by Paul Blakeley
Capital allowances on the plant and machinery content of a building have never enjoyed the degree of exposure they deserve. However, of late, more attention has been paid to the benefits available to a taxpayer investing in or using a building in the course of his trade — although it is debatable as to whether tax allowances are maximised.
What is almost completely overlooked, however, is the early consideration of capital allowances during the inception and design stages of a development project. Taking care to ensure that certain instructions are given to consultants, and that relevant facts are documented, will serve to strengthen the taxpayer’s case with the Inland Revenue. Similarly, the incorporation of certain features into the design can have a surprisingly advantageous effect on the availability of capital allowances.
Those of us who have to negotiate regularly with the Inland Revenue, or who spend their bedtime studying tax cases, will begin to isolate several unnecessary weaknesses in the taxpayer’s case. In purchased buildings, where the owner is dependent on the plant as it exists and has to accept circumstances which were created during planning and design by others, there is little choice. However, in buildings which the taxpayer has been instrumental in designing and developing, he is able to learn and profit by the mistakes of others.
Capital allowances planning should, therefore, always be considered, provided it is not detrimental to the design of the building, or its overall advantage is not negated by the cost of its implementation. The best way of illustrating tax planning considerations is by a number of selected examples.
In 1963 the case of Jarrold (Inspector of Taxes) v John Good & Sons Ltd made it clear that demountable partitioning would qualify as plant only if, for trade purposes, there was an intention to demount. A written instruction, therefore, from the building owner at design stage, requesting the architect to specify a particular system of partitioning because of the need to change his office layout for trade purposes, should be considered. Production of this instruction to the inspector of taxes at the appropriate time would strengthen the taxpayer’s case in such a claim.
Further to the foregoing example, there are instances of design features which are now commonplace in buildings used by financial institutions. The high degree of computerisation, which has manifested itself over recent years, has led to an increasing need to house cabling and ductwork in specially designed suspended floors and ceilings. These have been contentious items of claim with the Revenue in the recent past, because it has been argued that they form part of the setting of the building in which the trade is carried on, and not the plant with which the business is carried on. However, early correspondence in connection with the need for specifically designed floors and ceilings with demountability to cope with the changing needs of the taxpayer’s business should reinforce an argument for these parts of a building to qualify as plant.
Inspectors of taxes will often argue that lift shafts are not plant, because they form part of the setting of the building and perform a structural function. The taxpayer’s counter-argument is that lift shafts are an integral part of the lift installation, without which the lift would not function. In order to strengthen this argument it would assist if, wherever possible, a structural engineer could certify that the lift shaft was not a necessary structural element of the building.
While there is never a problem claiming capital allowances on electro-mechanical engineers’ fees, architectural and quantity surveying fees can prove to be more of a problem. It should be possible to ask the various consultants to identify, in their accounts, a specific part of their fee as being directly related to plant and machinery. In this connection it is worth not losing sight of the fact that plant is not just restricted to electromechanical work.
It should also be possible to qualify elements of “structural” work at an early stage if they form an integral part of an item of plant — the supporting structure for heavy air-conditioning equipment, for example. Design-stage correspondence in many similar instances can save considerable amounts of “time-wasting dialogue” when it becomes necessary to debate grey areas with the inspector of taxes.
The cost of “preliminaries and general conditions” in a construction contract is attributable to both allowable and non-allowable items. Therefore, these costs should be apportioned over the contract to ensure that a proportion of the expenditure is correctly attributed to capital allowable items. However, there is often disagreement with some inspectors of taxes over this area of work, probably due to their lack of understanding and the taxpayer’s inability to justify its inclusion adequately. The taxpayer’s case, therefore, could be strengthened by ensuring that the contractor is advised to provide specific information relating to the setting-up costs necessary for those subcontractors with a significant proportion of work involving machinery and plant.
The Finance Act 1974 made expenditure on fire precautions, as a result of a notice served under the Fire Precautions Act 1971, qualify as “plant”. However, it is strange that, without the notice being served, fire precaution work does not qualify.
Design features have already been mentioned as forming an important factor in maximising capital allowances. One such example of this can be illustrated by reference to the 1982 House of Lords decision of Cole Bros Ltd v Phillips (Inspector of Taxes). Here, socket outlets and their associated wiring in a departmental store were, in my view, correctly disallowed, as they were part of the “setting” of the building. However, in situations where wiring was dedicated to specific pieces of plant, such as kitchen equipment, lifts and air-conditioning equipment, it qualified as plant. Experience would therefore suggest that, where there is an option to dedicate wiring to a piece of machinery or plant, there will be a distinct advantage in considering the specific electrical supply to that item.
Other examples of design planning consist of incorporating items which are more likely to be plant than others. Demountable or removeable items stand a higher chance of success than fixed or static items. Examples include carpets rather than carpet tiles fixed with adhesive, and demountable partitions (as already described) rather than fixed walls.
Thus it can be seen that thought given to design features in a building at an early stage can save a taxpayer considerable amounts of corporate taxation. However, in every case it will be important to assess the viability of such design changes on the overall construction cost.
The foregoing examples are just a few of many situations which can arise in practice. However, each building is an individual asset and, as such, will have to be separately assessed.
Perhaps developers and building owners are too preoccupied with design, cost and speed of construction to give much thought to capital allowances until after completion of the building. However, if these aspects demand their attention, then preplanning capital allowances and the design features of a building should do so too. This can be undertaken by a professional with an intimate knowledge of capital allowances law and construction technology, but in order to be cost-effective it should be pointed out that the exercise is most suited to large multi-million-pound developments.
Capital allowances are there for the taking — why not plan for them?
