Revenue in no mood to make allowances

Changes to the tax rules governing fixtures in buildings could be bad news for property companies and local authorities. By Roger Trapp

Property investment companies and organisations such as local authorities that do not pay tax could find themselves substantially out of pocket as a result of recent moves by the Inland Revenue, accountants warn.

Philip Feibusch, head of the capital allowances practice at accountants Arthur Andersen, says the anti-avoidance provisions would - if enacted - restrict the availability of capital allowances regarding fixtures in buildings with effect from late last month. They come as draft legislation intended to simplify the rules for claiming capital allowances on the fixtures is published with a view to inclusion in the next Finance Bill.

The intention is to simplify the valuation rules on fixtures included in property disposals and to tighten anti-avoidance legislation. Normally, the sale of fixtures would be determined by writing down the original cost at 10 per cent per annum to create a book value for capital allowances on them, with the seller and the buyer being allowed to decide how much of the sale price is to be allocated to them. The changes, says Mr Feibusch, could be very restrictive and reduce investment incentives for purchasers.

"For example, an investment company buying property over 10 years old may be denied tax relief for fixed plant and machinery, such as lifts and heating, where previously they may have been entitled to allowances of between 20 and 30 per cent of the purchase price," he says.

By restricting the scope of non-taxpayers to benefit from allowances through equipment-leasing deals, they could also hit such developments as hospitals.

Other changes that are now effective are:

Capital allowances for fixtures leased to non-taxpayers are no longer available to equipment lessors who do not have an interest in the land;

Total plant and machinery allowances given on fixtures will be limited to the original cost of the fixture or, where capital allowances were claimed on the fixture for periods before 24 July, cost price to the most recent claimant;

Prevention of the acceleration of capital allowances through the sale of fixtures at less than their written-down value;

Removal of the possibility of claiming more than one type of allowance on the same expenditure, such as plant and machinery allowances and enterprise zone allowances.

Mr Feibusch said the announcements were partly a response to the House of Lords decision in the case of Melluish v BMI, in which allowances on fixtures leased to non-taxpayers were given to equipment lessors. But they also rejected the Inland Revenue's concerns over "various planning schemes and, in particular, the current potential step-up in value of plant and machinery in second-hand properties".

Though the intention of the draft legislation is to simplify the rules in this area, in practice the introduction of new book values could mean that property investors will need to hold more detailed cost information for each property, he adds. "This could prove impractical in many cases where information is not available."

Since the draft law provides for estimates to be made, in many cases there will be negotiations with the Revenue. "Purchasers would also be wise to carry out a capital due diligence excess prior to signing a contract, to identify where allowances are not available or are severely restricted, and whether any form of valuation is required."