Capital allowances and land remediation relief · legislation, case law and published HM Revenue &...

rics.org/guidance

rics.org

RICS HQ

Parliament Square London SW1P 3ADUnited Kingdom

Worldwide mediaenquiries:

e pressoffi [email protected]

Contact Centre:

e [email protected] +44 (0)870 333 1600f +44 (0)20 7334 3811

Advancing standards in land, property and construction.

RICS is the world’s leading qualifi cation when it comes to professional standards in land, property and construction.

In a world where more and more people, governments, banks and commercial organisations demand greater certainty of professional standards and ethics, attaining RICS status is the recognised mark of property professionalism.

Over 100 000 property professionals working in the major established and emerging economies of the world have already recognised the importance of securing RICS status by becoming members.

RICS is an independent professional body originally established in the UK by Royal Charter. Since 1868, RICS has been committed to setting and upholding the highest standards of excellence and integrity – providing impartial, authoritative advice on key issues affecting businesses and society.

RICS is a regulator of both its individual members and fi rms enabling it to maintain the highest standards and providing the basis for unparalleled client confi dence in the sector.

RICS has a worldwide network. For further information simply contact the relevant RICS offi ce or our Contact Centre.

AsiaRoom 2203Hopewell Centre183 Queen’s Road EastWanchaiHong Kong

t +852 2537 7117f +852 2537 [email protected]

AmericasOne Grand Central Place60 East 42nd StreetSuite 2810New York 10165 – 2811USA

t +1 212 847 7400f +1 212 847 [email protected]

OceaniaSuite 2, Level 161 Castlereagh StreetSydney, NSW 2000Australia


Europe (excluding United Kingdom and Ireland)Rue Ducale 671000 BrusselsBelgium

t +32 2 733 10 19f +32 2 742 97 [email protected]

AfricaPO Box 3400Witkoppen 2068South Africa

t +27 11 467 2857 f +27 86 514 0655 [email protected]

Middle EastOffi ce G14, Block 3Knowledge VillageDubaiUnited Arab Emirates


India48 & 49 Centrum Plaza Sector RoadSector 53, Gurgaon – 122002India


United KingdomParliament SquareLondon SW1P 3ADUnited Kingdom

t +44 (0)870 333 1600f +44 (0)207 334 [email protected]

Ireland 38 Merrion SquareDublin 2Ireland


RICS Professional Guidance, UK

1st edition, guidance note

GN 111 /2013

Capital allowances and landremediation relief

Part of the QS & Construction Standards

Capital allowances and land remediationreliefRICS guidance note, UK

1st edition (GN 111/2013)

Published by the Royal Institution of Chartered Surveyors (RICS)

Parliament Square

London

SW1P 3AD

www.rics.org

No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in thispublication can be accepted by the authors or RICS.

Produced by the QS and Construction Professional Group of the Royal Institution of Chartered Surveyors.

ISBN 978 1 78321 023 7

© Royal Institution of Chartered Surveyors (RICS) July 2013. Copyright in all or part of this publication rests with RICS. No part of thiswork may be reproduced or used in any form or by any means including graphic, electronic, or mechanical, including photocopying,recording, taping or web distribution, without the written permission of RICS or in line with the rules of an existing licence.

Typeset in Great Britain by Columns Design XML Ltd, Reading, Berks

Contents

Acknowledgments 1RICS guidance notes 2

Introduction 4

Part 1: Capital expenditure 61 General principles (Level 1 – Knowing) 7

1.1 Types and rates of relief ............................................................................................................... 71.1.1 Plant and machinery allowances ........................................................................................ 71.1.2 Business premises renovation allowances ......................................................................... 81.1.3 Flat conversion allowances................................................................................................. 91.1.4 Research and development allowances ............................................................................. 91.1.5 Industrial buildings allowances ........................................................................................... 101.1.6 Agricultural buildings allowances........................................................................................ 10

1.2 Business types that can benefit................................................................................................... 111.3 Property types .............................................................................................................................. 111.4 Transaction types ......................................................................................................................... 12

2 Practical application (Level 2 – Doing) 132.1 Entitlement to claim capital allowances generally ....................................................................... 132.2 Claims for construction expenditure ............................................................................................ 142.3 Claims for purchases of second-hand property .......................................................................... 162.4 Regular update and review of legislation, case law and HMRC practice................................... 182.5 HMRC and VOA manuals............................................................................................................. 18

3 Practical considerations (Level 3 – Doing/Advising) 193.1 Construction expenditure ............................................................................................................. 193.2 Second-hand purchases .............................................................................................................. 203.3 General ......................................................................................................................................... 20

Part 2: Land remediation relief 224 General principles (Level 1 – Knowing) 23

4.1 Finance Act 2001 rules ................................................................................................................ 234.2 Corporation Tax Act 2009 rules – general ................................................................................... 244.3 Corporation Tax Act 2009 rules – derelict land ........................................................................... 244.4 Interaction with the Environmental Protection Act 1990 ............................................................. 254.5 Interaction with landfill tax ........................................................................................................... 254.6 Key contaminants......................................................................................................................... 254.7 ‘Polluter pays’ principle................................................................................................................ 25

CAPITAL ALLOWANCES AND LAND REMEDIATION RELIEF | iii

5 Practical application (Level 2 – Doing) 265.1 Entitlement to claim land remediation relief................................................................................. 265.2 Claims for land remediation expenditure ..................................................................................... 265.3 Regular update and review of legislation, case law and HMRC practice................................... 275.4 HMRC and VOA manuals............................................................................................................. 27

6 Practical considerations (Level 3 – Doing/Advising) 286.1 Claims for land remediation expenditure ..................................................................................... 286.2 General ......................................................................................................................................... 28

iv | CAPITAL ALLOWANCES AND LAND REMEDIATION RELIEF

Acknowledgments

RICS would like to thank the following for their contributions to this guidance note:

Technical author:

Steven Bone (The Capital Allowances Partnership Ltd)

Black Book working group:

Chair: Andrew Smith (Laing O’Rourke)

Alpesh Patel (APC Coach Ltd)

Christopher Green (Capita Symonds Ltd)

David Cohen (Amicus Development Solutions)

Duncan Cartlidge (Duncan Cartlidge Associates)

Jim Molloy (Department of Health, Social Services and Public Safety NI)

John G Campbell (BAM Construction Limited)

Kevin Whitehead (McBains Cooper Consulting Limited)

Michael T O’Connor (Carillion Construction Limited)

Michelle Murray (Turner & Townsend plc)

Roy Morledge (Nottingham Trent University)

Stuart Earl (Gleeds Cost Management Limited)

Matthew Saunders (RICS)

CAPITAL ALLOWANCES AND LAND REMEDIATION RELIEF | 1

RICS guidance notes

This is a guidance note. Whererecommendations are made for specificprofessional tasks, these are intended torepresent ‘best practice’, i.e. recommendationswhich in the opinion of RICS meet a highstandard of professional competence.

Although members are not required to followthe recommendations contained in the note,they should take into account the followingpoints.

When an allegation of professional negligenceis made against a surveyor, a court or tribunalmay take account of the contents of anyrelevant guidance notes published by RICS indeciding whether or not the member had actedwith reasonable competence.

In the opinion of RICS, a member conformingto the practices recommended in this noteshould have at least a partial defence to anallegation of negligence if they have followedthose practices. However, members have theresponsibility of deciding when it isinappropriate to follow the guidance.

It is for each member to decide on theappropriate procedure to follow in anyprofessional task. However, where members donot comply with the practice recommended inthis note, they should do so only for a goodreason. In the event of a legal dispute, a courtor tribunal may require them to explain whythey decided not to adopt the recommendedpractice. Also, if members have not followedthis guidance, and their actions are questionedin an RICS disciplinary case, they will be askedto explain the actions they did take and thismay be taken into account by the Panel.

In addition, guidance notes are relevant toprofessional competence in that each membershould keep themselves up to date and shouldhave knowledge of guidance notes within areasonable time of their coming into effect.

This guidance note is believed to reflect caselaw and legislation applicable at its date ofpublication. It is the member’s responsibility toestablish if any changes in case law orlegislation after the publication date have animpact on the guidance or information in thisdocument.

2 | CAPITAL ALLOWANCES AND LAND REMEDIATION RELIEF

Document status defined

RICS produces a range of standards products. These have been defined in the table below. Thisdocument is a guidance note.

Type of document Definition StatusStandardInternational Standard An international high level principle based

standard developed in collaboration withother relevant bodies

Mandatory

Practice StatementRICS practicestatement

Document that provides members withmandatory requirements under Rule 4 of theRules of Conduct for members

Mandatory

GuidanceRICS Code of Practice Document approved by RICS, and endorsed

by another professional body/stakeholderthat provides users with recommendationsfor accepted good practice as followed byconscientious practitioners

Mandatory orrecommended goodpractice (will beconfirmed in thedocument itself)

RICS Guidance Note(GN)

Document that provides users withrecommendations for accepted goodpractice as followed by competent andconscientious practitioners

Recommended goodpractice

RICS Information Paper(IP)

Practice-based information that providesusers with the latest information and/orresearch

Information and/orexplanatory commentary


Introduction

This guidance note introduces the subjects ofcapital allowances and land remediation relief.

