When businesses purchase assets they normally use finance, it makes sense to conserve your cash and spread the purchase cost over the life of the asset, but how will you choice impact on whether you can claim Capital Allowances, Annual Investment Allowance or Enhanced Capital Allowances.
You can claim capital allowances when you buy assetsthat you keep to use in your business, for example:
business vehicles, for example cars, vans or lorries
You can deduct some or all of the value of the item from your profits before you pay tax.
So clearly buying assets without finance or with a business loan is fine as you will definitely own the asset.
The normal assumption is that a vehicle bought under a HP agreement will become the property of the hirer once the final payment is made at the end of the lease period.
Section 67 Capital Allowances Act 2001 (CAA 2001) allows the capitalisation of the entire expenditure on the vehicle from delivery, providing the asset was in business use at the end of the chargeable period.
However, if a payment is not made and the vehicle is not acquired then it is treated as having been disposed of by s67(4).
Under any other finance arrangement it will depend on whether the vehicle is owned or not, usually the documentation will confirm the position but a PCP is considered to be an HP arrangement with a balloon payment. If the end payment is not paid and the option to purchase not taken then that is a disposal and thus a clawback of the allowances claimed.
Contract Hire and Leases
Contract Hire will not pass ownership to hirer so they are not eligible for Capital Allowances.
But the hire costs will normally be tax deductible and generally 50% of car hire VAT can be reclaimed.
Until the 2010-11 tax year, relief against general income could be claimed to the extent the loss was due to furnished holiday lettings. This is not available for tax years 2011-12 onwards, see PIM4130. Losses of a furnished holiday lettings business may now only be carried forward to use against future profits of that same furnished holiday lettings business.
Where a customer claims loss relief against general income, they must take the full amount of the loss available up to the amount of their general income. They can’t opt to take a smaller amount, either they claim for the full loss or they claim for none (ITA07/S121).
HMRC have recently confirmed their view that common areas in Houses of Multiple Occupation (HMO) are parts of a “dwelling house” and ineligible for capital allowance claims.
Claims relating to Houses in Multiple Occupancy:
We are aware that some taxpayers have submitted claims for plant and machinery allowances in respect of shared parts of houses in multiple occupation (such as hallways, stairs, landings, attics and basements within the houses). They contend that these shared areas are not part of the dwelling-house and that allowances are therefore available. We disagree with this position. If you come across such a claim, please notify the Capital Allowances single point of contact for your area.
The capital allowance legislation specifically denies tax relief for plant and machinery installed in a dwelling house. However, plant and machinery installed in the common areas such as hallways, stairs and lift shafts, in blocks of flats would qualify as the flats themselves are the dwellings, not the building as a whole.
Expenditure incurred on the provision of plant or machinery ‘for use in’ a dwelling-house is not qualifying expenditure for an ordinary property business, an overseas property business or the special leasing of plant or machinery.
This would seem inconsistent with the HMRC view on HMOs and there may be a test case on the interpretation, particularly as there is no definition of “dwelling house” in the tax legislation. There is also a lack of clarity concerning the status of University Halls of residence where there is often substantial expenditure on plant and machinery in common areas.
Furnished Holiday Lets although a holiday home is a ‘dwelling house’, providing the conditions are met to meet the Furnished Holiday Let (“FHL”) legislation, capital allowances can be claimed CA20025 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk). FHL are deemed as ‘trading’ for tax purposes. The restriction for claiming capital allowances on dwellings (CAA2001 35) is therefore NOT applicable to FHL’s.
The plug-in grant has been around for several years as an incentive to purchase electric vehicles to curb climate change. The grant has been modified many times, but it currently offers £2,500 off of eligible low-emission cars and up to £16,000 for larger vehicles.
You do not need to apply for the grant. The car dealer will include the grant in the vehicle’s price if it is eligible.
Cars: CO2 emissions of less than 50g/km and can travel at least 112km with zero emissions. The car must cost less than £35,000 and be on the list of government approved vehicles. The grant will pay for 35% of the car price up to £2,500.
Grants for vehicle charging points
In addition to the plug-in grant, you can also receive up to £350 towards the cost of a vehicle charging point. The Electric Vehicle Homecharge Scheme (EVHS) provides up to 75% of the installation cost on domestic properties in the UK.
There is also the Workplace Charging Scheme (WCS) which is a voucher based scheme that provides support to businesses who install vehicle charging points.
Both grants need to be applied for from the government’s website.
