HMRC announced on Friday 12^th August, that with immediate effect that a certain loophole within the Capital Allowances Legislation will be closed.

This relates to s.230 of CAA2001 as part of the Anti-Avoidance provisions as set out in the Act, and more specifically relates to Allowances are claimed in transactions between manufacturers and suppliers of qualifying plant & machinery and those it may enter into a Hire purchase or lease agreement with.

This restriction of will have no impact on Capital Allowances claims for Plant & Machinery for our MULTILET – HMO, FURNISHED HOLIDAY LET or COMMERCIAL property clients.

Therefore the past, present and future CA claims for our clients are unaffected.

You will all be aware that the subject of Capital Allowances is indeed a deep and complicated one, and this update in rules demonstrates that it is an ever changing subject.

More information regarding this announcement can be found here:-

http://www.hmrc.gov.uk/budget-updates/march2011/index.htm#12Aug11

http://www.hmrc.gov.uk/budget-updates/technote-12-aug.pdf

http://www.hmrc.gov.uk/budget-updates/hmrcstatement-12Aug.pdf

Please feel free to contact us on the details below, if there are any further questions.

Many thanks

Arthur Kemp

t 0845 467 2765
m 07595 398 781
e ak@exactbusiness.co.uk

CAPITAL ALLOWANCES – GENERAL

The items which qualify as assets for HMO / Multi-let properties, Commercial and existing FHL Properties have not changed and tax relief CAN STILL be claimed on your property.

HMO / MULTI-LET PROPERTIES

HMO Owners can still claim between 8% – 20% of the purchase price of the property in allowances, depending on purchase date. The tax relief is available against any taxable income.

COMMERCIAL PROPERTIES

Commercial property Owners can still claim between 15% – 50% of the purchase price of the property in allowances, depending on purchase date and type of commercial use. The tax relief is available against any taxable income of the owner.

WRITING DOWN ALLOWANCES

It was confirmed that the overall rate of Writing Down Allowances will reduce from 20% and 10% (for long life assets) will reduce to 18% & 8% respectively, but not until APRIL 2012.

ANNUAL INVESTMENT ALLOWANCE

It was also confirmed that the AIA limit will reduce from £100,000 as it is currently, to £25,000 from April 2012. Since its introduction in April 2008, at a level of £50,000, the AIA is expected to capture 95% of all companies’ & individuals annual investment.

FURNISHED HOLIDAY LETTINGS

It was forecast within the draft finance bill in December 09, as a result of extensive consultation that the sideways-loss relief for both the trading loss, and the loss attributed to Capital Allowances claims will be clipped. This means that the losses identified can ONLY be used against that property business.

This was confirmed within the budget announcement as coming into effect from April 2011.

Letting thresholds will increase from April 2012.

This means that for the open tax years, 09/10 & 10/11 for CAN claim the loss relief against ANY income stream, but from the 11/12 tax year onwards, this will cease. Although the Capital Allowances can be claimed against the profits of your FHL business instead. Tax relief is still available.

ENTERPRISE ZONES

The chancellor also announced that 21 new enterprise zones have been identified to encourage growth and investment within these potentially deprived areas. Enhances Capital Allowances for PROPERTY INVESTMENTS are able to be claimed within these zones. First 10 zones will be in the urban areas of highest need. A further 11 zones are to follow, including 1 in London.

CAPITAL ALLOWANCES FOR FEED-IN ASSETS

Government will consult in May 2011 on the appropriate capital allowances treatment of expenditure on plant and machinery that attracts tariffs under the feed-in tariffs or Renewable Heating Incentives schemes.

LAND REMEDIATION RELIEF

To be abolished (date to be confirmed by HMRC) – This tax relief at 150% applicable to companies remediating contamination has been scrapped. Contact us for any work undertaken regarding remediation work prior to April 2011.

COMBINING PAYE & NIC

Having announced that the government will consult on the merging of these two taxes and announce over the coming years, this could potentially mean that more tax relief is available for Property owners if the combined levy is as a result of gross income.

GREEN INVESTMENTS

The chancellor announced that ‘New Capital Allowances’ for manufacturing would be available for investment in ‘green / environmental solutions’ from 2015/16.