Capital allowancesCapital allowances are a group of UK incometax and corporation tax reliefs that are availableto businesses for capital expenditure. Capitalexpenditure creates an asset or advantage withenduring benefit and is usually recorded as afixed asset on the balance sheet in the financialaccounts. Examples are expenditure upon land,buildings and equipment.

A basic rule of UK taxation is that capitalexpenditure cannot be written off for taxpurposes. Therefore, any depreciation shown inthe financial accounts must be added back totaxable profit when the tax computation isprepared. However, instead tax relief is givenvia the capital allowances system. This gives atax deduction in lieu of depreciation, underrules put in place and endorsed by successivegovernments. These permit tax relief for assetsapproved by government, at rates controlled byit. In essence, capital allowances are intendedto compensate a business with tax relief for thewear and tear, or loss in value, of its fixedassets. Capital allowances are also used bygovernment as an investment incentive toencourage businesses to spend money onassets that are desirable for policy reasons.

The principal legislation is the CapitalAllowances Act 2001 (CAA 2001), althoughrelevant statute is to be found elsewhere, forexample, in various Finance Acts. There is alsoan extensive body of case law dating from theend of the 19th century.

Land remediation reliefLand remediation relief was introduced in 2001as an urban regeneration measure. It is a UK

corporation tax relief for expenditure incurredto clean up contaminated land and buildings. Itis not a type of capital allowance but has asimilar effect.

The principal legislation is the Corporation TaxAct 2009 (CTA 2009).

General notesThis guidance note is written for charteredsurveyors who are not capital allowances orland remediation relief specialists. It thereforecovers the subject in general terms only. It isnot an attempt to provide specialist knowledge;neither is it any substitute for the relevantlegislation, case law and published HMRevenue & Customs (HMRC) and ValuationOffice Agency (VOA) practice, or more detailedtexts on the subject.

Importantly, any surveyor adopting bestpractice should recognise that capitalallowances and land remediation relief practiceis tax advice, which extends beyond simplyproviding copies of documentation that havebeen produced for other purposes. This guideis no substitute for properly considered advicefrom a competent and experienced capitalallowances or land remediation relief specialistor other tax professional. Surveyors shouldavoid the danger of straying into an area that isbeyond the scope of their expertise and shouldrecognise when and what type of specialistassistance might be required. A failure to usereasonable skill and care by a surveyor canresult in adverse consequences for thetaxpayer, including the time and cost of anunwelcome HMRC enquiry and the impositionof penalties. Surveyors should think carefullybefore providing capital allowances or landremediation relief advice, and seek appropriateassistance if necessary. That advice could belimited to advising the client to seek specialistassistance. It is also essential that the


surveyor’s professional indemnity insuranceprovides adequate cover for this type ofadvice.

Jurisdictions outside the UK have their ownequivalent systems of relief, and the variousinternational rules permitting tax deductions forcapital expenditure are commonly referred toas tax depreciation. This guidance focuses onthe UK rules. For property located outside theUK or owned by a business that is not liable toUK tax, care should be taken to determinewhich jurisdiction is applicable.

Guidance is given under the followingheadings, which map to the Assessment ofProfessional Competence (APC):

+ General principles (Level 1 – Knowing)

+ Practical application (Level 2 – Doing)

+ Practical considerations (Level 3 – Doing/Advising).


Part 1: Capital allowances


1 General principles (Level 1 – Knowing)

1.1 Types and rates of reliefThere are various types of capital allowances.They all have the same objective of permittingtax relief for capital expenditure. However, theyfocus on different assets and the detailed rulesdiverge.

The main types of capital allowances aresummarised below.

1.1.1 Plant and machineryallowances

These are the most commonly encounteredcapital allowances. They are given for businessexpenditure upon plant and machinery, asdefined for tax purposes.

To be entitled to claim plant and machineryallowances, a taxpayer must:

+ have a qualifying activity and

+ incur qualifying expenditure.

A qualifying activity is a UK taxpayingbusiness, such as a trade (for example, makingor selling things with a view to profit), propertyinvestment, or a profession or vocation.Qualifying expenditure is money spent on plantor machinery for business purposes that thetaxpayer owns or is deemed to own for capitalallowances purposes.

Fixtures are assets installed or fixed in or to abuilding or land so as to become, in propertylaw, part of that building or land. Whethersomething is a fixture is a matter of real estatelaw, which is beyond the scope of thisguidance note. However, the answer dependson considering the method and degree ofannexation (broadly, how it is fixed) and theobject and purpose of annexation (broadly,why it is fixed). Establishing the ownership ofplant and machinery fixtures for capitalallowances purposes is complicated andsubject to special rules. These can create a

fictional ownership that overrides property lawfor capital allowances purposes only.

Machinery takes its ordinary, natural meaning.However, plant has a particular meaning,defined in some circumstances by CAA 2001and more generally by case law. Correctlyidentifying plant can be difficult but, inessence, it is business apparatus. This includesmany fixtures within buildings. However, thereis no standard list. This is because whether anasset is plant is context specific and involvescarefully considering the nature of the particularbusiness and how the asset relates to it.Physically identical assets may be plant for onebusiness but not another.

Nevertheless, examples of plant and machineryfor tax purposes can include (among others):

+ sanitary appliances

+ hot and cold water

+ heating, ventilating and air conditioningsystems

+ electrical power and lighting

+ lifts and escalators

+ fire fighting and warning equipment

+ security alarm and camera systems

+ telecommunications and data installations

+ moveable partitions (meeting certainconditions) and

+ external solar shading.

While capital allowances are available for plantand machinery (as defined for tax) withinbuildings, structures or premises, they are notgenerally available for the building, structure orpremises itself. But there are specificexceptions, such as buildings provided fortesting aircraft engines and some moveablebuildings. In this context the terms building,structure and premises have specific legalmeanings. The layperson might recognise themas being broadly equivalent to the ’bricks and


mortar’, or a surveyor might think of them asakin to the envelope or shell. Plant andmachinery allowances are also not available forexpenditure to buy or alter land (except, inappropriate circumstances, where thealterations are for the purpose only of installingplant or machinery).

Plant and machinery allowances are given atvarious rates for different categories of plantand machinery. The tax relief arising (mostcommonly called ’writing down allowances’) isgenerally given on a ’reducing balance’ basis.This means that instead of writing off the samefixed amount every year, a fixed percentage ofthe asset’s remaining value is written off eachtime.

ExampleA plant asset costs £1,000 and may bewritten off for tax at 18 per cent a yearreducing balance. In the first year £180 maybe written off (that is, £1,000 x 18 per cent).And £820 is carried forward to the secondyear (that is, the £1,000 cost less the £180written off). In the second year £147.60 maybe written off (that is, the remaining balanceof £820 x 18 per cent) and £672.40 iscarried forward to the third year (that is, the£820 balance brought forward less the£147.60 written off). And so on.

The rates of relief given change from time totime, but at the time of writing they were asfollows:

+ 8 per cent a year reducing balance –special rate plant and machinery:

– Integral features of buildings andstructures: electrical systems includinglighting; cold water systems; hot waterand heating systems; mechanicalventilation and air conditioning systems;lifts, escalators and moving walkwaysand external solar shading

– Long-life assets: plant and machinerywith an expected useful economic life,when new, of at least 25 years

– Thermal insulation of buildings: addingthermal insulation to existing buildings(to prevent the loss of heat not cold)

– Solar panels

+ 18 per cent a year reducing balance – mainpool plant and machinery:

– Plant and machinery generally: thedefault rate of relief that applies unlessanother rate overrides it

+ Various rates – short-life assets:

– Plant and machinery that might beowned by a business for less than eightyears: the taxpayer can elect to treat itas a short-life asset. If the plant ormachinery is sold or scrapped beforethe eighth anniversary of the chargeableperiod when it was purchased, relief isgiven at that time for any expenditurenot yet written off. Short-life assettreatment is not available for integralfeatures, long-life assets or plant andmachinery owned by a landlord

+ 100 per cent – annual investment allowance(AIA):

– Plant and machinery generally (withsome defined exceptions): the first, butnot necessarily earliest, tranche ofexpenditure on plant and machinerytaken into account when the taxcomputation is prepared for achargeable period. The maximum AIAdepends on when the expenditure wasincurred. In recent years this has been£25,000, £50,000, £100,000 or£250,000. There are complicated rulesto allocate the AIA amount overchargeable periods when the amountchanges

+ 100 per cent – enhanced capital allowances(a type of first-year allowance):

– New (i.e. not used or second-hand)energy-saving and environmentallybeneficial (water-saving and quality-improving) plant and machineryspecified by Treasury Order

– New plant and machinery expenditurein designated assisted areas inenterprise zones

1.1.2 Business premises renovationallowancesThese capital allowances are an urbanregeneration measure, given for expenditure to


renovate business premises, with the intentionof bringing those premises back into use.