HMRC Advisory Fuel Rate
The advisory electricity rate for fully electric cars is 4p per mile.
So you can claim 4p per mile for business miles in an electric car.
Commercial Vehicles are tax efficient which ever option you choose and provided your employees agree to minimal private use they won’t have to pay any benefit in kind tax on using the vehicle.
But its important to make sure the vehicle you choose is actually a van and not classed as a car. For example double cab pick ups are extremely popular and it makes a big difference whether a double cab pick up is treated as Car or a Van for tax purposes, in summary:
Benefit in Kind on Cars is linked to CO2 where as on a Van its Flat Rate (and could be zero if your private use is insignificant)
Vans qualify for the Annual Investment Allowance, Cars have restricted Capital Allowances
You can reclaim VAT on Vans but its much harder to reclaim VAT on cars
HMRC have some guidance in EIM23150….
Under this measure, a double cab pick-up that has a payload of 1 tonne (1,000kg) or more is accepted as a van for benefits purposes. Payload means gross vehicle weight (or design weight) less unoccupied kerb weight (care is needed when looking at manufacturers’ brochures as they sometimes define payload differently).
Under a separate agreement between Customs and the Society of Motor Manufacturers and Traders (SMMT), a hard top consisting of metal, fibre glass or similar material, with or without windows, is accorded a generic weight of 45kg. Therefore the addition of a hard top to a double cab pick-up with an ex-works payload of 1,010 kg will convert the vehicle into a car (net payload reduced to 965 kg). Under this agreement, the weight of all other optional accessories is disregarded. HMRC has also adopted this treatment.
A double cab with a payload in excess of 1000kg can still be classified as a car if the taxman dealing with the case decides it is a car. You may have to justify a genuine business need for the vehicle.
Annual Investment Allowance
Since January 2016 the Annual Investment Allowance has been permanently set at £200,000, which means the first £200,000 you spend on assets, including Commercial Vehicles (vans), will be offset against your tax bill immediately. This applies to both the self employed and companies.
So if the buy your van, even if you get with a loan or on hire purchase, you should be able to make a big tax saving in the first year.
However, just remember that when you sell the vehicle there will be a balancing charge for tax, basically this means that the total tax offset will be the purchase price less residual value.
If you have already used up your AIA you will still be able to claim Capital Allowances.
If you lease the vehicle you can not claim AIA or Capital Allowances as you don’t own the vehicle.
If you buy the vehicle you will be entitled to full VAT refund, if you lease it you can reclaim the VAT on each Lease Payment (which slows down the recovery of VAT).
If you buy the Van when you later sell it you must charge VAT on the sale price.
Cash flow might be a reason to choose a lease as its likely the deposit will be less than if you get a loan or HP.
If you need different vehicles for different staff at different times, leasing might be a good flexible option.
When you carryout out a refurbishment or Fit Out of your business premises you will be entitled to Capital Allowances.
Here is quick summary of the main types of allowance.
Business Premises Renovation Allowances
BPRA gives incentives to bring back into business use derelict or business properties that have been unused for at least one year. It gives an allowance of 100% for certain expenditure you incur when converting or renovating unused business premises in a disadvantaged area.
BPRA started on 11 April 2007 and ends on:
• 31 March 2017 for Corporation Tax
• 5 April 2017 for Income Tax
To qualify for BPRA, you must incur qualifying expenditure.
Qualifying expenditure is capital expenditure you incurred when you:
• convert a qualifying building into qualifying business premises
• renovate a qualifying building that is, or will be, a qualifying business premises
• repair qualifying business premises
Integral features are:
• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading
You can claim for fixtures, eg:
• fitted kitchens
• bathroom suites
• fire alarm and CCTV systems
You can claim if you rent or own the building, but only the person who bought the item can claim.
Annual Investment Allowance
The Allowance is set at up to £200,000 from January 2016
You can only claim AIA in the period you bought the item.
The date you bought it is:
• when you signed the contract, if payment is due within less than 4 months
• when payment’s due, if it’s due more than 4 months later
If you buy something under a hire purchase contract you can claim for the payments you haven’t made yet when you start using the item. You can’t claim on the interest payments.
If you don’t want to claim the full cost, eg you have low profits, you can claim part of the cost as AIA and part using writing down allowances. You can do this at any time as long as you still own the item.
If your business closes, you can’t claim AIA for items bought in the final accounting period.
