Property Law Roundup
Welcome to the August issue of Anderson Strathern’s Property Law Roundup.
HM Revenue & Customs is nearing the end of its consultation period on "Capital Allowances for fixtures" which will have an impact on all taxpayers owning or leasing property assets.
As the burgeoning allowances’ advisory industry testifies, capital allowances can provide a valuable tax break for those businesses that invest in fixtures and plant and machinery for business use. Within commercial premises, be they office, retail or industrial, capital allowances available on fixed items can be sizeable. On the list of items that fall under the umbrella of fixtures benefiting from written-down allowances, are hot and cold water systems, comfort cooling units, lifts and other mechanical or electrical items all of which are considered to be integral fixtures within a building.
Under current tax rules, principally contained in the Capital Allowances Act 2001, property owners and investors can claim capital allowances for fixtures bought in the past, provided that the item giving rise to the claim is still owned and used in the business. Consequently, even if a property was bought more than a decade ago, and the owners have not previously claimed capital allowances, they can still put in a claim in the earliest open tax claim period.
The opportunity to submit a claim, well after the date of purchase, not only affords a valuable benefit to those who may have overlooked the original opportunity to make a claim, but also those who may not have had sufficient available profits to make use of the allowances at the time and who, therefore, can opt to retrace their steps and revisit their expenditure at a later date.
It is the potential abuse that can be made of this system and the attendant loss of revenue to the Exchequer which has stirred the current government into action to reform the capital allowances regime for fixtures.
The new proposals
HMRC processes many retrospective claims for capital allowances on fixtures and is concerned about those which may be made without proper due diligence having been carried out. This potentially results in a duplication of allowances claimed and awarded. With the passage of time, the quality of records on the cost or disposal value of fixtures fades and properties can change hands many times over the lifetime of the items attracting claims for allowances. As businesses' records become thinner, it can be extremely difficult for both taxpayers and HMRC to ascertain whether or not capital allowances have been claimed and, if so, at what value.
In light of this, the new mandatory pooling proposals provide that a property owner must make a capital allowances claim and pool the items concerned within a set time period (either one or two years) after purchase of the asset containing the fixtures. If a purchaser does not pool the qualifying expenditure within this period, the taxation relief will be lost forever.
The proposals will also cover past expenditure, which will affect owners and investors who have not yet pooled expenditure incurred on fixtures. These potential claimants will have to make their historic claims within a timescale laid down in the new legislation (either one or two years) after introduction of the new measures - a date as yet to be determined.
Record of agreement
The Government also proposes to introduce a new record of agreement scheme for capital allowances. This record of agreement would set out the value to be attached to fixtures within the property qualifying for capital allowances on a market-value basis upon disposal. At the moment, missives for the sale and purchase of commercial properties normally contain warranties about the amount of allowances that have been claimed and provisions requiring the parties to sign up to a section 198 election to fix a value to the capital allowances within the property when there is a commercial incentive to do so. Most transfers occur at nominal value (to enable the seller to retain the allowances) or at tax written-down value.
There may be interesting issues ahead with the detail of this new proposal. The process of pinning down an accurate market value for fixtures in a property is no easy task – there is little or no real market for a comfort cooling system which has been stripped from a building. Additionally, standard contracts for the sale and purchase of commercial properties may need to be updated to cater for the new record of agreement and how the market value issue is to be addressed.
The end of section 198 elections?
The s198 election regime is considered a pillar of the commercial property sector and although some anomalies or abuses may occur from time to time, sellers, purchasers and professionals involved with transactions are confident and skilled in its proper application.
A s198 election is a legal document signed by the seller and purchaser of a building, in addition to the sale and purchase contract, setting out the disposal value of the plant and machinery fixtures in the property. It enables a seller to avoid any negative impact of having to bring into account a disposal value for those items in excess of their tax written-down value by agreeing a more tax advantageous disposal value with the purchaser. The disposal value that is stated in the election will be binding on the purchaser and HMRC. By agreeing a s198 election value below the tax written-down value or at a nominal value of £1, the seller can effectively carry on claiming capital allowances after the property has been sold. Section 198 elections are particularly useful in situations where a seller sells a property to a body that cannot claim capital allowances - a pension fund, a charity or public body. As these organisations do not pay tax, they cannot make use of allowances and, when selling an asset to one of these organisations, a seller will often fix a value of £1 to fixtures in the property, meaning its capital allowances pool would remain all but intact.
Unsurprisingly, the Treasury is concerned that sellers are retaining allowances and accelerating taxation relief by using the s198 procedure, even though they no longer own the asset and despite the anti-avoidance rules already there in the Capital Allowances Act 2001. The Government also believes that the fixing of a nominal value by a seller (normally £1 in the s198 election) is generally not fair to property purchasers in any event and has mooted the removal of the s198 election altogether. Ministers think that it is unfair because a purchaser who owns and uses the asset in his business which contains the fixtures attracting allowances cannot obtain the benefit of any depreciation allowances on those fixtures.
To address this issue in the current proposal, it is suggested that a minimum amount (probably the tax written-down value) must be used when completing a transaction.
