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Category Archives: Solicitors

s198 Election

s198 Election – Capital Allowances

On a daily basis, we face various types of capital allowance related questions. A common one being, do I need to submit an election? Whilst there is much to take into consideration when claiming capital allowances, the subject of s198 elections are a crucial component to consider, especially when selling the property, and a failure to do so could result in the loss of allowances for current and future owners of the commercial property.

In accordance with the Capital Allowances Act 2001 (CAA 2001), the current mechanism for agreement by the seller and buyer as to the apportionment of capital allowances for fixtures in a property interest being sold is an s109 or s199 election. The changes to the fixtures rules which were included in the 2012 Finance Bill mean elections will become mandatory for all property transactions going forward.

Taxpayers have two years from the date of the transaction to submit an s198 or s199 election. If an election is required and not submitted during the two-year window, the effects of the election will not be binding and HMRC could make an alternative assessment for tax purposes. This assessment will mean the tax liability will be higher as the allowances may not be taken into account. Ultimately, the allowances will be lost in perpetuity on that property.

The s198 or s199 election notice must be submitted to HMRC and completed correctly to be valid, or the whole exercise may become void.

In the past, CAA 2001 s198 (freehold) and CAA 2001 s199 (leasehold) elections have often been completed poorly with inaccurate information or with historical detail not being taken into account and sent to HMRC. However, under the new legislation, there are legal and commercial consequences if this continues, and can have a negative impact upon the property owner. HMRC can now reject the submission of an incorrect election or declare it invalid, often resulting in the loss of allowances, which is why many commercial property owners have missed out on these important tax refunds.

Given the negotiated nature of these agreements, it is highly likely that the seller and the buyer will want to reach a settlement on the value and contents of the s198 or s199 election as part of the sale process prior to completion for certainty, and at a time when the purchaser at least has more leverage. If the apportionment values cannot be agreed, then either party can, within the two-year period of the transaction, unilaterally refer the case to an independent tax tribunal for determination.

It is important to note that it is only possible for a valid s198 election to be made if the seller has actually claimed capital allowances during their ownership.

So from April 2014, sellers will need to pool their fixtures expenditure, unless they are prepared to risk the price of their property being chipped down in recognition that no allowances will be available. To avoid unnecessary costs, confusion, delays or jeopardising the whole transaction, sellers can collate all the relevant capital allowances information, with which we can use to liaise with their solicitor to ensure the position is included within the draft heads of terms for the sale of their property.

If you’d like more information on this matter and feel that you require specialist advice, please get in touch with a member of our team who will be happy to help you with any queries.

For more information read our post on the importance of CPSE 32

Why is CPSE 1 s32 Important?

The subject of CPSE 1 s32 can often lead to the glazing over of eyes when brought up as it’s a much talked about subject and yet the truth is that it still really does not seem to have sunken in just how important it is that it’s done correctly and it still gets fudged or even totally ignored. It’s important for all parties as failure to do so can have repercussions down the line that potentially are impossible to deal with.

So if you are involved in the buying or selling of commercial property in any capacity why should you concern yourself?

How does CPSE 1 s32 affect you?

Solicitors – quite apart from a duty of care issue there are also potentially litigation issues if CPSE 1 s32 is not handled properly. It was made clear in a Law Society article last year that it is the responsibility of the acting solicitor (for both vendor and purchaser) to ensure this matter is dealt with correctly. If it is not, it is eminently possible that a disgruntled client who loses out due to the two-year rule governing the s198 election may well seek compensation if they feel that they have materially lost out as a result of their acting solicitor not dealing with this matter as they should have done. At best it’s highly doubtful they would instruct the same solicitor again even if they don’t go down the litigation route. This is all the more frustrating as it can be handled so simply if a capital allowances specialist is involved from the outset.

Accountants – even though the solicitors may be seen to have the responsibility to ensure that this is all handled, a typical client will look to their accountant to advise and direct them correctly in matters to do with taxation. If an accountant is aware that their client is buying or selling a commercial property (or actually even if they have no transaction happening but currently own commercial property) then that client will have a level of expectation that their accountant will advise them effectively. All the accountant has to do is to suggest to the client that they involve a capital allowances specialist and they can be seen to be acting in that client’s best interest.

