In 2024, HM Revenue & Customs (HMRC) has been sharpening its compliance focus on capital allowances valuations for commercial real estate and infrastructure deals with a new 'Schedule of Information' emerging in sales that are not covered by a Capital Allowances Act (CAA) 2001 s198 election.
In this article we explore the background to the enhanced focus, the areas of scrutiny and what you should be prepared to ask from whoever prepares your capital allowances claims.
The information schedule has been passed to us for comment and we understand it is appearing across multiple firms (big and small). It is clearly designed to root out spurious claims and whilst it might seem onerous most of the core details should be covered in the capital allowances report(s) submitted with the tax return(s), and if it is not, you should speak with whomever is responsible for your claims.
If you have any questions or concerns over the level of information required, or your ability to defend the assumptions in a claim, please do not hesitate to get in touch for a confidential no obligation chat.
Background to HMRC Compliance Focus Capital Allowances
Concerns have been growing on the quality and standards of tax advice in the UK for some time with lots of new entrants offering ‘expert’ advice on how to save tax or get cash back from HMRC, switching between a breadth of different tax reliefs to support their business models purporting 100% success rates, no win no fees and tie-ins which can quickly lead to taxpayers paying over the odds for tax advice.
Unfortunately, capital allowances are a tax incentive that has attracted a range of unscrupulous providers over the years. Taking advantage of HMRC’s light touch approach, pushing the boundary to what is acceptable and in extreme cases disregarding established law, risking clients’ reputations and exposing them to unsuspecting tax bills and penalties.
Burden of Proof Rests with the Taxpayer not HMRC
Contrary to the marketing literature, claims for capital allowances on ‘fixtures’ are not new or mysterious and there is a long history supported by legislation, guidance, and case law which HMRC will expect to see followed.
If you purchase a second-hand property and wish to claim plant and machinery allowances (PMAs) there is always a requirement to determine whether a past owner could have been entitled to claim, in some cases back to 24 July 1996. This was the backdrop to the Tapsell & Lester v HMRC [TC01231] case which held that the taxpayer had failed in the ‘burden of proof’ associated with determining past ‘fixtures’ restrictions.
The rules were tightened in Finance Act (FA) 2012 with the introduction of the 'fixed value' and 'pooling requirements' we have today (CAA 2001 s187A): -
Fixed Value: - This is designed to encourage Buyers (taxpayers and non-taxpayers) from April 2012 to get s198 elections (or disposal value statements) from Sellers who are entitled to claim and agree disposal values (the fixed value) in writing or appeal to Tribunal for a determination. No election or statement results in Buyer(s) automatically being restricted to nil.
Pooling: - If a Seller is entitled to claim allowances on the ‘fixtures’ from April 2014 and fails to do so, future owners are automatically restricted to nil.
Both these measures are designed to protect HM Treasury and ease the burden on HMRC in compliance with its primary aim of ‘not paying out more than once on the same asset’, or not at all when a taxpaying Seller fails to claim.
Not All Sales Require a S198 Election
The challenge for HMRC is that not every asset is owned by a taxpayer and sales between (or from) non-taxpayers can frequently fall outside CAA 2001 s187A because the Seller is not entitled to claim. There also remains some legacy claims for certain ‘integral features’ introduced in Finance Act 2008 where no past owner was entitled to claim.
In 2019, HMRC also lost an important decision on a long standing dispute into fixtures purchases under the ‘old rules’ (sales pre FA 2012) where the Seller’s £2 disposal value bared no relation to the disposal value they were 'required to bring into account' under CAA 2001 s196/s562 using the Valuation Office Agency (VOA) formula guidance. HMRC lost its long-standing argument on symmetry between Seller disposal and Buyer claim values and was left on the hook for paying out twice on the same assets.
So, whilst most asset deals will not require specialist capital allowances valuations there will be legitimate circumstances where one is needed; most notably: -
Scenario | Reason |
Acquisitions from a developer. | Developers not normally entitled to claim. |
Acquisitions from non-taxpayer(s) always owned property. | Non-taxpayers cannot claim, and Buyers must verify this. |
Acquisitions form a series of non-taxpayer owners back to 24 July 1996. | Non-taxpayers cannot claim, and Buyers must verify this. |
Acquisitions form a non-taxpayer who has substantially altered the property since acquisition post April 2012. | Substantial alterations create case for a new restricted claim. |
Acquisitions from a non-taxpayer who purchased the property before 2012 (CAA 2001 s187A). | Old rules with high burden of proof on past owners entitlement. |
Acquisitions from taxpayer who bought the property before April 2008. | Potential 'overage' claim on certain 'integral features' with evidence. |
A market value disposal event. | CAA 2001 s187A only applies to the defined disposal events (not all). |
A dispute between taxpayers to agree a reasonable apportionment or appeal to Tribunal. | Rare because most parties reach a commercial agreement on the s198 value as part of the wider deal. |
In every scenario, HMRC will require evidence to support with reference to tax legislation and legal documents.
Tax and Surveying Expertise are Frequently Intertwined
Much of the claim will rely on the interaction of tax legal entitlement and surveying judgement for dealing with asset restrictions, novel designs or complex ownership/occupation, so make sure whoever prepares your claims has the right combination of skills needed.
There remains a surprising number of firms offering these types of capital allowances claims with no formal valuation, estimating or even tax qualifications so as well as a strong track record, look for capital allowance’s experts or teams in firms with respected qualifications (e.g. RICS, ATT, CIOT etc.) in both tax and surveying because HMRC will bring these skills together to scrutinise your claim.
And remember, just as two builders are unlikely to give you matching quotes for that house extension do not expect the VOA to tie in exactly with your own, the most important question is often – what is ‘just and reasonable’?
What Accountants and Tax Advisers Need to Know
Advisers are central to guiding businesses through compliance checks and HMRC’s scrutiny often extends to reviewing how advisers supported the accuracy of any claims made.
Long gone are the days of summary capital allowances reports with only high-level details on claim assumptions or valuations and you should expect to see full details of entitlement, ownership and claim history with a valuation basis for all claims made.
If you have any doubts about the ability to provide the details requested in the Schedule of Information or defend the assumptions in a report you should raise these concerns with your clients and capital allowances adviser immediately.
You should also bear in mind that some of the information included in the above schedule will need to be managed carefully. For example, CPSEs are not normally legally binding and can cover a wide range of tax issues, not just the capital allowances.
Also, be mindful to check whether your accountant or tax adviser outsources this work to others where there is no direct contact or engagement (e.g. white labelling) to make sure responsibilities for liability, compliance, record keeping and dealing with any compliance checks are all clearly understood.
Don’t be afraid to ask an adviser to justify their claim assumptions or discuss the content of their report. Be wary of anyone who is reluctant or says "we’ve always done it this way" or "we have a 100% track record with HMRC" – times are changing.
Anyone familiar with working with us will be aware that our capital allowances reports already include full details on entitlement, ownership history, tax law restriction application and valuation basis reflective of VOA methodology.
We operate under the principle of full disclosure and discuss each claim with our clients, including their tax team or advisers, in advance of submission to make sure everyone is comfortable. We also keep detailed electronic records to support.