The qualifying expenditure may be written offfor tax in full at the time it is incurred.Therefore, a 100 per cent allowance isavailable.

In contrast to plant and machinery allowances,tax relief is given for all capital expenditure on,or in connection with, the conversion,renovation or repairs of qualifying buildings intoqualifying business premises. However,allowances are not given for:

+ the purchase of land or rights over land

+ extensions (except to provide access)

+ developing land beside a qualifying building

+ providing plant and machinery chattels (achattel is a loose, moveable asset; or putanother way, an asset that is not a fixture –see 1.1.1)

+ demolishing existing buildings or

+ property previously used for specifiedbusiness sectors including, among others,fishery, shipbuilding and the coal industry.

A qualifying building is a building that:

+ is situated in a designated disadvantagedarea

+ was unused for at least a year previously

+ has last been used for business purposesor as an office, or offices and

+ has not last been used as, or as part of, adwelling.

A qualifying business premises is a qualifyingbuilding used for business purposes or as anoffice, and which is not a dwelling or part ofone.

1.1.3 Flat conversion allowances

These are another urban regeneration measure.They are given for expenditure incurred toconvert parts of business premises intoresidential flats (typically, flats above shops).Flat conversion allowances are abolished forexpenditure incurred after April 2013.


Unlike plant and machinery allowances, taxrelief is given for all capital expenditure on, orin connection with, the conversion, renovationor repairs of qualifying buildings into qualifyingflats. However, allowances are not given for:


+ extensions (except to provide access)

+ developing land beside a qualifying buildingor

+ providing furnishings or chattels.

A qualifying building is a building that:

+ was built before 1 January 1980

+ has no more than four storeys above theground floor (not counting the attic unless ithas been used as a dwelling)

+ has all or most of the ground floorauthorised for specified business planninguse classes

+ was intended when it was built that theupper storeys were to be used for dwellingand

+ has been unused, or used only for storage,for at least a year previously.

A qualifying flat is a residential flat in aqualifying building that:

+ is suitable for letting as a dwelling and heldfor short-term letting

+ has its own entrance separate from thebusiness premises

+ has four rooms or less (excluding kitchens,bathrooms, closets, cloakrooms or hallwayssmaller than 5m2 in area)

+ is not a high-value flat (by reference to atable of notional furnished weekly rents)and

+ is not let to someone connected to thetaxpayer.

1.1.4 Research and developmentallowances

These allowances are aimed at encouragingbusiness investment in research anddevelopment.



Unlike plant and machinery allowances, taxrelief is given for capital expenditure onbuildings as well as equipment. However,allowances are not given for:


+ the purchase of rights in, or arising out of,research and development or

+ expenditure on a dwelling (unless it is nomore than one-quarter of the cost of thewhole building of which it is part).

The relief is available where a taxpayer carryingon a trade (for example, making or sellingthings with a view to a profit) incurs capitalexpenditure on research and developmentundertaken directly by him or her orsubcontracted to someone else. It is notavailable to taxpayers with other businesstypes, such as property investment or aprofession.

Research and development has the meaninggiven by generally accepted accountingpractice. In practice, this follows publishedgovernment guidelines. These define researchand development as taking place when aproject seeks to achieve an advance in scienceor technology. The activities that directlycontribute to achieving this advance throughthe resolution of scientific or technologicaluncertainty are research and development.

1.1.5 Industrial buildings allowancesIndustrial buildings allowances were introducedafter the Second World War. The objective wasto encourage investment in manufacturingpremises and the like. Enterprise zoneallowances from the 1980s and 1990s were aspecial type of industrial buildings allowancesfor a small number of specially designatedareas.

Industrial buildings allowances were abolishedfrom April 2011. Although they have beenabolished, the buyer of a second-hand propertymay find that their claim for plant andmachinery allowances is nil or restrictedbecause of industrial buildings allowancesclaimed by a previous owner.

In recent years the standard rate of relief was 4per cent a year straight-line. Straight-line reliefmeans that the same fixed amount is written-off each year.

ExampleIf the qualifying expenditure was £1,000,000then £40,000 could be written off each year(that is, £1,000,000 x 4 per cent).

Therefore, an industrial building had a standard25-year tax life at the end of which all tax reliefwas exhausted. However, in the four years priorto abolition the rate reduced on a transitionalbasis by one-quarter each year straight-line.For old-style enterprise zones a 100 per centallowance was available.

In contrast to plant and machinery allowances,tax relief was given for capital expenditure onbuildings and structures. However, allowanceswere not given for:

+ the purchase of land or rights over land or

+ buildings or structures in use as, or as partof, a dwelling-house, a retail shop, ashowroom, an office or a hotel (subject tospecial rules for certain qualifying hotels).

Whether a building qualified for industrialbuildings allowances depended on its use.Industrial buildings or structures were in use forone of a number of business activities,including, among others, manufacturing,processing, and storing goods and materialsfor manufacturing or processing purposes. Alsoincluded were utility undertakings (for example,electricity, water and sewerage) as well astransport and highway undertakings. Hotelsmeeting certain conditions were also deemedindustrial buildings.

1.1.6 Agricultural buildingsallowances

Agricultural buildings allowances wereintroduced at the same time as industrialbuildings allowances. The aim was toincentivise investment in agricultural productionassets.

Agricultural buildings allowances wereabolished from April 2011. Although they havebeen abolished, the buyer of a second-handproperty may find that their claim for plant andmachinery allowances is nil because ofagricultural buildings allowances claimed by aprevious owner.


In recent years the rate of relief was 4 per centa year straight-line. Therefore, an agriculturalbuilding had a standard 25-year tax life at theend of which all tax relief was exhausted.However, in the four years prior to abolition therate reduced on a transitional basis by one-quarter each year straight-line.

In contrast to plant and machinery allowances,tax relief was given for capital expenditure onagricultural buildings, fences or other works.However, allowances were not given for thepurchase of land or rights over land.Agricultural buildings were defined very widelyto include farm houses or cottages, farmbuildings such as barns or sheds, fences andother works such as drainage, water supply,walls, silos and farm roads.

To qualify for agricultural buildings allowancesthe expenditure had to have been incurred by ataxpayer holding the freehold or leaseholdinterest in UK land for the purposes ofhusbandry. Husbandry meant that the businessdepended to a material extent on the fruits,natural or commercial, of that land.

1.2 Business types that canbenefitBroadly speaking, capital allowances areavailable to property owner-occupiers andinvestors who are within the charge to UKincome or corporation tax and are sufficientlyprofitable to have recently paid, or be expectedto pay, income or corporation tax. It is normallyof no consequence whether the business formis a sole trader, partnership or company, etc.

Capital allowances are not available forproperty built or bought with the intention ofsale (that is, trading stock where theexpenditure is recorded on trading account asa current asset on the balance sheet). Undertax law a property trader’s stock is revenueexpenditure, and tax relief becomes availablefor money spent, as an ordinary tax-deductiblebusiness expense, when the property is sold.However, there are limited exceptions to thisgeneral rule. For example, a property tradermay still be able to claim allowances forexpenditure on its own facilities, such as a

head office or depot. In the right circumstancesindustrial buildings allowances could alsosometimes be claimed for expenditure incurredby a property developer or trader. This was arare exception to the principle that capitalallowances are only available for capitalexpenditure.

1.3 Property types

Capital allowances are available for fixtures andchattels in a wide range of property types. Aslong as the taxpayer is liable to UK tax, theproperty can be located outside the UK.

Virtually all business premises contain plantand machinery fixtures. Particularly plant-richproperty types include, among others:

+ hospitality and leisure: public houses,restaurants and hotels, etc.

+ healthcare: care homes, private hospitals,doctors and dentists’ surgeries, etc.

+ motor industry: motor dealers and petrolstations and

+ offices.

Plant and machinery allowances are generallynot available to landlords of residential property(that is, taxpayers with a UK or overseasproperty business, or who lease plant outsideanother qualifying activity). This is becauseCAA 2001 dictates that plant and machineryprovided for use in a dwelling-house cannot bequalifying expenditure. However, other taxreliefs may be available instead. Some placeswhere people live are not considered to bedwelling-houses for tax purposes and thereforecapital allowances are available. Commonexamples include care homes, traditionalstudent halls of residence and furnishedholiday lettings (meeting certain conditions).Also, a block of flats is not a dwelling-house(although the individual flats usually are), socapital allowances may be available for thecommon parts of such premises.