BUSINESS PREMISES RENOVATION ALLOWANCE

NOT Abolished, but extended for a further 5 years – This relief gives 100% capital allowances for expenditure incurred in converting or renovating unused business premises in certain areas and subject to certain conditions being met. HM Treasury did find it questionable whether the relief acts as an incentive and it has a negligible impact in terms of savings.

FLAT CONVERSION ALLOWANCES

To be abolished (date to be confirmed by HMRC) – This relief gives 100% capital allowances for expenditure incurred in converting empty or under-used space over shops and commercial premises for residential use, subject to certain conditions being met. HM Treasury found it questionable whether the relief acts as an incentive, it is complex and it has a negligible impact in terms of savings

TAX AVOIDANCE

The chancellor announced that although 3 forms of Land Tax Evasion are being scrapped it confirms that Capital Allowances, being a legitimate tax avoidance mechanism as set out by the treasury are a genuine way of reducing your tax bill.

SUMMARY

Capital Allowances can still be claimed on UK Properties. The rate of allowances which can be claimed per year, unless in the year of purchase, will reduce from April 2012.

The biggest impact is those who own FURNISHED HOLIDAY LETTING Properties who cannot now use the losses against general income. The qualifying rules will also change from April 2012.

Full budget :- http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf

For more information and to discuss how this can benefit your portfolio, contact:-

Arthur Kemp

info@hmotax.co.uk

0845 467 2765

07595 398 781

As a result of HM Treasury looking into simplifying the current tax regime for small businesses, which of course has a knock on effect for the property owner, HMRC are looking to abolish the following tax relief’s pertinent to Capital Allowances. These are highlighted below:-

Business premises renovation allowance

This relief gives 100% capital allowances for expenditure incurred in converting or

renovating unused business premises in certain areas and subject to certain conditions being

met. HM Treasury find it questionable whether the relief acts as an incentive and it has a negligible impact in terms of savings.

Flat conversion allowances

This relief gives 100% capital allowances for expenditure incurred in converting empty or

underused space over shops and commercial premises for residential use, subject to certain

conditions being met. HM Treasury find it questionable whether the relief acts as an incentive, it is complex and it has a negligible impact in terms of savings.

Land remediation relief

Where a company acquires contaminated or derelict land from a third party who was

responsible for the contamination, there is enhanced relief for the costs incurred in cleaning up

the land. HM Treasury indicates that the relief is not considered to influence behaviour and is not a

cost effective method of achieving the policy rationale.

Capital allowances – safety at sports grounds

Capital allowances are available for expenditure on safety precautions at certain sports

grounds. As stadiums are mostly considered to be up to the required standards, HM Treasury find the policy rationale is no longer valid, and the relief is unlikely to be claimed in the future.

HM treasury have also considered the much ailed point that Capital Allowances should be replaced by a simpler form of tax deductible depreciation.

It is considered here:-

Capital allowances vs. depreciation

• An issue that was regularly raised with HM treasury as a source of complexity is the calculation of capital allowances. The argument put forward is that allowing depreciation to be tax deductible for small businesses would be a simplification.
• The problem is that the smaller business that this idea has in mind does not routinely prepare accounts of the sort that would show depreciation properly, thus there is rarely a balance sheet.
• However, it was also noted in a number of HM treasury meetings that capital allowances do not pose a significant problem, and businesses would be unlikely to accept this change if it resulted in a greater tax liability.
• In any event, the annual investment allowance (“AIA”) has meant that the smallest businesses can claim a 100% deduction for plant purchases. However, the reduction in the AIA to £25,000 from April 2012 brings this issue back into focus: HM treasury were cited many examples of small businesses whose occasional purchase of a single item of plant such as a tractor or a lorry would exceed the £25,000 limit.
• The actual calculation of capital allowances was suggested by some as causing difficulties in practice. Given the AIA, and tax software, we do not see this as a significant issue, though HM treasury do acknowledge that the regular changes in capital allowance rates in recent years has caused some problems.
• HM treasury would also note an unfairness stemming from the way the capital allowance rates have changed. The rates have changed for both incorporated and unincorporated businesses; companies have had compensation through some reductions in corporation tax rates but there has been no such compensation for the (much larger) population of unincorporated businesses. HM treasury appreciate that such matters are policy issues, rather than simplification matters within the OTS’s strict remit, but HM treasury have to record them given the way they have been brought to our attention.