The Seller – It’s really a matter of control and opportunity. If the seller establishes the level of capital allowances available in the property it becomes a strong selling point and certainly one that can be leveraged in negotiation. It adds value to the property and ensures the seller controls how that added value is used within the sales process.

The Buyer – if the seller has not done this exercise and as is often the client is unaware of it, if the buyer takes control before the contract process it’s perfectly possible for them to get agreement as part of the contract that they can conduct this review and therefore they can benefit from any allowances identified. It also ensures that the seller will cooperate with the supply of information if it forms part of the contract that they should do so. This massively smooths the way for conducting the review after the sale has completed.

So there you are, the solicitors. The accountant, the seller and the buyer all have very strong practical and economic reasons to ensure this review is done as it should be. They need to engage with a capital allowances specialist earlier rather than later in the process.

Be Honest – Do you understand the Laws of Rugby?

There is no doubt that with the Six Nations currently in full swing, rugby fever has gripped the nation and you cannot open a newspaper or switch on the radio or television without being overwhelmed by some obscure reference to an act or combination of events in a rugby match being analysed, dissected and assessed by experts, all of whom seem to have a different interpretation of what the outcome should have been. It does make it hard to see how any form of cohesive situation can come from it all and how any form of structure for the game can ever be possible. Even the referee at times finds it impossible to decide what did happen and what should happen next. So what does he do? He refers it to the Television Match Official or TMO who then, armed with copious slow motion re-runs and countless requests for a different angle arrives at a definitive answer. In those situations how many of us are amazed to find what we thought was obvious (a try – a foot not in touch – a pass going backwards) was in fact not the case and that with the ability for real analysis and review we can see he did drop the ball over the line or he did put his foot in touch or the ball did go forward. It certainly shows the value of reassessing a situation armed with all the facts and some specialised knowledge.

It’s very similar when we consider the situation regarding Embedded Capital Allowances in commercial property. These capital allowances are highly specialised and can be complex to identify and quantify. In many cases assumptions are made concerning the potential for them being available or the belief that the accountant handling the general accounting functions of the business will have done it already. Experience tells us that frequently that is not the case and in reality many successful and highly professional accounting firms prefer to refer this to their own “TMO” which in this field of taxation specialism is us. The accountant can deal with all aspects of capital allowances that can be seen or easily identified but when items are embedded in the building or are obscure items that are not easily recognised as qualifying then the best of the professionals involved may be unable to give fully informed advice and the best of those recognise the need to proactively involve specialists such as us to ensure their client is best served and best advised. If an international referee who is refereeing a rugby match in front of millions recognises they need specialist input then its just the same when highly professional and proficient accountants, solicitors or commercial property agents refer clients to us so we can use our highly specialised in house team to go through the review process.

This was very clearly seen only recently when an accountant who was aware of our services spoke to us about a client who owned a small care home group. They had not long taken over responsibility for the accounts and the client had never previously been advised of any potential for Embedded Capital Allowances. It was in fact an even bigger assumption than that as the client was convinced that nothing would be available and that it could be a costly exercise that would in the end deliver them no benefit. Nothing could have been further from the truth because it costs nothing at all to find out so it’s possible to have a full review at no upfront cost with fees being only charged once the exercise had been done and allowances identified and those then being accepted by HMRC. Once the client realised he would not be expected to pay anything if nothing was found he was happy to let us proceed even though he still felt we would find nothing. We got on with the job in hand, surveys were done, necessary documentation accessed and a report completed. Even though it involved 8 properties the whole thing was completed within a 10 week period and submitted successfully to HMRC. Allowances in excess of £1Million were found which resulted in significant repayments from HMRC with further tax reductions due over the next few years as the allowances continue to be used up. What looked like a situation that could not deliver any positive outcome for the client was in fact a situation that put valuable cash back into their care home business and will continue to help improve cash flow year on year for a number of years and all done with zero risk, no interruption of services and without involving the client in any disruption to their busy schedules. The lesson to be learned is never think it’s been done or that it can’t be done and always remember that finding out costs nothing and risks nothing – not finding out might though. Those who own any form of commercial property should really take heed and get in touch to get their own situation assessed for no cost, no commitment and no assumption.

We don’t know who will win the Rugby World Cup but we do know that making assumptions will never be part of influencing the outcome.