Other targeted reliefs are also available forspecific circumstances already mentioned inparagraphs 1.1.1 to 1.1.6. These include:


+ energy-saving and environmentallybeneficial (water-saving and quality-improving) plant and machinery – enhancedcapital allowances

+ renovating business premises in designateddisadvantaged areas – business premisesrenovation allowances

+ converting parts of business premises intoresidential flats – flat conversion allowances(abolished from April 2013)

+ research and development facilities andequipment – research and developmentallowances

+ industrial buildings and structures –industrial buildings allowances (abolishedfrom April 2011)

+ agricultural buildings, fences and otherworks – agricultural buildings allowances(abolished from April 2011).

1.4 Transaction typesCapital allowances are available for expenditureon:

+ new assets (including new builds,extensions, refurbishments and otheradditions) and

+ the purchase of second-hand property.

To satisfy the ownership condition and claimplant and machinery allowances forconstruction additions (that is, plant andmachinery fixtures comprising part of newbuild, extension or refurbishment projects, etc.)the taxpayer must have an interest in therelevant land at the time the plant andmachinery becomes a fixture, or havecontributed towards the cost of the asset forbusiness purposes (see paragraph 2.2).

For the purchase of second-hand property,plant and machinery allowances may beavailable for freehold acquisitions and thegranting or assignment of a lease (seeparagraph 2.3).


2 Practical application (Level 2 – Doing)

2.1 Entitlement to claimcapital allowances generally

The most fundamental issue when providingcapital allowances advice is to establish thebusiness’ entitlement to claim tax relief (that is,whether it is legally permitted to claim anycapital allowances).

Each type of capital allowance has its owndetailed rules to establish a business’entitlement to claim the relief (see paragraph1.1). These are complicated and change fromtime to time, so it is advisable to review andconfirm these in the context of the taxpayer’sbusiness and the expenditure in question.

Capital allowances are an income tax andcorporation tax relief, so, to benefit directly, theproperty owner should be within the charge toUK tax (that is, not be a non-taxpayer such asa charity, public body or self-invested personalpension). Although capital allowances may bedisclaimed (that is, deliberately deferred), in thevast majority of circumstances they will beused to reduce current period taxable profits.Therefore, to benefit from relief a businessshould also be sufficiently profitable to haverecently paid, or be expected to pay soon, anincome tax or corporation tax bill. Alternatively,claiming capital allowances can create orincrease a taxable loss. Precisely how andwhen taxable losses may be used depends onthe business type. The main distinctions arebetween businesses subject to income tax orcorporation tax, and between tradingbusinesses (for example, those making orselling things with a view to profit) and propertybusinesses (that is, investors). It is alsopossible for companies (not other forms ofbusinesses) to surrender losses arising fromclaiming enhanced capital allowances forenergy-saving and environmentally beneficialassets, in return for a cash payment from the

government (broadly equal to 19 per cent ofthe loss surrendered, subject to upper limits).

However, some property owners who are notwithin the charge to income tax or corporationtax can nevertheless benefit indirectly fromcapital allowances. For example, to protect orenhance the value of its property investment, apension fund or charity may wish to establish avalue for plant and machinery fixtures so that afuture taxpaying buyer can claim allowances onthose fixtures. Also, real estate investmenttrusts (REITs) are property investment vehiclesthat are exempt from corporation tax on theirrental income, and capital gains tax on theirproperty investment activities, but mustdistribute at least 90 per cent of investmentprofits to shareholders. But a REIT’sdistributable profits are calculated inaccordance with UK tax rules so, even thoughit does not pay tax on those activities, it canbenefit significantly from claiming so-called‘shadow’ capital allowances. These reduce theprofits that must be distributed to shareholders.This retains cash that can be reinvested in thebusiness.

The most fundamental tax question is whetherincome or expenditure is capital or revenue.Establishing this is a matter of tax law, which isnot determined by the accounting treatmentfollowed. Capital allowances are given tobusinesses for capital expenditure. A buildingcontractor’s or trading property developer’soutgoings are usually revenue for tax purposes.Therefore, with rare exceptions, capitalallowances are not available for theirexpenditure, although the expenditure cannormally be written off for tax when it isincurred, or when the finished development issold.

Repairs and maintenance building works areoften also revenue expenditure for taxpurposes. Capital allowances are not availablefor such expenditure, which may instead be


written off for tax as an ordinary operatingexpense of the business. However, in HMRC’sview, when repair and maintenance work iscapitalised (that is, the expenditure is recordedin the financial accounts as a fixed asset onthe balance sheet) any tax relief only becomesavailable when depreciation is charged to theprofit and loss account. Put another way, thetax deduction follows the depreciation rate inthe accounts. Capitalised revenue expenditureis sometimes described as deferred revenue.Many property investors do not depreciate theirinvestment property. In such cases, any taxrelief for capitalised repair and maintenancework is likely to be significantly delayed untilthe sale of the property, or a permanentrevaluation below original cost. For tax reasonsit may therefore be advisable to expense (thatis, charge) repairs and maintenanceexpenditure through the profit and loss accountwhen it is incurred. For tax-efficient treatmentto be readily adopted, it may be advisable forsurveyors to consider identifying potentialrevenue expenditure at an early stage (forexample, during cost planning).

Capital allowances must be claimed in a taxreturn. For corporation tax purposes, the basicrule (subject to specific later exceptions) is thata claim may be made or amended within twoyears from the end of the accounting periodwhen the expenditure was incurred. For incometax purposes the deadline is one year after the31 January following the year of assessment.The year of assessment (also known as a taxyear or fiscal year) is the 12-month periodending on 5 April. However, except where rulesbrought in by the Finance Act 2012 apply (seeparagraph 2.3), nothing obliges a taxpayer topool qualifying expenditure (that is, notify it toHMRC) and claim allowances in the chargeableperiod in which the expenditure is incurred.Therefore, a business is free to pool theexpenditure and claim allowances in a laterperiod, as long as the qualifying assets are stillowned and the normal time limits (outlinedabove) are followed for that later period.

A surveyor’s general objectives would normallybe to legitimately:

+ identify as much expenditure as possiblethat qualifies for capital allowances

+ allocate the maximum qualifyingexpenditure to the capital allowances typesthat give the fastest tax relief (sometimes achoice is available) and

+ aim for the capital allowances claim toenable the business to meet its self-assessment obligation to submit a correctand complete tax return and retainadequate records to support this.

2.2 Claims for constructionexpenditureProviding that the client is entitled to claimcapital allowances, relief is available forconstruction additions in the widest sense,including new builds, extensions andrefurbishments.

For construction additions, fixtures belong to abusiness for plant and machinery allowancespurposes as long as that taxpayer has aninterest in the relevant land at the time theplant and machinery becomes a fixture (that is,when a chattel is attached to the land orbuilding). The relevant land is the land orbuilding that the fixture is attached to. Aninterest in land is either:

+ the freehold or its Scottish equivalent, or anagreement to acquire this

+ a lease or its Scottish equivalent, or anagreement to acquire one

+ an easement or servitude, or an agreementto acquire one or

+ a licence to occupy land (which in HMRC’sview must be exclusive).

If expenditure is jointly incurred by two or moretaxpayers with different levels of interests thenthe fixture is treated as belonging only to theparty with the lowest interest. For example, if alandlord and tenant each pay towards the costof an air conditioning asset, then the asset willbe deemed to belong only to the tenant forcapital allowances purposes. However, thelandlord would usually be able to claim capitalallowances for its expenditure under a differentstatutory mechanism that applies tocontributions made towards someone else’sexpenditure.


It is advisable that capital allowances claims forconstruction works are based on detaileddocumentary evidence, as far as practicable.The information available and appropriate willdepend on the procurement route adopted.However, it may typically include, but notnecessarily be limited to, the followingdocuments:

+ contract sum (for example, contract sumanalyses, priced schedules of works, billsof quantities or accepted supplierquotations)

+ final account, including variations

+ payment certificates

+ site plan and architectural drawings

+ performance criteria and specifications

+ financial statements showing expenditurerecorded in the accounts and

+ invoices.

Capital allowances are claimed upon actualexpenditure incurred to carry out theconstruction works. This may include maincontract and subcontracted works, pluspotentially works undertaken directly or in-house by the claimant. It can prove valuable toverify the total expenditure by checking thebusiness’ financial accounts and reconcilingthe cost documentation and capital allowancesanalysis to this.

Nevertheless, it is rare that constructiondocumentation prepared for cost managementof the construction works is sufficiently detailedfor capital allowances purposes. Therefore, it isusual for this information to be supplementedwith a survey and estimates of costs. It isadvisable to undertake the survey in sufficientdetail to identify the plant and machinery,bearing in mind that in HMRC’s view the capitalallowances plant and machinery fixtures ruleswork on an individual asset-by-asset basis. Itcan prove valuable to retain adequate records,including measurements, written notes andphotographs, as appropriate. Estimates of costare normally acceptable to HMRC and the VOAas long as they:

+ are reasonable

+ apply established estimating techniquesand

+ are ideally based on independent cost data,such as that published by the Building CostInformation Service (BCIS) and buildingprice books.

