Buying, building or refurbishing – are you getting any relief?

The retail and leisure sector may be experiencing improved trading conditions, but it would be fair to say that very few operators are preparing to relax too much when it comes to expenditure.

Why then, when cost efficiencies are indelibly printed at the forefront of every business’ mind these days, are some of the biggest investors in commercial premises in the UK – the owners of shops, cafes, bars, restaurants, and hotels – not geared up to pursue the very significant tax savings that capital allowances offer?

Perhaps it’s because property owners, and indeed many of their advisors, do not fully understand how to identify when capital allowances can be claimed.

Stuart Rivers, managing partner of specialist capital allowance advisors Stuart Rivers Associates, explains…

When you buy long-term assets for your business such as property, you generally cannot deduct the expenditure from your profit and loss account. However, you may instead be able to claim capital allowances on part of the expenditure.

Capital allowances provide a type of tax relief that allows businesses to deduct the cost of certain assets from their taxable profits. This tax relief is generated following capital expenditure on commercial property, for example, when purchasing an old or newly built property, constructing a new property, completing building alterations, extending, and refurbishing a property or for fitting out shell units.

These allowances are available for all businesses and individuals who are liable for tax whether they are sole traders, partnerships or large nationwide PLCs.

Here is a good example of the tax saving these allowances can realise.

We recently analysed part of a growing portfolio of KFC and Starbucks outlets for owner Acky Khan. He has been building new outlets, as well as buying existing units and refurbishing them into KFCs and Starbucks. Allowances in excess of £1m have been generated from a review of the expenditure.

Mr Khan has enthusiastically adopted the principles of capital allowances and is now also looking into how specifying energy efficient plant can benefit him further by accelerating tax relief as well as lowering energy costs.

All operators fitting out their premises whether owned by them or tenanted can benefit from capital allowance assessments and should not be put off by the scale of an undertaking to review their expenditure. It is not always necessary to analyse the expenditure in every unit owned by one business. Retailers who are fitting out in the same corporate style throughout the UK can adopt a simpler approach involving sampling an agreed number of properties.

In the case of Optical Express, we negotiated with HMRC and agreed a percentage of spend to be attributed to capital allowances. This involved analysing Optical Express’s expenditure on a relatively small number of properties compared to their portfolio size and then using this percentage across their portfolio. The benefits of this are savings in fees for the business and certainty as to the level of tax relief over future years for which the agreement is applicable.

Building expenditure isn’t always readily quantifiable. For example, the complex conversion of a listed office building into the multi-million pound 5 star Grand Central hotel in York involved much renovation and had to be carried out at speed. A lot of the work undertaken on a daywork basis, was incidental to the installation of plant and machinery, and qualified for capital allowances. Each month our surveyor went to site to record costs being incurred as they were not identifiable from the building contract documentation. The claim compiled was agreed with HMRC and the total tax relief was equal to 67% of the building expenditure.

It is not just capital expenditure incurred in refurbishment or construction that might be eligible for tax savings, the buying and selling of any commercial property provides tax relief too. For example, if a business spends £2m buying a hotel or retail unit this could well generate circa £500,000 of capital allowances which could be worth £100,000 to a company in tax saving, or £225,000 to an individual paying tax at 45%.

Recent changes in legislation mean that when buying property, capital allowances must now be addressed at contract stage otherwise there is a risk for the buyer that the potential to claim could be lost forever. Nothing is more important therefore, than good advice and proper wording being included in the Sale & Purchase contract.

A client of ours purchased a former manor house hotel for £1,300,000 where the vendor had already claimed capital allowances. Despite that, additional allowances totalling £139,000 were identified and claimed by the buyer. This produced an overall tax saving of £28,000 for the new owner, all of which was saved in the year of acquisition.

We would always urge property owners to act early in obtaining capital allowance advice, as with most things a little forward planning can make all the difference. However, should realisation come late, with this type of tax relief, all may not be lost. In the right circumstances, there may be a claim, but possibly for a much smaller sum than would have been possible with proper planning.

Previously Stuart Rivers Associates reviewed historic property expenditure incurred ten years earlier by Theakstons Brewery at their Masham headquarters and using forensic surveying techniques we were able to increase the existing claim for capital allowances by an additional £250,000. Despite changes to legislations, retrospective claims are still possible for all properties purchased before April 2014.

There are many startling figures bandied around estimating the value of capital allowances that go unclaimed. Whatever the true figure is, we are certain lots of companies are paying unnecessarily large tax bills. So now, more than ever it is worth reviewing commercial property capital expenditure. First to see if there are any tax savings that can be generated from old expenditure and secondly to ensure that capital allowances are not lost in future property purchases.

If you have a query, please feel free to contact us with our contact form or give us a call on 01937 350001.