Enhanced Capital Allowance
100% capital allowances can be obtained for expenditure on environmentally beneficial technology. This enables businesses to write off the whole capital cost against their profits in the year in which the expenditure is incurred and therefore to obtain valuable tax relief which can improve cashflow.
What doesn’t count as plant and machinery
You can’t claim capital allowances on:
• things you lease – you must own them
• buildings, including doors, gates, shutters, mains water and gas systems
• land and structures, eg bridges, roads, docks
• items used only for business entertainment, eg a yacht or karaoke machine
New Tenant – Lease Incentives
New Tenants may get incentives such as rent free periods or reverse premiums. The new accounting rules (FRS102) mean that these incentives are spread over the life of the lease not taken over the period to the first rent review. Spreading these savings out will mean that tenants get a tax advantage as the gain will be less at the beginning of their lease.
Fit Out Finance
Generally funding fit outs is an issue due to the nature of the security.
As the name suggests, Fit-Out Finance is dedicated to funding fit-outs of business premises, including:
• Head Office.
• Fast food outlets.
• Restaurants/retail premises.
Using a blend of hire purchase, lease, unsecured loan and other facilities where appropriate, we are able to fund not just the tangibles, but all manner of tertiary work, from survey through to painting and plumbing.
As previously noted HP and Loans are suitable for tax relief through Capital Allowances.
Here are a couple of examples of how funding can work.
Start Up Fast Food Outlet
Well researched & professional, our client was buying into a well-respected fast food franchise.
Their bank had supported the franchise purchase, but there was a further £75,000 required to fit the premises to franchisor specification.
With the customer’s background and a solid franchise, arranging leasing on equipment was fairly straight forward.
That left a £30,000 shortfall on less tangible works – as there were 2 owners in the business, we were able to secure Start-Up loans to fund the shortfall
The client was a well established, profitable hirer of electrical equipment. Despite being profitable, the business was highly seasonal and therefore cashflow fluctuated wildly.
Most of their funding was done under their roof, being shared between the bank, and the bank’s own finance company, who handled their hire stock.
However, when they approached the finance company, they were confidently informed that racking and mezzanine floors couldn’t be financed; hence they ploughed on, pouring valuable cash into fixed assets.
They had spent over £100,000 on racking etc and were struggling with cashflow to complete the project.
The Funder was able to:
• Release the full value of the assets they had paid for.
• Provide ongoing further funding for a mixed bundle of assets, ranging from a mezzanine floor to bikes used to move around the facility efficiently.
• Provide a £35K term loan to cover intangible costs.
2 Commercial Property should be in a Pension Scheme
Self Invested Personal Pension (SIPP) Schemes and Small Self Administered Schemes (SSAS) can invest in commercial property, no tax on the rental income, no capital gains, you only pay tax when you draw your pension.
You also get tax relief on money paid into your Pension.
3 Claim tax deductible expenses
Claim allowable expenses
Mortgage or Loan Interest (but not capital)
Repairs and maintenance (but not improvements)
Travel costs to and from your properties for lettings or meetings
Buildings and contents insurance
Rent insurance (if you claim the income will need to be declared)
Legal fees relating to eviction
If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year
Claim for repair and advertising expenses incurred in getting the property ready for renting
4 Use a Property Development Company to Save VAT
Property Development is a trade, where as Property Investment isn’t – renting out a residential property is a VAT exempt supply.
If you are planning significant building work, setting up a Development Company or using a building contractor might save VAT.
Your builder may be able to charge you VAT at the reduced rate of 5 per cent if you are converting premises into:
a ‘single household dwelling’
a different number of ‘single household dwellings’
a ‘multiple occupancy dwelling’, such as bed-sits, or
premises intended for use solely for a ‘relevant residential purpose’
As your builder will be VAT registered, they reclaim the VAT they are charged and then charge you VAT at 5%.
If your business is property rental and you do the work yourself, you can’t take advantage of the 5% rate.
If your Development Company is VAT registered you can reclaim all the VAT.
Get your existing business or your property development company to convert the property and then sell it to another company that you own (may be an SPV) will be a VAT Zero Rated transaction. The other company then carries on the rental business.
5 Principle Private Residence Relief and Lettings Relief
Principle Private Residence Relief (PPR) is useful relief that saves you capital gains tax (18% for basic rate tax payers and 28% for higher rates tax payers) on your main residence.
You may also qualify for lettings relief after you have moved out.
6 Give away your Property in Stages
As long as the home you give away is your main home, Capital Gains Tax won’t be payable.