Capital allowances are given for expenditure onthe provision of plant and machinery. Thisincludes transport and installation costs, aswell as an appropriate allocation of related on-costs, such as preliminaries and professionalfees. It is advisable to include these costs asappropriate.

Sometimes third-party funding is receivedtowards the cost of construction works (forexample, a contribution or grant). Capitalallowances are based on the expenditureactually incurred by a business. Therefore,where money has been received the facts needto be considered and, if necessary, the receiptdeducted from the recipient’s qualifyingexpenditure.

To claim accelerated enhanced capitalallowances for energy-saving orenvironmentally beneficial plant and machinery,the asset must be of a description specified byTreasury Order. In most cases this means thatthe equipment must be listed on thegovernment’s Energy Technology List or WaterTechnology List. However, some products,called non-listed products, do not appear onthe Energy Technology List but do still qualifyfor accelerated tax relief. At the time of writingthese are:

+ lighting

+ pipework insulation

+ combined heat and power and

+ component-based automatic monitoringand targeting equipment.

The process for claiming enhanced capitalallowances for non-listed products depends onthe particular technology type but, broadly,depends on meeting specified performancecriteria. The products that qualify for enhancedcapital allowances can, and often do change,with technologies and products being added orexcluded from the scheme. For enhancedcapital allowances to be claimed it is advisableat an early stage to ensure that qualifyingassets are specified. It is also important tokeep evidence to prove that the equipment


qualifies and to substantiate its cost, and forthis to be passed to whoever is responsible forpreparing the building owner’s tax computationand return. Where the qualifying products arecomponents of larger systems it is necessaryto ensure that the amount claimed does notexceed the maximum claim value permitted bythe government.

2.3 Claims for purchases ofsecond-hand property

Providing the client is entitled to claim capitalallowances, relief is available for the purchaseof second-hand property. This includes capitalexpenditure on freehold and leasehold property.

It is prudent to establish the ownership of plantand machinery fixtures for capital allowancespurposes as part of an entitlement reviewprocess. In the case of second-hand purchasesfor plant and machinery allowances purposes,fixtures belong to the freehold owner unlessimmediately after the transaction anotherperson has a prior right. This means thatsomebody else has previously incurred capitalexpenditure on the same fixtures and is alreadyclaiming capital allowances on them. The mostcommon example is a tenant’s trade fixtures.The rules regarding leasehold interests aremore complicated. Capital allowances may onlybe claimed if the capital allowances areassociated with that particular leaseholdinterest. This would either be because thefixtures were installed by a previous holder ofthat lease, or ownership for capital allowancespurposes was passed to the lessee by a taxelection when the lease was granted, or thelessor was not entitled to claim capitalallowances and the fixtures had not been usedfor a qualifying activity by the lessor or anyoneconnected to it. Sometimes statute givesbusinesses a choice of tax treatment andrequires HMRC to be given certain information.A tax election is a formal written notification toHMRC of the tax treatment adopted.

It is advisable to base capital allowancesclaims for the purchase of second-handproperty on relevant documentary evidence.The information available and appropriate will

depend on the particular transaction. However,it may typically include, but not necessarily belimited to, the following documents:

+ sale and purchase agreement, or leaseagreement

+ completion statement

+ pre-contract enquiry questions andresponses relating to capital allowances

+ site plan and architectural drawings

+ financial statements showing expenditurerecorded in the accounts

+ marketing agent’s sales particulars

+ valuation report

+ building survey report

+ title deeds providing evidence of title toland

+ licences for alterations and

+ building specifications.

For the purchase of second-hand property anallocation in the sale and purchase agreementis not binding for capital allowances purposes.

By default a buyer’s capital allowances claim isbased on a just and reasonable apportionmentof the purchase price. This is a specialistvaluation for tax purposes that apportions thepurchase price to reflect the value that eachconstituent part of the property makes to thevalue of the whole property. The RICS Valuation– Professional Standards (Red Book) is not ofmandatory application for this purpose.

The apportionment should be calculated basedon the total expenditure incurred to buy theproperty. It may be helpful to verify this bychecking documentation such as thetransaction completion statement or buyer’sfinancial accounts or both.

Statute does not specify a particular method ofpreparing a just and reasonable apportionment.However, the VOA-endorsed approach isknown as the formula approach and is normallyused. A surveyor is free to depart from theformula approach, but this is used in the vastmajority of circumstances and a surveyorwould need to have strong reasons for usingan alternative basis. An apportionment usingthe formula approach involves undertaking asurvey to identify the plant and machinery and


then calculating a bare site value andreconstruction cost estimate for tax purposes.It is helpful for the survey to be undertaken insufficient detail to identify the plant andmachinery and for adequate records to beretained. These could include measurements,written notes and photographs, as appropriate.It is advisable that replacement cost estimatesare reasonable, apply established estimatingtechniques, and are ideally based onindependent cost data, such as that publishedby BCIS or building price books.

Alternatively, a buyer’s or lessee’s capitalallowances claim for plant and machineryfixtures may be determined by the seller andbuyer agreeing a CAA 2001 section 198 jointelection (or its section 199 equivalent forleases). For any fixtures that are the subjectmatter of an election, the election overrides anapportionment. There are detailed statutoryrules that must be followed for a section 198election to be valid, including a two-year timelimit from the completion date of thetransaction for it to be submitted to HMRC.Whether or not an election is in a buyer’s orlessee’s interests is not straightforward, andelections are often best avoided by buyers.Even if an election is agreed in respect ofassets on which the seller has claimed capitalallowances, it is normal for the capitalallowances value of other plant and machineryfixtures to be established by means of anapportionment.

Additionally, statute contains complicated anti-avoidance rules relating to plant and machineryfixtures. Among other things, these preventdifferent taxpayers claiming capital allowanceson the same fixtures simultaneously, andprevent the value of fixtures being inflatedwhen fixtures change hands. For fixtures onwhich a seller has previously claimed plant andmachinery capital allowances, the rules cap abuyer’s claim at the qualifying expenditureoriginally claimed by the seller. It is importantthat these rules are considered and appliedwhere relevant.

For expenditure incurred (that is, sale andpurchase transactions) before April 2012 capitalallowances can be claimed in any later taxperiod as long as the plant and machinery

fixtures are still owned by the taxpayer in thatlater period (that is, the plant has not beenstripped out or the property sold by then).

After April 2012 the Finance Act 2012introduced new technical requirements to claimplant and machinery allowances for fixtures.These are the fixed value requirement ordisposal value statement requirement, and thepooling requirement. These rules arecomplicated and it is vital that they areconsidered and applied where relevantotherwise neither the buyer nor any futureowner may ever be able to claim capitalallowances on affected fixtures, meaning someexpenditure on fixtures may never benefit fromany tax relief over those fixtures’ lives. Thiscould also damage the market price of affectedproperties.

The fixed value requirement and disposal valuestatement requirement apply for expenditureincurred from April 2012. They only apply toplant and machinery fixtures on which theseller (or an earlier owner since April 2012) hasclaimed capital allowances. These requirementsoblige the buyer to take steps to establish thevalue of those fixtures for capital allowancespurposes within two years of the transactioncompletion date. In the vast majority of normalcircumstances the fixed value requirement willapply. This requires a section 198 (or section199) election, or an application to the TaxChamber of the First-tier Tribunal for anindependent determination. A tribunalapplication can be made unilaterally by eitherthe seller or buyer, although the other taxpayerconcerned is entitled to be joined as a party tothe proceedings. Alternatively, certain writtenstatements may be used where property wasbought from someone who was not entitled toclaim allowances (such as a charity) but did notcomply with these rules at the time. Morerarely, the disposal value statement requirementmay apply in circumstances such as whenproperty is purchased from someone whopreviously ended their business. Fixtures onwhich capital allowances have not beenclaimed previously are not subject to theserequirements and should be valued for capitalallowances purposes by just and reasonableapportionment.


The pooling requirement applies from April2014. Where the seller was entitled to claimcapital allowances, irrespective of whether itactually did, it must pool the expenditure (thatis, notify it to HMRC in a tax return) before thebuyer may claim allowances. Within the normalself-assessment time limits (see paragraph 2.1), the expenditure must be pooled in achargeable period beginning on or before theday when the building was sold or the sellerclaimed a first-year allowance (see 1.1.1) on it,or on any part of it. Because the seller is, ineffect, forced to claim allowances before thebuyer may claim, then the fixed valuerequirement and disposal value statementrequirement also apply. This necessitates asection 198 (or section 199) election, or atribunal application to determine the fixtures’value.

The Finance Act 2012 changes do not apply toassets on which capital allowances could nothave been claimed by the relevant prior owner,for example, because at the time theexpenditure was incurred, they would not havebeen considered to be plant in that owner’shands.

2.4 Regular update and reviewof legislation, case law andHMRC practiceCapital allowances law and practice, such asrates of relief, tribunal and court decisions, andHMRC interpretations, often change. It isadvisable to remain aware of this and ensurethat advice is based on the rules and practicein force at the appropriate time.

