My daughter has an obsession at the moment with Dua Lipa’s song “New Rules”. It is played on the CD Player so often that I know the lyrics by heart and am, “Talkin’ in my sleep at night, Makin’ myself crazy.”
However, in a strange way, the song did get me thinking about some historical property refurbishments that we reviewed recently, for a few clients.
Could the development process have been done a bit differently or improved allowing the client to claim a higher proportion of the costs as revenue expenditure or even enhanced capital allowances?
Indeed, “Now I’m standing back from it, I finally see the pattern,” i.e. many clients aren’t getting the right advice about how to maximise the tax reliefs on refurbishment projects. So, here’s our top tips for maximising the tax reliefs –
Appoint a specialist adviser
Their knowledge of law, tax and understanding of construction materials and techniques will assist in ensuring any claim is maximised.
Read through the scope of works and spec with your advisor
Do this prior to tendering for the works. The advantage of doing this before commencing the project is two-fold. i) Firstly, it gives you the opportunity of including more items that qualify for tax relief, i.e. capital allowances, rather than items that don’t. Small tweaks to the project brief such as using carpet or linoleum floor finishes instead of wooden flooring may help to maximise tax savings.
A further benefit of reviewing this document is that it offers the client the opportunity to review wording contained within the specification to ensure that what is genuinely a repair is not excluded as a consequence of the specification wording defining items to be improvements. It is also useful where appropriate to specify where a “modern equivalent” item is used as a replacement and thus not excluding any works that could be categorised as “repairs and maintenance”.
Unfortunately, there is no simple test for and no statutory definition or guide of what is determined as capital or revenue expenditure, and this is acknowledged in HMRC’s Capital v Revenue Toolkit. So, you can see why an adviser can be invaluable.
Plan an energy efficient project
Then plan to claim 100% tax reliefs. We often find with historical claims that 100% tax reliefs are lost because although energy efficient equipment has been installed in the property, stage gates haven’t been put in place meaning that adequate checks were missed to ensure that the plant installed still qualified for higher rate tax reliefs.
Basically, if the equipment installed is on the Energy Technology List or Water Technology Lists then it will qualify for a 100% tax deduction in the year the expenditure is incurred rather than the typical 8%. Therefore, stage gate 1 is to identify the opportunities to include qualifying equipment within the project specification and ensure all parties are aware of the requirement to maximise. For example. if you are installing a new boiler, ask your advisor to check that the specific make and model number qualifies for Enhanced Capital Allowances.
Stage 2 ensure clauses are inserted into the building contract that obliges the contractor to install compliant plant or the necessary information to ensure a valid claim for non-listed technologies.
Stage 3 ensure the lists are reviewed before ordering the equipment, to ensure that the equipment has not been removed from the list.
Make good use of CAA2001 section 25
With the refurbishment of an existing building, incidental works to the installation of the plant will be qualifying. Where allowances are claimed by virtue of s25, the capital allowances rules operate as if the incidental expenditure were expenditure on the provision of the plant or machinery. The cost of the incidental works, is treated as part of the cost of the plant or machinery itself and attached to the respective pool i.e. main pool or special rate pools.
- Have you incurred expenditure that may qualify for a 150% deduction? Land Remediation Relief allows businesses to claim relief of 150% of the clean-up cost from corporation tax for contaminated land and buildings, not caused by the company, subject to some provisions too detailed to go into in this short paper.
For example, a company that incurs costs in removing asbestos, will receive a 150% of the expenditure as a tax deduction. This effectively means that their net remediation costs can be reduced by 30%. Land Remediation Relief can therefore be quite a valuable tax relief and should not missed.
- Make sure that you review the tax position shortly after you finish the project There is no time limit for claiming capital allowances on qualifying expenditure. If you have incurred the capital costs, use the asset in your business and still hold the relevant interest in the property you can still benefit from Capital Allowances.
However, the same cannot be said for claiming the 100% deductions available for qualifying repairs or items qualifying for 100% Enhanced Capital Allowances. In these cases, the expenditure must be claimed within 2 years of the accounting year end for companies or 12 months following the submission date for the self-assessment return for income taxpayers.
A similar two-year time limit applies for companies submitting an election to claim a 150% tax deduction for the costs of qualifying remediation works (such as asbestos removal) to land and buildings. It’s a bit longer for a developer.
There are two main benefits of adopting these best practice rules. Firstly, there is the cash flow advantage associated with reducing your tax bill. Secondly, by actively maximising these tax reliefs, you will reduce your overall project costs. This, in turn, has the potential to increase any returns on investment, where the net costs are measured against any rental income received.
So, when undertaking a refurbishment project, it would be wise to remember these rules and make then your “New Rules”. Leaving the last word to Dua “I’ve gotta tell them to myself, Practice makes perfect.”