HM treasury therefore consider that the only policy options are as follows:-

• HM treasury do not think that a blanket move to tax-deductible depreciation should be taken forward.
• However, there is scope to improve the position and help businesses with certainty. These include:

1. As stated in the OTS’s review of tax reliefs report, fix on a level of AIA and keep to it for many years. The changes in limits are a real source of problems for smaller businesses;
2. Consider allowing a small business to split a purchase that exceeds £25,000 over two years if that enables it to utilise otherwise lost AIA; and
3. Develop a process to allow a small business that acquires an interest in a building to identify quickly and agree the plant component of the building.

What does this mean for the discerning property owner?

In the short term, it means that plant & Machinery allowances are not changed. The ‘extra’ more valuable tax relief s are to be scrapped, potentially, and that confirmation of the AIA reducing has been achieved, although a more uniform level should be applied.

Confirmation of how the changes to FHL treatment will be clarified tomorrow.

To speak about these changes or anything else, please call

Arthur Kemp

0845 467 2765

info@hmotax.co.uk

www.hmotax.co.uk

The UK commercial property market picked up in February, producing an improved total return of 0.8% and capital growth of 0.3%, according to CB Richard Ellis’ latest UK Monthly Index. This represents a marginal increase on January’s 0.7% total return, as property yields continued to nudge downwards as a result of continued investor demand. Retail Warehouses had a strong month with a total return of 1.0% and capital growth of 0.5%, although Central London offices remained the strongest performing sub-sector, having outperformed for the duration of the property market recovery, with total returns of 1.5% and capital growth of 1.1% in February.

Another reason to invest in commercial property, is the good levels of Capital Allowances which can be claimed against business profits, property profits or personal income.

Capital Allowances of between 15% & 45% can be claimed on commercial property depending on the type of property in question.

Plant & Machinery Allowances tax Relief:-
Standard items that are claimable as Plant and Machinery include, but is not limited to:
Heating, air conditioning and extract ventilation, Hot water installations, Electrical transformers and switchgear, Emergency lighting, Fire Alarm installations, Power wiring to items of plant and machinery, Specialist lighting – illuminated signs, security lighting, etc, TV and aerial Systems, BMS systems, Generator and UPS systems, Fire fighting equipment, Computer installations, Security installations, Lifts and escalators, Welfare equipment, Catering equipment, Carpeting, Furniture and fittings, Dock levellers, Swimming pools .
Typical allowances as % of investment are given thus:-

Most businesses have an Annual Investment Allowance (AIA) of £50,000 for P&M. This allows them to write off 100 per cent of the cost of the qualifying plant and machinery, up to a value of £50,000, against their taxable profits in a standard accounting period.

On expenditure over this amount, the standard rate of capital allowance is 20 per cent, although there are other rates depending on the type of expenditure. P&M attracts tax relief of between 10% & 100%.

To discuss these or BPRA, ECA’s, FYA, WDA, IBA, s.198 Elections, Tax planning, HMRC negotiations, ABA, HMO’s or any other Capital Allowances related items, please contact the office on 0845 467 2765, or e-mail the Managing Director at info@hmotax.co.uk

Talking at the conservative party spring conference, Mr. Osborne gave more of an insight into the content of the 2011 budget to be announced on the 23^rd March. He stated:-

“In my Budget in less than three weeks’ time we will confront the forces of stagnation that stand in the way of success; bring down the barriers that stop Britain getting back on its feet.” And:-

“The Budget is going to be unashamedly pro-growth, pro-enterprise and pro-aspiration”

Mr. Osborne promised to introduce no less than 10 new enterprise zones to encourage business growth across the country, not just the south east and also hinting that the once great manufacturing base of the UK would be prioritised also.

One could speculate that as before with enterprise zones, 100 per cent of the allowances can be claimed on the cost of constructing industrial and commercial buildings (including offices), and certain purchases of buildings in these designated areas.

One could further speculate that the anticipated reduction of sideways loss relief for FHL’s or indeed the current AIA / WDA rate could be relieved further, therefore encouraging expenditure of a capital nature by property owners.

We look forward to hearing what the chancellor says at the budget announcement on the 23^rd March.