Peter Smith, Partner in our CRE Department comments:
In terms of tax law, you can see the logic in HMRC’s position. These proposals aim to eliminate an anomaly which exists - the claiming of a tax relief long after the appropriate period for claiming a benefit has closed. However, some may argue that the suggested changes come as part of the Revenue's on-going stealth campaign against property owners and investors in this protracted, difficult climate - consider the empty property rate removal proposals south of the border and 5% SDLT on residential properties worth over £1 million in recent times.
Whatever the detail is that transpires from HMRC after the consultation, the thrust of the proposals will impact on all commercial property transactions within the UK. When change comes, sellers, purchasers and their advisers will need to dedicate more time and money to the scrutiny of the allowances position and to procedures that will ensure claims are made within much narrower timescales. What lies ahead is a more limited scheme for claiming allowances and that, in itself, will mean greater professional costs with potentially less return.
When other types of allowances such as Industrial Buildings Allowances were removed, there was a great deal of confusion and last minute adjustment of claims - it may be best to start looking at what can be claimed historically now. Whilst capital allowances may not be the first thing on property people’s radars at the moment, the potential to make some improvement to margins with levers which may not be there in the future should not be overlooked.
If you would like any further advice or guidance, do get in touch.
Details of the proposals are available on HMRC's website accessible here.
Part 8 of the Local Democracy, Economic Development and Construction Act 2009 ("2009 Act") makes a number of changes to the payment and adjudication provisions in Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (the 1996 Act).
The 2009 Act will become law on 1 October 2011 for England and Wales and on 1 November 2011 in Scotland by means of statutory instruments.
The key changes under the 2009 Act are:
Part 2 of the 1996 Act is being extended to cover oral contracts and those that are partly oral and partly in writing.
Contractual clauses allocating, in advance, the whole cost of the adjudicator's fee to one party will become ineffective. The intention is to ensure that adjudication is available to any party to a construction contract as Parliament originally intended.
Correction of Typographical Errors
The adjudicator will be given the power to correct a clerical or typographical error in his/her decision.
Changes to Payment Framework
"Pay when Certified" – the timing or entitlement to payment can no longer be dependent on the issue of a payment certificate linked to the progress or completion of work under another contract in the same supply chain.
"Payment Notices" - the payer must issue a payment notice within 5 days of the payment due date. The payment notice must state the sum due and the basis for the calculation. If the payment notice is not issued within the required timeframe by the payer, then the payee may issue a 'default' payment notice. If the payer fails to make payment or respond to the 'default' notice, the payee may suspend performance of his obligations under the contract.
"Pay Less" Notices – the payer may issue a "pay less" notice when he receives the Payment Notice. This will replace a notice of withholding as previously required. The "pay less" notice must identify the different amount the payer intends to pay and the basis for the calculation. If the payer fails to issue a "pay less" notice, he must pay the amount shown as due in the Payment Notice.
Suspension of Performance
A contractor may suspend all or part of its obligations under the contract as a result of non-payment. In addition, under the 2009 Act, a contractor can recover a reasonable amount for costs and expenses incurred following the exercise of his right of suspension.
Part 8 of the 2009 Act also makes changes to Scottish Ministers' power to exclude certain types of contracts from the operation of Part 2 of the 1996 Act. Agreements entered into under the public finance initiative are, themselves, already excluded from the operation of all of Part II of the 1996 Act. The new rules will also exclude first tier sub-contracts entered into under an excluded PFI contract from the operation of the 1996 Act.
If you would like advice and guidance on the changes coming in, please get in touch with Pat Loftus, Partner in our Construction Team.
Guidance on the Use of Compulsory Purchase: An Analysis of Consultation Responses
The Scottish Government has released a report analysing responses to their consultation on two new circulars offering guidance to authorities with CPO powers on the use of compulsory purchase and the amendment of the Crichel Down Rules. The Crichel Down Rules, in short, require the body that has acquired land by a CPO to give former owners a first opportunity to repurchase the land previously in their ownership provided that it has not been materially changed in character since the CPO acquisition. The circulars are produced as an interim measure while the Scottish Government awaits the recommendations of the Scottish Law Commission on compulsory purchase law in general. The majority of the 410 consultation responses received welcomed the publication, with specific queries raised including the definition of public benefits, human rights compatibility and exploring alternatives to CPOs.
Details are available on the Scottish Government website accessible here.
Making bankruptcy law accessible
The Scottish Law Commission has published its Consultation Paper on the consolidation of the law of bankruptcy. The primary aim of consolidation is to bring earlier enactments on a given subject matter into one statute, making the law more accessible both to practitioners and to those affected by it. Most of the law proposed for consolidation is already contained in a single Act – the Bankruptcy (Scotland) Act 1985. But the Act has been heavily amended in recent years, most notably by the Bankruptcy and Diligence etc. (Scotland) Act 2007. Many of the provisions of the 1985 Act are excessively long and the structure of the Act has become difficult to follow with the result that the Act has lost coherence.
Details are available on the Scottish Law Commission accessible here.
BSD Circular - Recast of the Energy Performance of Buildings Directive 2010/31/EU
The Scottish Government Building Standards Division has issued an information circular, in advance of the proposed consultation next month, on the implications of the recast Energy Performance of Buildings Directive 2010/31/EU. The circular outlines the implications of the recast and offers the initial views of the Scottish Government on action required as a result of the changes in the Directive.
The circular is available on the Scottish Government’s website, accessible here.
This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.