(Photo: Reuters)
(Photo: Reuters)

These are austere times as businesses are under constant pressure to slash costs and run efficiently in order to turn a profit.

However, it will also kill CEOs to know that they may unknowingly be sitting on substantial tax relief windfalls, perhaps worth hundreds of thousands of pounds.

Cashing in on Capital Allowances?

Capital allowances are a form of tax relief on items (or assets) bought for use within a business. They allow commercial property owners and many leaseholders to write off the cost of assets against taxable profit.

Tools, machinery, office or kitchen equipment, computers, vehicles, pieces of plant and factory equipment may all qualify for plant and machinery capital allowances.

Any accountant worth their salt should pick up on these, but certain fixtures and integral building features may also qualify.

These could include electrical wiring, cold water systems, heating and air conditioning systems and lifts.

Claiming capital allowances on fixtures and building features requires a level of specialist expertise beyond what a general practitioner could be expected to possess, so less obvious items are often left unclaimed.
Consequently, most property owners are only claiming the tip of the iceberg while most of the value remains hidden from them. This means they pay more tax than they need to and therefore lose money.

Capital allowances rules state that only one owner is able to take full advantage of the available tax relief during the lifetime of the building, so if the previous owner did not claim the current owner could be in line for a windfall.

The Details

For chargeable periods that relate to corporation tax and begin on or after 1 January 2013, or that relate to income tax and begin on or after 1 January 2013, HMRC allows a 100% 'annual investment allowance' (AIA) on the first £250,000 of capital expenditure on all of the above.

This lets commercial property owners and some leaseholders deduct up to £250,000 from their taxable profit.

Any capital allowances over this £250,000 qualify at a standard rate, depending on the item.

Around 96% of businesses are estimated to be under claiming their rightful capital allowance tax relief - to the tune of tens of billions of pounds.

What are the Benefits?

Accurately assessing qualifying items and processing an effective claim will in many cases form the basis of a substantial write off against the profits of a business, resulting in a lower tax charge or in some cases a cash rebate for previous years.

Individual claims can sometimes amount to as much as 35% of the value of a freehold - for example - £350,000 of tax relief for a building bought for £1m.

Capital allowances also add to the monetary value of a commercial property or business.

This is great news for sellers and, it has to be said, companies that encounter hard times and go into receivership.

Why the Urgency?

The Finance Bill 2012, which comes into force April 2014, has changed the way capital allowances work at the point of sale.

The central reform is the introduction of mandatory pooling of capital allowances. From April 2014 all commercial properties must be fully assessed and capital allowances pooled, recorded and transferred to the new owner.
If this does not happen by the book then the opportunity to claim simply disappears.

Businesses wishing to unlock tax relief need to act now or risk losing this major tax benefit.

How do Companies' Claim?

When it comes to fittings and building features a full survey of the property is necessary.

The actual claim is determined by the property and its usage.

The key test is if the item is used for the business (therefore claimable) or forms part of the setting where the business is carried out (un-claimable). This distinction is not as clear cut as you might think and can vary greatly from business to business- for example- a hotel can claim for a chandelier where as a factory cannot!

The rules governing which items are eligible to be pooled for this form of tax relief are complex and vary significantly from building to building and across different industries.

Due to the variable nature of what is claimable and the fact that a substantial amount of case law needs to be brought into consideration, it is vital to take professional advice to ensure every eligible item is included in the pool and get a claim agreed with HMRC.

Andrew Stanley is the founder of STax, a firm of tax advisers specialising in capital allowances.