For Mr. Osbornes full speech please see

http://www.conservatives.com/News/Speeches/2011/03/George_Osborne_speech_to_Spring_Forum_2011.aspx

For more comment or to discuss more details regarding Capital Allowances, please call Arthur Kemp on 0845 467 2765 or email info@hmotax.co.uk www.hmotax.co.uk

Issued by 9th December 2010

In the June Budget The Chancellor confirmed that the Government would not repeal the
special tax rules for furnished holiday lettings. Instead, the Budget announced that a public consultation would be held on a proposal to change the existing rules.

On 27 July the Government published “Furnished Holiday Lettings Consultation” which invited interested parties to respond by 22 October.

The proposals were, from April 2011, to:

• increase the minimum period over which a qualifying property is available to let to the public during a year (the “availability threshold”) from 140 days to 210 days;
• increase the minimum period over which a qualifying property is actually let to the public during a year (the “occupancy threshold”) from 70 days to 105 days;
• restrict the use of loss relief from furnished holiday lettings so that losses can only be set against income from the same business.

A total of 229 responses to the consultation were received. Responses came from MPs and MSPs, professional and trade associations, accountants, tax specialists, small businesses and individuals.

The key findings were that the Government found the consultation valuable, and a wide range of thoughtful and informative responses were received. Other findings from the consultation responses were that the proposals would be unlikely to have any material effect on UK tourism. Impact would be likely to be greater for properties in more remote areas. Some commercial businesses with UK properties (up to 25 per cent), particularly smaller businesses, could be excluded by the higher thresholds, particularly the proposed occupancy threshold. Some concern over thresholds camefrom those feeling their circumstances were such that they would never be in a position to meet the revised levels.

As a result of the responses and considering the government’s objectives they have concluded:-

• • to proceed with proposals for restriction of loss relief; (restricted to profits of that income only – no sideways loss relief)
• to proceed with proposals for an availability threshold of 210 days and an
  occupancy threshold of 105 days – but delayed until April 2012.
• to retain the current treatment of capital allowances and capital gains tax reliefs;
• to highlight that all properties within a business can qualify where on average they meet the occupancy threshold;
• to reduce uncertainty and complexity by allowing businesses which meet the
  revised occupancy threshold in one year to elect to be treated as having met it in
  the two following years, providing certain criteria are met.

HMRC issued their Revenue Brief 45/10 “Change of Guidance: meaning of dwelling-house” on 22nd October 2010.

Their previous statement on 29th December 2008 went onto explain, and provide examples of, what was deemed to be dwelling houses for Plant & Machinery purposes. In this particular statement, only the let-able bedrooms of the tenants were deemed to be dwelling houses, therefore Plant & Machinery allowances could be claimed on all other communal areas. This would typically result in a Capital Allowances claim equivalent to 20% of the purchase price. Link to this statement on HMRC website.

The latest briefing statement, issued late on 22nd October 2010 states that:- “A dwelling house is a building, or a part of a building. Its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence.”

It goes onto say:- “HMRC have concluded that the definition based on the presence of the facilities required for day-to-day private existence is a better everyday description.”

As usual, HMRC are vague in their understanding of the tax law, and what are considered to be ‘facilities for day to day private existence’ is not clear though. HMRC mention kitchens and lounge areas, but do not mention communal storage and wash facilities. Although we can easily defend the inclusion of storage and access areas, it would be difficult to argue that bathroom, albeit communal, would not be necessary for day to day private domestic existence.

When considering how it may affect owners of such HMO properties, if property has been purchased between 29th December 2008 and 22nd October 2010, then the original interpretation will stand. For all other purchases the updated guidance will prevail, thus “In relation to capital expenditure incurred on or after 29 December 2008 but before 22 October 2010 HMRC will either accept capital allowances claims in returns made in respect of communal areas on the basis of the view as set out in R&C Brief 66/08”.

Link to HMRC’s 45/10 ruling.

“In relation to capital expenditure incurred before 29 December 2008 claims made in returns for open years and filed before 22 October 2010 relying on R&C Brief 66/08 will also be accepted. So:-
Purchase date Available allowances (% of purchase price)

Overall, whereas previously the Plant & Machinery value would be at least 20% of the purchase price, it has now been reduced to around 7-9%.

Annual Investments Allowances are still available, as is sideways loss relief against other income streams.

Furnished Holiday Lets & Commercial Property Capital Allowances are unaffected by this statement.