However, if you give away a second home, Capital Gains Tax may be payable if the property has increased in value between when you first owned it and when you gave it away.
If you sell your second home and give the money to your children, the gift won’t be included in your estate for Inheritance Tax purposes, provided you live for 7 years after you make the gift.
It is possible to to gift property in stages.
Your solicitor will draw up the required documents to conveyance a percentage of the property and register the transactions with the Land Registry.
In order to calculate the capital gain you will need to know the acquisition cost and any reliefs such as PPR.
Giving away your property in stages could save you from having to pay capital gains tax.
7 Claim Capital Allowances and Claim Tax Relief on Integral Features
FA2008 introduced a new classification of integral features of a building or structure, expenditure on the provision or replacement of which qualifies for WDAs at the 10% special rate. The new classification applies to qualifying expenditure incurred on or after 1 April 2008 (CT) or 6 April 2008 (IT).
The rules on integral features apply where a person carrying on a qualifying activity incurs expenditure on the provision or replacement of an integral feature for the purposes of that qualifying activity. Each of the following is an integral feature of a building or structure –
an electrical system (including a lighting system),
a cold water system,
a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system,
a lift, an escalator or a moving walkway,
external solar shading
Only assets that are on the list are integral features for PMA purposes; if an asset is not one of those included in the list, the integral features rules are not in point.
However, Plant and Machinery includes….
other building fixtures, such as shop fittings, kitchen and bathroom fittings
Many businesses have never claimed capital allowances for these items.
8 Consider Joint Ownership
If you own property personally you could double up your tax free Capital Gains Tax Allowance if you switch to owning property jointly with your spouse.
9 Check if you qualify for relief from ATED
Most residential properties (dwellings) are owned directly by individuals. But in some cases a dwelling may be owned by a company, a partnership with a corporate member or other collective investment vehicle. In these circumstances the dwelling is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’.
ATED is a tax payable by companies on high value residential property (a dwelling).
There are reliefs that might lead to you not having to pay any ATED. You can only claim these by completing and sending an ATED return.
A dwelling might get relief from ATED if it is:
let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
open to the public for at least 28 days per annum, if part of a property is occupied as a dwelling in connection with running the property as a commercial business open to the public, the whole property is treated as one dwelling and any relief will apply to the whole property
part of a property trading business and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
part of a property developers trade where the dwelling is acquired as part of a property development business the property was purchased with the intention to re-develop and sell it on and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
for the use of employees of the company, for the company’s commercial business and where the employee does not have an interest (directly or indirectly) in the company of more than 10%, the employee’s duties must not include services for any present or future occupation of the property by someone connected with the company, the relief is also available where a partner in a partnership does not have an interest of more than 10% in the partnership
a farmhouse, if it is occupied by a qualifying farm worker who farms the associated farmland, a former long-serving farm worker or their surviving spouse or civil partner
a dwelling acquired by a financial institution in the course of lending
owned by a provider of social housing
10 Take dividends this tax year
When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try our Dividend Calculator to see how much difference it could make.
Dividend tax rates before April 2016
Effective dividend tax rate
Basic rate (20%) (and non-taxpayers)
Higher rate (40%)
Additional rate (45%)
This will change from April 2016, see the table below
Dividend tax rates after April 2016
Effective dividend tax rate
Tax Free £5,000
Basic Rate Tax Payers (20%)
Higher Rate Tax Payers (40%)
Additional Rate Tax Payers (45%)
The new rules are easier to follow, the 10% tax credit in the current rules is hard for most people to follow.
While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.
The cost of a web site is analogous to that of a shop window. The cost of constructing the window is capital; the cost of changing the display from time to time is revenue. (BIM35870)
UITF Abstract 29
Set out 4 key areas of cost:
Planning – P&L
Application and infrastructure development – Tangible Fixed Asset
Design costs – P&L
Content costs – P&L
HMRC also have some useful information on software in CA23410
Computer software qualifies for PMAs if it is not already plant.
Computer software is not defined in the capital allowance legislation. You should treat computer programs of any type and data of any kind as computer software. Computer programs range from operating systems like Windows to games like Solitaire. There may be no physical asset because software is sometimes transferred by electronic means, for example it may be downloaded over the Internet. Software acquired that way is also plant.
A person may acquire a right to use or otherwise deal with computer software. If so, the right and the software to which it relates are plant. Treat the person as owning the plant while the person is entitled to the right.
Capital Allowances and the Annual Investment Allowance can be claimed against Plant including software.