional circumstances, the seller can provide a written statement, within two years of sale, of the amount of the disposal value of fixtures that he or she was required to bring into account at an earlier time; for example, when he permanently ceased his business).

Agreed Procedures

The procedures which allow for a buyer and seller to fix agreement of the value of the fixtures being transferred are:

- Section 198/199 CAA election, where the seller and buyer make a joint election.

- Section 563 CAA, where the parties are unable to agree on a value within two years of the transaction and the matter is referred to the First Tier Tribunal for a decision.

Fairer, but more work

Although there have been areas of contention, the fact that the Bill requires a buyer and seller to agree the value of the fixtures being transferred at the time of the sale, should make things easier.

However by putting in place these new rules, unless the value of the fixtures is fixed by either of these methods, neither the current purchaser (nor any future purchaser) can claim capital allowances on those fixtures and the tax relief will be lost forever.

It will also be necessary for owners of fixtures to retain the documentation which supports their capital allowances entitlement.

It is important to realise that these new rules apply even where the new owner cannot claim capital allowances (or can’t use them, eg has losses). The issue being that if the buyer fails to undertake the relevant procedures on purchasing the assets, then a future purchaser is prohibited from claiming those allowances.

First Year Allowances

Following on from the Chancellor's Autumn Statement, businesses operating in six selected enterprise zones will qualify for 100% First Year Allowances for plant and machinery investment incurred between April 2012 and March 2017.

Unsurprisingly the chosen zones all areas where industrial regeneration is a priority and have a high focus on manufacturing, such as the Black Country, Humber, Liverpool, North East Yorkshire, Sheffield and Tees Valley.

Allowances will be capped at 125m Euro and the plant or machinery must not be held for use in an area outside of the designated assisted area for a period of five years.

Other changes

Other changes which come into effect from April 2012 relating to capital allowances (which have been announced previously) include:

- Reduction in the AIA from £100,000 to £25,000

- Reduced rate of capital allowances (from 20% to 18% and 10% to 8%)

Both of these changes will slow down the speed at which capital allowances are available and therefore tax relief on the cost of purchasing capital equipment will take longer to obtain. Therefore any business contemplating capital investment would be well advised to review the timing of that expenditure to ensure that valuable reliefs are not missed for the sake of a few days delay in making the purchase.

There is bound to be some consternation from businesses operating in qualifying industries yet based in zones where they do not qualify. The creation of new enterprise zones was a headline announcement in the March 2011 Budget. The new zones will offer 100% business rates relief worth up to £275,000 over the first five years and will have access to superfast broadband and benefit from simplified