Tag Archives: capital allowance

Capital Allowances Act: Balancing Charges and Allowances

Posted on December 2, 2011 by admin| Leave a comment

Under Section 55 of the Capital Allowances Act 2001, persons might be entitled to balancing allowances and liable for balancing charges when a long-life asset is sold. These are computed separately for each pool of qualifying expenditure. If the qualifying expenditure is less than the amount received on disposal of the asset, the person is entitled to a writing-down or balancing allowance.

On the other hand, if the amount received on disposal is more than the qualifying expenditure, the person is liable for a balancing charge to the extent of the excess of disposal receipts over qualifying expenditure. In effect, the person will have to pay tax avoided earlier through capital allowance claims.

There rules and provisos that increase or reduce the claims and charges.

When the asset disposed off is an industrial or agricultural building or hotel, the buyer and seller can negotiate the value of the plant and machinery that forms part of the building. If the value is agreed at a low amount, the seller will gain in tax terms. On the other hand, if the value is agreed at a high amount, the buyer can claim capital allowances on that value.

It is standard practice to look at the capital allowances claimed on such plant and machinery when property is disposed off. The seller declares the value of the Capital Allowances claimed, in what form they were claimed, to what the allowances relate and what the written down value of the allowances is. Based on these, the seller and buyer negotiate the value.

The seller might be able to get a higher price for the property by allowing the buyer the opportunity to claim higher capital allowances. Whatever is agreed upon can be included in an Election Notice under Section 198 of the Act. We will look at this section in a separate article.

For more information visit the authors site Private Pension or Private Pensions

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Apportionment of Sale Price for Capital Allowance Purposes

Posted on December 2, 2011 by admin| Leave a comment

In certain circumstances one sale price will have to be apportioned between distinct assets that are covered under one sale contract with a common price. For example:
? You might sell land with an attached asset that is eligible for capital allowance claims. In such a case, the price attributable to the attached asset needs to be clear to enable claiming capital allowances for that asset.
? You might sell plant and machinery items that belong to different asset pools and hence need to be accounted separately

The general rule is that the apportionment should be done in a just and reasonable manner. However, the seller and buyer have opposing pulls in fixing the price of assets that are eligible for capital allowances.

The buyer would like to see it fixed at a high value so that the person can claim maximum capital allowances. The seller, on the other hand, would like to apportion a low value to the asset so that there will be no surplus over the written down value (original expenditure minus capital allowances claimed so far).

Where an asset is sold at a price over the written down value, tax authorities will consider excessive capital allowances to have been given and add back the excess to current taxable income. The taxpayer will thus be forced to bear additional tax burden.

Because the buyer and seller have to use the same apportionment, a negotiation process usually follows. However, if the result of the negotiation appears to be designed to avoid tax with no reasonable basis, tax authorities might not accept the apportionment. Instead, they might open an enquiry in consultation with the concerned District Valuer.

Where buyer and seller has not entered into any agreement for apportionment of the sale price, the buyer can do the apportionment in consultation with the District Valuer.

The price apportioned to the asset eligible for capital allowances cannot exceed:
? The amount on which the seller could have claimed capital allowances
? The total sale price

Provided that the sale contract has been made at “arm’s length” leading to the assumption that is has not been fixed to avoid tax, and the above provisions have been followed, apportionment of the sale price will not normally be rejected.

Similar provisions apply in the case of a lease transaction with the lessee paying a premium and using the asset for a qualifying activity.

For more information visit the authors siteSelling Pensions or Sell Pensions

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Capital Allowance Allows You to Write off the Cost of Long Life Assets

Posted on December 2, 2011 by admin| Leave a comment

Capital allowance replaced the “wear and tear” allowance that was allowed originally. The term “wear and tear” probably expresses the idea behind the allowance better. What capital allowance does is to allow you to write off the cost of long-life assets over their useful lives.

For non-accountants, the distinction between ordinary expenses (such as raw material purchases) and expenditure on long-life assets (such as plant and machinery) might appear a little confusing. Both are business expenses and yet one of them is allowed to be deducted from current year’s income while the other is not.

The reason for the different treatment is that while the raw material is typically consumed in the year of purchase, the asset is used over a number of years. Hence, the cost of the latter is spread over these years of useful life. Each year, you can deduct a percentage of the value of the asset so that the full value (minus any scrap value at the end of the period) is written off by the time the asset needs to be replaced.

It is this yearly percentage that we call capital allowance (or wear and tear allowance). In most countries, this write-off is called depreciation while in UK it is called capital allowance.

Capital allowance as outlined above is comparatively easy to understand and even to compute. However, the computation becomes extremely complicated when the asset is a building. A building as such is considered to be an asset with an “indefinite” life and no capital allowance is allowed on buildings.