2.5 HMRC and VOA manualsHMRC and the VOA publish manuals and otherexplanatory material, but these do not have theforce of law. While they provide usefulguidance and outline the government’s practiceand official view on a particular matter, theyshould be treated with caution. A tribunal orcourt is obliged to apply the law, even wherethis conflicts with HMRC guidance.

A properly informed and advised taxpayer isfree to adopt a different view of the law to thepublished view of HMRC or the VOA. However,to protect against a subsequent discoveryassessment it may be advisable for the taxreturn or accompanying documents to indicatethat a different view has been adopted.Discovery gives HMRC powers to re-open aseemingly agreed tax return up to 20 yearsafter HMRC’s normal time limit, for enquiringinto a tax return, has passed.


3 Practical considerations (Level 3 –Doing/Advising)

This section outlines practical considerationsthat need to be taken into account whenadvising on capital allowances. It is importantthat surveyors do not give advice that isbeyond the scope of their knowledge andexperience, particularly in the area of taxation.

3.1 Construction expenditureA business subject to income tax (for example,a sole trader or partnership) has ten monthsafter the end of the chargeable period whenthe expenditure was incurred to submit its taxreturn, and a further year to make or amend acapital allowances claim. A company has ayear to submit its return, and another year tomake or amend a capital allowances claim.Therefore, there can routinely be a considerabledelay between expenditure being incurred andthe relevant tax return being prepared andsubmitted to HMRC. However, whenconstruction works are being considered it canbe helpful to consider capital allowances asearly as possible.

This provides the opportunity to review theproposed transaction structure to ensure thatcapital allowances will be available to the partythat wishes to claim them.

While design will normally be driven bycommercial or operational needs, rather thantaxation, sometimes there is a choice betweendesign alternatives that have different taxationoutcomes. Early advice allows the design anddocumentation to be optimised for taxpurposes by choosing solutions that qualify fortax relief, or benefit from accelerated relief. Forexample, specifying energy-saving orenvironmentally beneficial plant and machineryqualifying for enhanced capital allowances willaccelerate the tax relief compared to non-greenassets. This is because relief is available at 100

per cent instead of at 8 per cent a yearreducing balance – see paragraph 1.1.1 and2.2. In most cases unless assets that are listedon the government’s Energy Technology List orWater Technology List are specified andinstalled then no enhanced capital allowanceswill be available. If the issue is ignored until thetax return is prepared then the opportunity willbe lost.

Appropriate documentation may be producedto support and assist preparation of the capitalallowances claim, for example, by confirmingthe purpose of particular expenditure, ordescribing it in a way that accurately presentsits true features for taxation purposes.Sufficiently detailed cost information may alsobe made available to efficiently support amaximised capital allowances claim.

An alternative to preparing a bespoke detailedcapital allowances claim is to use a systems-based approach (for example, pro-forma orinformation technology solution) to capture thequalifying expenditure in the right format inadvance. This can be particularly suitable whena business carries out regular programmes ofwork on a portfolio of similar properties. It isadvisable to ensure that the system capturesand appropriately categorises all expenditure. Itis also prudent to include training and supportfor the people who will input the informationinto the system, as well as a review andreconciliation mechanism (for example, at theend of the project or chargeable period). Also,systems can soon become outdated, so it canprove valuable to periodically check proceduresto ensure that they continue to be based onup-to-date law and practice.

For large programmes of regular, similar workanother option is to base the capitalallowances claim on a detailed analysis ofexpenditure in a sample of those properties. If


this approach is used, surveyors arerecommended to follow HMRC guidelines onsampling as a basis of claim, in particular, toensure that the result is statistically valid toHMRC’s satisfaction.

3.2 Second-hand purchasesAdequate due diligence is necessary to applythe anti-avoidance rules relating to plant andmachinery fixtures. This is usually dealt with bythe seller completing the Commercial PropertyStandard Enquiries – General pre-contractenquiries for all commercial propertytransactions form (CPSE.1). This is availableonline from Practical Law Company. Someconveyancing advisers use their own in-houseversions. It is helpful if such due diligence iscompleted thoroughly, and sensible answersare necessary. Nevertheless, the availability ofdetailed capital allowances information issometimes limited. Take particular care in suchcircumstances. Sometimes HMRC may acceptestimated figures to apply the restrictionsrequired by statute. In such cases it isadvisable that estimates are reasonable, applyestablished estimating techniques, and areideally based on independent cost data, suchas that published by BCIS or building pricebooks.

Different capital allowances rules apply to plantand machinery fixtures and chattels (that is,loose plant and machinery). These assetsshould be identified separately. Whether assetsare chattels or fixtures is a matter of propertylaw and surveyors should be careful not to giveadvice that is beyond the scope of theirexpertise.

During second-hand property transactions theavailability of CAA 2001 section 198 (or section199) elections means that capital allowancescan become a commercial matter, which is thesubject of negotiation. In such circumstancesthe seller’s and buyer’s interests are usuallyopposed. The seller may wish to retain some,or all, of the capital allowances (despite sellingthe assets) by agreeing a low election amount.In this case, it is generally prudent for the sellerto signal this intention as early as possible (forexample, in the sales particulars, or heads of

terms, or both). In contrast, unless theproposed election amount broadly reflects theseller’s original expenditure qualifying forcapital allowances, a buyer’s interests are oftenlikely to be best served by avoiding an electionentirely and instead seeking a tribunaldetermination. Elections are subject tonumerous technical, tactical and practicalconsiderations and should be advised on withcare. Also, when advising during transactionnegotiations about capital allowances, effectivenegotiation skills are important. The process ofnegotiation is beyond the scope of thisguidance note.

3.3 GeneralCapital allowances are income tax andcorporation tax reliefs and can interact withother taxes. Be mindful of other areas of taxthat may require consideration. This can becomplex. Potential interactions include valueadded tax (VAT), capital gains tax (CGT) andstamp duty land tax (SDLT).

HMRC has wide-ranging powers. It may checkany tax return (that is, open an enquiry or so-called investigation). This includes askingquestions, reviewing documentation andinspecting premises to establish whether thetax return is correct and complete. Where inHMRC’s view this self-assessment obligationhas not been met, it can assess the tax that itconsiders should have been due and chargeinterest and penalties for inaccuracies. Returnsare selected for enquiry on a random basis.They may also be selected, for example,according to risk, or where significant tax is atstake, or where HMRC suspects thatsomething might be wrong. Ordinarily HMRCcan query a capital allowances claim within 12months of the tax return due filing date.However, where there has been inadequatedisclosure, or careless or deliberate conduct bythe business or someone acting on its behalf(such as a surveyor) this can be extended untilup to 20 years after the end of the tax period.

A business also has a self-assessmentobligation to keep records to enable it tosubmit a correct and complete tax return. Formost income tax purposes the general rule is


that records must be retained until the fifthanniversary of the 31 January next followingthe year of assessment. For corporation taxpurposes the equivalent timeframe is six yearsfrom the end of the relevant accounting period.Therefore it is advisable to retain a thoroughaudit trail to reconcile the capital allowancesclaim to the original documentation orestimating sources used to prepare the claim.

HMRC routinely enquires into capitalallowances claims. When giving capitalallowances advice, it is worth surveyors beingmindful of taxpayers’ self-assessmentobligations and HMRC’s enquiry powers, andensuring that any advice given, disclosure toHMRC and the surveyor’s working practices(such as document retention) are appropriate.

When HMRC opens an enquiry into a capitalallowances claim, correspondence andmeetings may be necessary to agree the claimwith HMRC and the VOA. Negotiatedconcessions may be needed to reach asettlement, and interest and penalties may beconsidered. Dealing with HMRC enquiries torobustly serve a business’ interests involvesgood negotiation skills and a sound knowledgeof taxpayer’s rights and HMRC’s powers. Theprocess of negotiation, taxpayer’s rights, andHMRC’s powers are beyond the scope of thisguidance note.

Fundamental issues to consider are whether asurveyor has the ability to deal with capitalallowances, and the appropriate professionalindemnity insurance cover. If advice is giventhen a court will take the view that theindividual or organisation giving the advice washolding itself up as having the requisiteknowledge. A court will not apply a lowerstandard to a surveyor who provides advice oncapital allowances because they are not a taxprofessional. Where a person or anorganisation holds themselves up as havingknowledge in a particular area, then the courtwill apply the standard of a reasonablycompetent person appropriately qualified forsuch advice.


Part 2: Landremediation relief


4 General principles (Level 1 – Knowing)

4.1 Finance Act 2001 rules

The Finance Act 2001 (FA 2001) introducedland remediation relief as an urban regenerationmeasure to encourage bringing brownfield sitesback into use. The original rules applied toexpenditure incurred between 11 May 2001and 31 March 2009 inclusive.

