Everyone knows that tax returns must be filed within certain time limits to avoid penalties and if you wish to benefit from reliefs like capital allowances you must include them in a relevant return. But, what if you have missed or never fully explored your tax claims because of your underlying tax-paying position.
There are many good reasons why businesses do not investigate their full entitlement to capital allowances and related relief. For example, trading losses and other legitimate tax deductions (e.g. interest) that have reduced taxable profits to nil.
To what extent the governments new ‘corporate interest restriction’ will have on the tax profile of large real estate transactions previously modelled on such a strategy remain to be seen.
Human behaviour
Whenever you investigate the tax strategy of a business it is wise to speak to the stakeholders in conjunction with robust data analysis. At some point in the process, it will have been a person that has made the decision to claim (or not) a particular asset class.
This often results in a pattern of treatment that is not immediately obvious from the data sets which can be extrapolated.
Successful claims are an iterative process based on a thorough understanding of both data and human decision making. A business that consistently disregards a modest invoice or expenditure category (e.g. general works) can quickly find its disallowance increase over the years to many hundreds of thousands of pounds (and in some cases millions).
Expenditure profiling
Identifying large elements of non-qualifying expenditure is not difficult. Getting a broad understanding of what work was also carried out at the relevant time is also relatively straight forward but, getting sufficient detail to make claims and satisfy HM Revenue & Customs is a very different matter.
Chances are the business did not analyse it in the first place because the qualifying details were not immediately obvious.
This is where a combination of tax, surveying, numerical and technology skills are needed to efficiently work in partnership with the business to deliver value and avoid wasting valuable management time.
Time limits for claims
There are time limits for certain types of capital allowances claim; most notably, research and development allowances, first year allowances and the annual investment allowance. However, the most common type of claim (plant and machinery allowances) is devoid of such a limitation.
This is down to the way capital allowances claims are normally made*. The first step in making a claim is to ‘pool’ the expenditure in accordance with CAA 2001 s58. Provided you still own the asset, there is no time limit in when a business can do this ‘initial allocation’. Therefore, in theory, you could ‘pool’ missed qualifying expenditure incurred many years ago.
Once you have ‘pooled’ your expenditure you are required to then make a claim in a tax return for it to be valid. For capital allowances, this will normally be up to 12 months following the statutory filing date. It is this requirement that ensures a business that incurred qualifying expenditure in say 2005 cannot revisit its tax return for that period (i.e. you are bound to current filing deadlines).
For example, a business with a 31 December year end may still be able to make a claim for unclaimed qualifying capital allowances expenditure in 2005 in an amended tax return for the year ended 31 December 2017.
*the normal claiming provisions are disregarded for Real Estate Investment Trusts.
Inherited upside
Hidden tax claims can not only arise from your own businesses tax strategy but also from others. From a capital allowances perspective, the new owners of a business acquisition will often ‘walk into the shoes’ of its predecessor and therein inherit the historical capital allowances position.
At Furasta Consulting we have significant experience of working with businesses and negotiating retrospective claims with HM Revenue & Customs, often on a purely success-based fee.
If you would like more details, or have any questions, please do not hesitate to contact us.