However, certain fixtures of the building such as air conditioners, lifts and many others are considered “plant and machinery” and capital allowances can be claimed on these. The problem is that it is difficult to value these fixtures separately when you purchase a building with all the fixtures included. Tax authorities do not take kindly to any over-valuation of the fixtures while under-valuation means that you will get tax reductions less than what you are entitled to.

For claiming capital allowances on property, you need more than accounting and taxation expertise. You also need valuation expertise to ensure that the fixtures of the building are valued correctly. Portal Tax Claims LLP works with your accountants and tax consultants to ensure that you get the full benefits you are entitled to.

For more information visit the authors site Private Pension or Private Pensions

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Business Premises Renovation Allowance

Posted on December 2, 2011 by admin| Leave a comment

Business Premises Renovation Allowance (BPRA) is a tax allowance provided by HMRC in UK to provide an incentive to renovate derelict or unused properties and bring them back into use. Provided the business premises thus converted or renovated is in a disadvantaged area, 100% of the qualifying expenditure can be claimed as capital allowance. BPRA will be in effect only for a period of five years from April 11, 2007 to April 10, 2012 and the expenditure must be incurred during this period.

A disadvantaged area is any area included in The Assisted Areas Order 2007 or Northern Ireland. Areas such as North Cornwall and Isles of Scilly in England and Swansea and Pembrokeshire in Wales are included in the 2007 order. Just enter the area’s postcode at Postcode Database of Assisted Areas website to check whether it qualifies.

To qualify for BPRA, the expenditure must be incurred:
? To convert or renovate a commercial building or structure situated in a disadvantaged area into a “qualifying” business premises
? To repair qualifying business premises
? Specifically in order to claim BPRA

Qualifying business premises are commercial buildings that are presently unused and have not been used during one year preceding the incurrence of the expenditure. The last use must also not have been as a dwelling. Expenditure for conversion, renovation and repairs of such a building will qualify for BPRA provided it is used or let out for a “relevant trade,” i.e. for:
? Fisheries and aquaculture,
? Shipbuilding,
? Coal industry,
? Steel industry,
? Synthetic fibres,
? Primary production of certain agricultural products, and
? Manufacture or marketing of products which imitate or substitute for milk and milk products.

Any expenditure for acquiring land, extending the building or developing land next to the building does not qualify, however.

For more information visit the authors site Private Pension or Private Pensions

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Capital Allowance Claims and Property Sales

Posted on December 2, 2011 by admin| Leave a comment

If you are a property owner who has claimed capital allowances, you should carefully review the possibilities and arrange things in a manner to retain the tax savings you had received from the capital allowance claims. If you have not claimed capital allowances, but could have claimed it under relevant rules, you could explore the possibility of passing on the claims to the buyer and negotiating a higher price.

Capital allowances are claimed on the fixtures that form part of the building at rates applicable to plant and machinery. To make the claim, the value of these fixtures should be determined in a manner acceptable to HM Revenue. This can be done in different ways depending on the context.

If the seller has claimed capital allowances, the person can indicate the disposal value of the fixtures in the sale contract. This can be through an Election Notice under section 198 of the Capital Allowances Act 2001 or by a fair apportionment of the sale price under section 196. The price of fixtures so apportioned cannot exceed the cost of the fixtures to the seller.

Claiming capital allowances results in the value of the fixtures being “written down” for tax purposes. If the disposal price of fixtures on a sale as above exceeds the “tax written down value,” then the seller will be liable to make good the excess allowance the person has claimed through a “balancing change.” This will result in paying additional tax over and above the tax on income that year.

By opting for a different way of apportioning the disposal value of fixtures, sellers can avoid balancing charges and the additional taxes. Such a different apportionment is possible by electing to show the disposal value of the fixtures at a low figure that is either equal to the tax written down value or lower.

However, a low disposal value for the fixtures will mean lower capital allowance claims and consequent tax relief for the buyer. It is in this context that the buyer might be willing to pay a higher price for the property in return for a higher disposal value.

For more information visit the authors site Private Pension or Private Pensions

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Capital Allowance Claims and Tax on Furnished Holiday Lets

Posted on December 2, 2011 by admin| Leave a comment

If you are a person who owns furnished holiday lets in UK or Euro zone, you can reduce the tax you pay not only on the rents of property but also on the salaries and dividends you receive in UK. The savings can be substantial and can help cope with low exchange rates and weak occupancy rates. While there is no time limit for claiming tax allowances, there is a possibility that the government might change the law and you might lose the claim unless you act fast.