The relief is available for expenditure incurredby companies only (not other forms ofbusinesses) to clean up land and buildings thatwere acquired from a third party in acontaminated state. A tax deduction isavailable equal to 150 per cent of theexpenditure incurred. If that deduction resultsin a tax loss the company may surrender theloss and instead claim a tax credit, which canbe repaid to it, equal to 16 per cent of the landremediation loss.

Land remediation relief is available for revenueand capital expenditure. Revenue expenditureis business operating expenses that arenormally charged to the profit and lossaccount. They include a trading propertydeveloper’s expenditure, recorded on thebalance sheet as a current asset, for which taxrelief becomes available at the point of sale.Capital expenditure creates an asset oradvantage with enduring benefit and is usuallyrecorded on the balance sheet as a fixed asset.To claim land remediation relief for capitalexpenditure it is necessary to deem theexpenditure to be revenue* by election inwriting to HMRC within two years of the end ofthe accounting period when the expenditurewas incurred. The time limit for claiming a taxdeduction for true revenue expenditure is alsotwo years after the end of the accountingperiod for which the claim is made. (*Thereason is that land remediation relief is onlygiven for revenue expenditure. But, by makingan appropriate election a taxpayer can deem(that is, create a fiction that) capital expenditure

is revenue. The election means that the capitalexpenditure is treated as revenue expenditurefor tax purposes and so qualifies for landremediation relief, even though its true nature iscapital. Therefore, land remediation relief canbe claimed for genuine revenue expenditureand deemed revenue expenditure, i.e. capitalexpenditure subject to an election.)

The remediation work may be undertakendirectly by the company or on its behalf.

Expenditure qualifies for the relief if it is onemployee costs, materials or payments tosubcontractors.

For the land or building to be classified ascontaminated, this required the presence of‘substances’ in, on or under the land that:

+ caused, or could possibly cause, harm (tothe health of living organisms, interferencewith ecological systems, offence to humansenses, or damage to property) or

+ polluted, or were likely to pollute, controlledwaters (groundwater, streams, rivers andcoastal waters).

Works that qualified included taking any stepsto prevent, minimise, remedy or mitigate theeffects of any harm or water pollution, forexample, removal, containment ordecontamination. This included preparatoryactivity to assess the condition of the land,building or water, unless the remediation workwas not carried out.

Where work was subcontracted to a third partythen the whole of the payment was treated asqualifying for land remediation relief. Wherework was subcontracted to a connected partythen the payment only qualified if, inaccordance with generally accepted accountingpractice, the subcontractor accounted for all ofthe payment and expenditure when calculatingits profit or loss for an accounting period


ending within 12 months after the accountingperiod when the contracting company incurredthe expenditure.

4.2 Corporation Tax Act 2009rules – generalLand remediation relief was rewritten andamended by the Corporation Tax Act 2009(CTA 2009). The revised rules apply toexpenditure incurred from 1 April 2009.

The CTA 2009 rules largely reflect those of FA2001 but differ in some key respects.

The claimant must acquire, or have acquired, a‘major interest’ in land in the UK for thepurpose of a UK property business (that is,property investment) or trade (for example,making or selling things with a view to profit). Amajor interest is the freehold (or its Scottishequivalent) or a lease of at least seven years,or a remaining term of at least seven yearswhere a lease is assigned. It includes buildingsupon the land.

The meaning of contaminants was widenedfrom ‘substances’ to ‘something’ (seeparagraph 4.6) in, on or under the land thatcauses, or results in a serious possibility of,relevant harm.

Relevant harm means:

+ death of living organisms or significantinjury or damage to living organisms

+ significant pollution of controlled waters(groundwater, streams, rivers and coastalwaters)

+ a significant adverse impact on theecosystem or

+ structural or other significant damage tobuildings or other structures or interferencewith buildings or other structures thatsignificantly compromises their use.

It also became necessary for the land to havebecome contaminated as a result of industrialactivity. Industrial activity includes, but is notlimited to:

+ mining and quarrying

+ manufacturing

+ supply of electricity, gas and water and

+ construction.

This does not mean that the site must havebeen in use for an industrial activity. It simplymeans that the contamination must be presentas a result of an industrial activity (such as theconstruction of the building), even where thepremises was used for some other activity.

Contamination resulting from the presence ofliving organisms or decaying matter derivingfrom them (except Japanese knotweed) wasalso excluded.

Where work is subcontracted to a third partythen the whole of the payment is treated asqualifying for land remediation relief. Wherework is subcontracted to a connected partythen the payment only qualifies if thecontracting company has actually paid thesubcontractor and, in accordance withgenerally accepted accounting practice, thesubcontractor accounted for all of the paymentand expenditure when calculating its profit orloss for an accounting period ending within 12months after the accounting period when thecontracting company incurred the expenditure.

4.3 Corporation Tax Act 2009rules – derelict landThe CTA 2009 also widened the scope of therelief to include remediating land that wasacquired in a derelict state. To be classed asderelict the land must not be in a productivestate (economically or socially, includinghousing or recreation, etc.) and must be unableto be put into productive use without theremoval of buildings or other structures. Theland must have been derelict since 1 April1998. HMRC will accept the National Land UseDatabase and Scottish Vacant and DerelictLand Survey as evidence of whether land isderelict. However, land does not have to berecorded in these data sources to qualify. Otherevidence may be acceptable. For example,local media articles, insurance companyinformation or empty property business ratesclassification may be suitable to demonstratedereliction since April 1998. Similarly, theselling agent’s marketing particulars or apurchase survey may show that the land wasderelict at the time of acquisition.


Works that qualify include preparatory worksand the removal of:

+ post-tensioned concrete heavyweightconstruction

+ building foundations and machinery bases

+ reinforced concrete pile caps

+ reinforced concrete basements or

+ redundant below-ground services.

4.4 Interaction with theEnvironmental Protection Act1990The land remediation relief legislation refers toland in a contaminated state. This differs fromthe term ‘contaminated land’ used in theEnvironmental Protection Act 1990 (EPA 1990),Part IIA. It is possible that land can becontaminated for land remediation reliefpurposes but not be contaminated for thepurposes of the EPA 1990.

4.5 Interaction with landfill taxLandfill tax is a tax on the landfill disposal ofwaste at licensed sites and is charged by theweight of the disposed material. Landremediation relief can be claimed on the costof transporting waste to a landfill site and anycharges levied by the site operator. However,land remediation relief is not available for thepayment of landfill tax itself.

4.6 Key contaminantsBy way of illustration, common contaminantsinclude oil, petrol, diesel, asbestos andJapanese knotweed.

The FA 2001 used the term ‘substances’. Asubstance was defined as any natural orartificial substance, whether in solid or liquidform or in the form of a gas or vapour. Thisincluded naturally occurring gases such asradon. Until 23 November 2008 HMRC took theview that life-forms were not substances.However, from 24 November 2008, toaccommodate remediating Japanese knotweed

contamination, HMRC changed its view toaccept that a plant could be a substance.

In the CTA 2009, providing that thecontamination is present as a result ofindustrial activity, the relevant terminology iswidened to ‘something’. This includes theremoval of radon and arsenic. It does notinclude water (for example, high groundwater)or air but may include pollutants present inwater or air, nor does it include contaminationresulting from the presence of living organismsor decaying matter deriving from them (exceptJapanese knotweed). Therefore, for example,burial sites, animal waste and naturallyoccurring hydrocarbons do not qualify.However, hydrocarbons deriving from thedistillation of coal or the cracking of crude oil,such as petrol or diesel, are sufficiently remotefrom the living organisms, so do qualify for therelief.

4.7 ‘Polluter pays’ principleA fundamental principle for land remediationrelief is that the polluter pays. This means thatthe relief cannot be claimed by a company, oranyone connected to it, that caused thepollution through anything it did or failed to do.This can include contamination spreading orworsening, and applies even if, at the time theaction was taken, it was standard practice inthat industry and not considered to becontamination.


5 Practical application (Level 2 – Doing)

5.1 Entitlement to claim landremediation relief

The most fundamental issue when providingland remediation advice is to establish thebusiness’ entitlement to claim tax relief (that is,whether it is legally permitted to claim any landremediation relief).

Land remediation relief is corporation tax relief,so it is advisable to confirm that the claimant isa company that is within the charge to UK tax(that is, not a non-taxpayer such as a charity,public body or self-invested personal pension).If the company is to benefit from the enhancedtax deduction it should also be sufficientlyprofitable to have recently paid, or be expectedto pay soon, a sufficient corporation tax bill.Alternatively, it may be possible for it to benefitfrom the tax credit that may be repaid to it.

Land remediation relief is available tocompanies for both revenue and capitalexpenditure, but for capital expenditure it isessential that an appropriate tax election isentered into. It is advisable to confirm that thisrequirement is met.

5.2 Claims for landremediation expenditure

Land remediation relief is available for a broadrange of works, including removal, containmentor decontamination, as well as preparatoryactivities.

