Capital allowances on acquiring buildings (S.198 elections)

Many businesses and legal advisers may be unaware of the elections system for fixtures when applying for tax relief. Chartered Accountant and Chartered Tax Adviser LUKE SHACKLOCK explains more.

Capital allowances are the primary mechanism for tax relief on the acquisition of 'plant and machinery' for use in a trade, yet it may not be so intuitive that such allowances are often available on the acquisition of buildings. While the building itself does not qualify as plant and machinery, certain assets that are acquired do qualify for tax relief and are referred to in the legislation as 'fixtures'. A fixture is plant and machinery that has been installed or 'fixed' into a property to the degree that it becomes legally a part of the building. Common examples include:

• Plumbing systems
• Electrical systems, including lighting
• Heating, cooling and ventilation systems
• Fitted kitchens, bathrooms and washbasins
• Alarm systems and CCTV circuits

While the above list is by no means exhaustive, it does serve to illustrate how common the allowances would be to prospective buyers.

The difficulty in such transactions is that unlike on the normal acquisition of plant and machinery, it is not always clear what the acquisition cost of such assets are, as the sale and purchase contract is often silent, or provides only a total allocation of the purchase price for all fixtures rather than an itemised list. It was therefore common for the buyer and seller to bring into account different values for the purchase and sale of such assets in their respective tax returns.

Legislation was therefore introduced to ensure that all parties had to agree to the price for fixtures, now known as a S.198 election. The election is a joint election to HMRC by the buyer and seller, informing HMRC of the agreed price for the fixtures, which are then brought into the respective parties' capital allowance claims. While it may be prudent for all parties to agree the price prior to signing the contract, the parties have until two years following the sale to make the election.

It is important for buyers purchasing commercial properties to be aware of this, as without an election there is no way to otherwise make a claim for capital allowances and they may be foregoing lucrative tax reliefs. The seller on the other hand may be forced to recognise a high disposal value and be charged additional tax as a result.

It is important to consider seeking professional tax advice if you are looking to pursue the purchase or sale of commercial buildings to ensure that you are maximising the tax advantages available to you. It is common for businesses and legal advisers to be unaware of the existence of S.198 claims, and an experienced tax advisor can help to identify all the available assets qualifying for potential tax relief.

Page Kirk has experience in assisting our clients with maximising their capital allowances claims and our advisors would be happy to discuss with you any prospective purchase or sale that your business is considering. Call 0115 955 5500 or email enquiries@pagekirk.co.uk.