It is estimated that an amazing 96% of holiday home owners are unaware of the capital allowance claims they are entitled to. This happens because of the complex rules regarding capital allowance claims on property. While you claim capital allowance from your taxable income on the full price of the asset in the case of furniture, computer systems and vehicles, the situation is very different in the case of property.

The price you paid for property has to be split into “First Fix” and “Second Fix” elements and allowances can be claimed only on the Second Fix items. And the valuation of second fix items cannot be based on guesswork; if you put an excessive value on these, HMRC might impose penalties for a wrongful claim; if you put too low a value, you lose a legitimate claim. Hence you need a tax expert who is also a valuation expert to help you with capital allowance claims on property.

Unless your accountant has acquired special expertise in property valuation, it is most likely that you have substantial unclaimed amounts. We can work with your accountant and help you claim what you are eligible for. And it can mean thousands of pounds in tax savings.

At least two million tax payers in UK are likely to own holiday homes either in UK or overseas. If the holiday homes are furnished and located in the UK or Euro zone, your property might qualify as Furnished Holiday Let. Eligibility also depends on whether the property was available for holiday letting at least for 140 days (and was let out at market rates for 70 days).

If your property qualifies, your capital allowance claims could even enable you ask for refunds of tax paid in the past. You can also carry forward the claims to future years. Considering that the amounts involved are likely to be in thousands of dollars, it would be a pity if it is left unclaimed.

Supplement your accountant’s expertise with ours and we would most likely be able to find unclaimed capital allowances, and consequent excess tax payments, worth thousands of dollars for owners of furnished holiday lets or FHLs. This expectation is based on our solid experience in the past.

If you had constructed the house yourself, you might have an idea of how much the Second Fix items such as air conditioning, kitchen fixtures and fittings, and numerous others, cost. However, as is more likely, if bought the property as a whole, how will you identify and estimate all the varied fixtures that are eligible for capital allowances?

It is also not a simple question of valuation. Some items, such as electrical and water supply systems, might include both First Fix and Second Fix components. Only a valuation expert, who is also a capital allowances and tax expert, can help you make a sustainable claim.

For more information visit the authors site Private Pensions or Private Pension

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Capital Allowance Claims for Partnerships

Posted on December 2, 2011 by admin| Leave a comment

To understand the significance of claiming capital allowance on partnership property, it is helpful to understand the different tax treatments of income from partnerships and joint ownerships.

Partnership profits are treated, well, as the profits of the “partnership,” a tax entity on its own. These profits are taxed according to rules applicable for taxing the income of partnerships.

Income from jointly owned assets is taxed at the level of individuals who receive the income from the assets. Each recipient is taxed separately on the share of income that person received, according to rules applicable for taxing individuals.

Tax authorities determine whether a partnership exists or not before deciding how to tax the income. If a partnership exists, then the income from the assets owned by the partnership is taxed separately from the incomes of the individual partners. Even if a partner has to share in the losses suffered by a partnership that loss cannot be set off against his or her personal income to reduce tax, for example.

Similar rules apply for capital allowance claims. A partnership can claim capital allowance on its property if the property can be shown to belong to the partnership, rather than being jointly owned by two or more individuals. A property is considered as partnership property if:
? The partnership has been registered with HM Revenue & Customs
? The property has been purchased in the name of the partnership and appears in its accounts
? The property and related expenses have been paid through the partnership’s bank account

If your partnership owns a building used in a business, it is quite likely that you have not claimed the capital allowances the business is entitled to. This happens because of the complexity of capital allowance rules for buildings. Unlike other assets, you cannot claim capital allowance on the full value of the asset; you have to value the “second fix” components of the building and claim capital allowance on this value alone.

Unless you are a valuation expert, it is almost impossible to identify and value these items which typically appear as an integral part of the building. The problem is further complicated by the fact that if the value and consequent claim are excessive, tax authorities can penalize you. You need a specialist who is expert in both taxation and valuation to help you claim the right amounts.

As there is no time limit for claiming capital allowances, the partnership might be able to save large amounts of tax for a property purchased several years ago.

For more information visit the authors site Private Pensions or Private Pension

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Plant & Machinery Disposal Events

Posted on November 16, 2011 by admin| Leave a comment

In other articles we have seen that when a disposal event occurs, taxpayers are subjected to a balancing charge or allowed a balancing allowance. A balancing charge involves charging back excessive capital allowances claimed and balancing allowance provides relief for short claims.

Capital allowances are considered excessive when the disposal value is more than the notional written down value after deducting the writing down allowances from the original cost. If the disposal value is less than the notional written down value, capital allowance claims are treated as inadequate and the shortage is made up through a balancing allowance.