Land remediation relief claims should be basedon detailed documentary evidence, as far aspracticable. The information available andappropriate will depend on the particularcircumstances. However, it may typicallyinclude, but not necessarily be limited to, thefollowing documents:

+ contract sum (for example, contract sumanalyses, priced schedule of works, bills ofquantities or accepted supplier quotations)

+ final account, including variations

+ payment certificates

+ investigation or survey reports

+ remediation strategy report

+ site plan and drawings

+ performance criteria and specifications

+ financial statements showing expenditurerecorded in the accounts and

+ invoices.

The land remediation relief analysis is based onthe actual expenditure incurred to carry out theremediation works. This may include maincontract and subcontracted works, pluspotentially any works undertaken directly orin-house by the claimant. It is advisable toverify the total expenditure by checking thecompany’s financial accounts, and reconcilingthe remediation cost documentation and landremediation analysis to this. Special conditionsapply to subcontracted expenditure thatsurveyors are recommended to consider.

The cost of remediation works may include anappropriate allocation of related on-costs, suchas preliminaries and associated professionalfees.

Sometimes third-party funding is receivedtowards the cost of remediation works (forexample, a contribution or grant). Subsidisedexpenditure does not qualify for landremediation relief. Therefore, where money hasbeen received the facts need to be consideredand, if necessary, the receipt deducted fromthe taxpayer’s expenditure. If, however, theexpenditure is greater than the subsidy or grantreceived, then the balance of expenditure canqualify. This can be worth considering.


5.3 Regular update and reviewof legislation, case law andHMRC practiceLand remediation law and practice sometimeschanges. It is advisable to remain aware of thisand ensure that advice is based on the rulesand practice in force at the appropriate time.

5.4 HMRC and VOA manualsHMRC and the VOA publish manuals and otherexplanatory material, but these do not have theforce of law. While they provide usefulguidance and outline the government’s practiceand official view on a particular matter, theyshould be treated with caution. A tribunal orcourt is obliged to apply the law, even wherethis conflicts with HMRC guidance.

A properly informed and advised taxpayer isfree to adopt a different view of the law to thepublished view of HMRC or the VOA. However,to protect against a subsequent discoveryassessment it may be advisable for the taxreturn or accompanying documents to indicatethat a different view has been adopted.Discovery gives HMRC powers to re-open aseemingly agreed tax return up to 20 yearsafter HMRC’s normal time limit for enquiringinto a tax return has passed.


6 Practical considerations (Level 3 –Doing/Advising)

This section outlines practical considerationsthat need to be taken into account whenadvising on land remediation relief. It isimportant that a surveyor does not give advicethat is beyond the scope of their knowledgeand experience, particularly in the area oftaxation.

6.1 Claims for landremediation expenditureWhen remediation works are being consideredit can be prudent to consider land remediationrelief as early as possible.

Adequate due diligence is necessary toestablish the business’ entitlement to claimland remediation relief. This is usually dealtwith, in part, by the seller completing formCPSE.1 (see paragraph 3.2), although someconveyancing advisers use their own in-houseversions. In the light of this information it isadvisable that the transaction is structured toensure that land remediation relief is available,for example by ensuring that the acquirer is acompany. Take particular care in joint venturearrangements, or where connected parties areinvolved. For example, land remediation relief isnot available where the land is contaminated orin a derelict state, wholly or partly, by anythingthat has been done or not been done by thepotential claimant company or anyoneconnected to it. It is also not available wherethe polluter or a connected party retains aninterest.

The works that can qualify for land remediationrelief are broad. It is not always obvious thatworks will qualify, and surveyors shouldrecognise when specialist assistance isrequired.

Where a subsidy or grant is received that is notallocated to particular items of work then itshould be allocated in a just and reasonableway.

6.2 General

Land remediation relief is a corporation taxrelief and can interact with other areas oftaxation. Be mindful of other areas of tax thatmay require consideration. This can becomplex. For example, land remediation reliefis not available if a capital allowance has been,or may be made, in respect of the expenditure.Also, capital expenditure on qualifying landremediation is not an allowable deduction forCGT purposes, so land remediation relief maybe partially or fully clawed back if the propertyis sold.

HMRC may check any tax return (that is, openan enquiry or so-called investigation). Thisincludes asking questions, reviewingdocumentation and inspecting premises toestablish whether the tax return is correct andcomplete. Where in HMRC’s view this self-assessment obligation has not been met, it canassess the tax that it considers should havebeen due and charge interest and penalties forinaccuracies. Returns are selected for enquiryon a random basis. They may also be selected,for example, according to risk, or wheresignificant tax is at stake, or where HMRCsuspects that something might be wrong.Ordinarily HMRC can query a land remediationrelief claim within 12 months of the tax returndue filing date. However, where there has beeninadequate disclosure, or careless or deliberateconduct by the business or someone acting on


its behalf (such as a surveyor), this can beextended until up to 20 years after the end ofthe tax period.

A business also has a self-assessmentobligation to keep records to enable it tosubmit a correct and complete tax return. Forcorporation tax purposes the timeframe is sixyears from the end of the relevant accountingperiod. Therefore it is advisable to retain athorough audit trail to reconcile the landremediation relief claim to the originaldocumentation or estimating sources used toprepare the claim.

HMRC routinely enquires into land remediationrelief claims. When giving land remediationrelief advice it is worth surveyors being mindfulof taxpayers’ self-assessment obligations andHMRC’s enquiry powers, and ensuring that anyadvice given, disclosure to HMRC and thesurveyor’s working practices (such asdocument retention) are appropriate.

When a HMRC enquiry is opened into a landremediation relief claim, correspondence andmeetings may be necessary to agree the claimwith HMRC or the VOA. It is possible that

negotiated concessions may be necessary toreach a settlement, and interest and penaltiesmay be considered. Dealing with HMRCenquiries to robustly serve a business’ interestsinvolves good negotiation skills and a soundknowledge of the taxpayer’s rights and HMRC’spowers. The process of negotiation, acompany’s rights, and HMRC’s powers arebeyond the scope of this guidance note.

Fundamental issues to consider are whether asurveyor has the ability to deal with landremediation relief, and appropriate professionalindemnity insurance cover. If advice is giventhen a court will take the view that theindividual or organisation giving the advice washolding itself up as having the requisiteknowledge. A court will not apply a lowerstandard to a surveyor who provides advice onland remediation relief because they are not atax professional. Where a person or anorganisation holds themselves up as havingknowledge in a particular area, then the courtwill apply the standard of a reasonablycompetent person appropriately qualified forsuch advice.


rics.org/guidance

rics.org

RICS HQ

Parliament Square London SW1P 3ADUnited Kingdom

Worldwide mediaenquiries:

e pressoffi [email protected]

Contact Centre:

e [email protected] +44 (0)870 333 1600f +44 (0)20 7334 3811

Advancing standards in land, property and construction.

RICS is the world’s leading qualifi cation when it comes to professional standards in land, property and construction.

In a world where more and more people, governments, banks and commercial organisations demand greater certainty of professional standards and ethics, attaining RICS status is the recognised mark of property professionalism.

Over 100 000 property professionals working in the major established and emerging economies of the world have already recognised the importance of securing RICS status by becoming members.

RICS is an independent professional body originally established in the UK by Royal Charter. Since 1868, RICS has been committed to setting and upholding the highest standards of excellence and integrity – providing impartial, authoritative advice on key issues affecting businesses and society.

RICS is a regulator of both its individual members and fi rms enabling it to maintain the highest standards and providing the basis for unparalleled client confi dence in the sector.

RICS has a worldwide network. For further information simply contact the relevant RICS offi ce or our Contact Centre.

AsiaRoom 2203Hopewell Centre183 Queen’s Road EastWanchaiHong Kong

t +852 2537 7117f +852 2537 [email protected]

AmericasOne Grand Central Place60 East 42nd StreetSuite 2810New York 10165 – 2811USA


OceaniaSuite 2, Level 161 Castlereagh StreetSydney, NSW 2000Australia


Europe (excluding United Kingdom and Ireland)Rue Ducale 671000 BrusselsBelgium

t +32 2 733 10 19f +32 2 742 97 [email protected]

AfricaPO Box 3400Witkoppen 2068South Africa

t +27 11 467 2857 f +27 86 514 0655 [email protected]

Middle EastOffi ce G14, Block 3Knowledge VillageDubaiUnited Arab Emirates


India48 & 49 Centrum Plaza Sector RoadSector 53, Gurgaon – 122002India


United KingdomParliament SquareLondon SW1P 3ADUnited Kingdom

t +44 (0)870 333 1600f +44 (0)207 334 [email protected]

Ireland 38 Merrion SquareDublin 2Ireland


RICS Professional Guidance, UK

1st edition, guidance note

GN 111 /2013

Capital allowances and landremediation relief

Part of the QS & Construction Standards

Capital allowances and land remediation relief · legislation, case law and published HM Revenue &...

Documents

Transcript of Capital allowances and land remediation relief · legislation, case law and published HM Revenue &...