Ian White, chair of the Property Section, talks to Mark Tighe, CEO of Catax Solutions, about what solicitors need to know about capital allowances, an important and increasingly prevalent area of commercial property tax law
If you are involved with any stage of a commercial property transaction, acquisition or disposal, you must be aware of the relevant legislation around capital allowances. The mandatory pooling of capital allowances at the point of sale is now an element of compliance for all commercial property transactions. If you have not yet implemented a process to deal with this, now is the time.
IW: What is the main responsibility for the solicitor in terms of compliance?
MT: It is the solicitor’s responsibility to ensure that their clients understand the value of capital allowances, and the importance of reaching an agreement at the point of exchange. It is in both parties’ interests to agree a ‘fair value’ for the fixtures, and to fix this value by way of a capital allowances election. Doing so will prevent a clawback of prior tax relief, and allows full control over which party will be able to claim allowances in future.
It is essential that the capital allowances position is addressed within the sale and purchase agreement, by the solicitor. Protective clauses must be put in place detailing with which party will benefit from the tax relief in future, and steps must be taken in order to effect this agreement.
Without protective clauses, there is no onus on either party to engage in a capital allowances claim post-completion, and there is also a risk of the fixed plant being removed or replaced prior to a survey of the property taking place.
IW: What are the implications to the legal professional if they do not correctly address capital allowances?
MT: Accusations of negligence are a real possibility, as the sums involved can run into hundreds of thousands of pounds, and failure to provide the correct advice could potentially result in litigation against you and your firm.
IW: Won’t considering the capital allowances position delay the transaction?
MT: This is a common misconception among lawyers. Once it has been agreed how any available allowances are to be allocated, and this is reflected within the agreement, the transaction can progress. The due diligence process and valuation of the qualifying plant can then take place, post-completion.
IW: How will the property owner benefit from this if they are selling the property?
MT: When the owning entity disposes of its commercial property, there is an opportunity to realise the full relief, which can result in a large financial benefit. If, however, the capital allowances are not identified, this immediate and significant benefit will be lost forever. Failure to correctly address the capital allowances position can also result in the clawback of tax relief, so it is essential that this is reviewed.
IW: What will this mean for clients who have already completed transactions?
MT: The more stringent legislation fully came into effect from April 2014. However, it makes sense for commercial property owners that acquired property prior to that date to review their capital allowances position now. Conducting a retrospective review will allow owners to begin enjoying tax savings, and to have a complete response available in the event that they sell the property at a later date.
IW: What are the commercial implications to property-owning clients if the legal professional does not fulfil their responsibilities?
MT: When acting for the purchaser of a commercial property, failure to fulfil professional responsibilities can result in your client forgoing any rights to a potentially lucrative tax relief. Plus, any future owners will also be unable to submit a claim.
If you are acting for a vendor, they may be unwittingly underselling their property by not identifying a pool of capital allowances beforehand, or may be subject to the clawback of relief which I mentioned previously.
IW: What immediate advice would you give to legal practitioners?
MT: You need to make sure you have an understanding of the legislation, how it impacts on your clients, and whether or not your current procedures adequately handle the subject of capital allowances. It is imperative that clients are made aware of capital allowances to avoid the loss of tax relief, and that specialist advice is sought where required.