The issue of disposal even becomes relevant in the above context. Disposal events are not confined to sale of an asset. Instead, all the following events are disposal events:

. The taxpayer ceases to own the asset

. Possession of the asset by the taxpayer is lost permanently

. Abandonment of an asset used for mineral exploration and access at the site where it was so used

. The asset ceases to exist

. The asset begins to be used for a purpose other than the qualifying activity

. The qualifying activity itself is discontinued permanently

. The asset is leased under a long funding lease

When a disposal event takes place, the taxpayer is required to bring a disposal value into account. The rules regarding computation of disposal value is somewhat complex; it might not be even the sale value if the sale event is considered a tax avoidance measure.

It is possible that an asset might have more than one disposal event. For example, the first event might occur when an asset is leased under a long funding lease, which might be canceled by the lessee and a second disposal event might occur if the lessor sells the asset. In such cases, disposal value needs to be brought into account only on the happening of the first event.

It is to be noted that except in the case of single asset pools, the above provisions apply to the pool total as a whole and not to individual assets.

For More Information Please Visit Section 198 Election Capital Allowances or Drop by the blog Owners Site 198 Election To Get Intouch

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Long Life Assets for Plant & Machinery Allowance

Posted on October 27, 2011 by admin| Leave a comment

You can claim only 6% writing down allowance (WDA) on long life assets. Expenditure on lengthy life belongings are added to a long life belongings pool and the allowance is claimed on the balance in the pool. This balance is arrived at by adding additional expenditure on long life assets to the pool balance brought forward from the previous year and deducting disposal values of any lengthy life asset disposed during the year.

Long life property are property that can be reasonably be expected to have an useful economic existence of at least 25 years “when new.” Once an asset has thus been deemed to be a long existence asset, it continues to be a lengthy existence asset in the hands of a subsequent buyer even though it might not have a remaining economic life of 25 years.

It is not necessary for all parts of the plant and machinery to have economic lifetimes exceeding 25 years. If the asset as a whole is deemed a long life asset, even parts of it that might be replaced over a lesser period will be considered lengthy existence.

While a building might have an economic life much in excess of 25 years, the fixtures in the building (treated as plant and machinery) might or might not be considered long life belongings. The building itself does not qualify for capital allowance and any fixtures in the building that qualify for plant and machinery allowance (PMA) must be evaluated independently of the building. For example, a lift in the building that qualifies for PMA might have an economic life of 25 years, and will hence be considered a long existence asset.

Certain expenditure is excluded from the category of long life belongings even though they might otherwise be considered so. The exclusions are:

. Fixtures in a dwelling house, retail shop, showroom, hotel or office

. Ships, excluding certain types, on which the expenditure was incurred before January 1, 2011

. Railway property for use in a railway business on which the expenditure was incurred before January 1, 2011

. Cars

If the expenditure on property is less than the specified monetary limit of ?100,000 in the year, property are not considered lengthy existence property, unless they fall under the exemptions to the monetary limit rule, such as acquiring the asset for leasing.

For More Information Please Visit s198 Elections or Drop by the blog Owners Site Capital Allowances To Get Intouch

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Plant & Machinery Disposal Events

Posted on October 27, 2011 by admin| Leave a comment

In other articles we have seen that when a disposal event occurs, taxpayers are subjected to a balancing charge or allowed a balancing allowance. A balancing charge involves charging back excessive capital allowances claimed and balancing allowance provides relief for short claims.

Capital allowances are considered excessive when the disposal value is more than the notional written down value after deducting the writing down allowances from the original cost. If the disposal value is less than the notional written down value, capital allowance claims are treated as inadequate and the shortage is made up through a balancing allowance.

The issue of disposal even becomes relevant in the above context. Disposal events are not confined to sale of an asset. Instead, all the following events are disposal events:

. The taxpayer ceases to own the asset

. Possession of the asset by the taxpayer is lost permanently

. Abandonment of an asset used for mineral exploration and access at the site where it was so used

. The asset ceases to exist

. The asset begins to be used for a purpose other than the qualifying activity

. The qualifying activity itself is discontinued permanently

. The asset is leased under a long funding lease

When a disposal event takes place, the taxpayer is required to bring a disposal value into account. The rules regarding computation of disposal value is somewhat complex; it might not be even the sale value if the sale event is considered a tax avoidance measure.

It is possible that an asset might have more than one disposal event. For example, the first event might occur when an asset is leased under a long funding lease, which might be canceled by the lessee and a second disposal event might occur if the lessor sells the asset. In such cases, disposal value needs to be brought into account only on the happening of the first event.

It is to be noted that except in the case of single asset pools, the above provisions apply to the pool total as a whole and not to individual assets.

For More Information Please Visit Section 198 Election Capital Allowances or Drop by the blog Owners Site 198 Election To Get Intouch

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