by Keith Harbage and Michael Crossley
“Property is theft”, said Proudhon. If he was right, perhaps this would explain the negative attitude of past governments to the idea of a commercial buildings’ allowance for expenditure on offices and similar non-industrial buildings. It could be argued that, in view of the movement away from heavy industry and, given the value to the country of invisible earnings, a specific allowance should be conceded to non-manufacturing and service industries for the cost of housing their businesses. Until this argument is won, however, a substantial measure of relief is actually available in practice, even if it is anything but intentional.
Not many years ago, the idea that over 50% of the cost of a building might qualify for capital allowances would have been regarded as pre-posterous. On purchasing a building a claim might have been made for the odd fixture and fitting, but no more. Indeed, the decision of the courts which held that certain movable partitions would qualify as plant on which capital allowances were due was regarded as a major breakthrough. Yet, within a relatively few years a combination of advances in building techniques leading to construction of buildings with a much greater “hi-tech” content along with favourable rulings of the courts have led to a situation where the 50% claim is a reality. Increasingly, the cost of office accommodation, other than the cost of the land, lies not in bricks and mortar or their modern equivalents, but in sophisticated heating and ventilation systems, fancy washrooms and electrical installations dedicated to particular functions.
While this article is not primarily concerned with the ample tax law on the question of what is plant — it seeks rather to highlight the opportunities for tax relief, which are perhaps being missed at present — a word or two about the way in which the courts have interpreted the very simple words of the Taxes Acts may be helpful.
The capital allowances laws refer to “expenditure on plant and machinery”, expressions which are not defined. By and large what is “machinery” is self-evident. There is not much doubt that a lift is a piece of machinery and that allowances are due to its owner on the cost of installing it in a building occupied for the purposes of the trade. (The position of non-trading lessors is not specifically addressed in this article, although they may well qualify for relief on plant in buildings owned and let by them.)
What is qualifying “plant” is a rather more difficult problem. In defining plant, the courts have made a distinction between assets which are used in the trade of the occupier, albeit as a fixed part of the building, and assets which are part of the setting in which the trade is carried on.
The fact that an asset is moveable may be a factor in deciding its nature, but it is not conclusive. Indeed, in one case a boat used as a floating restaurant was held not to be plant because it was, in effect, the setting in which the trade was carried on rather than an asset used in the trade. In addition, Inland Revenue statements and practices further muddied the waters, so that it would be a considerable task to justify logically why sophisticated fluorescent light fittings within a building may be regarded as part of the setting whereas hot water pipes are accepted to be qualifying plant.
Most businessmen will be more concerned with what can be claimed than with why. Many would be surprised at how a dissection of the cost of construction or purchase of the building, properly attributing overheads as well as direct costs of installation, will considerably increase the true cost of provision of the plant, compared with the total building costs.
In our experience, even well-versed practitioners may miss the boat. We have been allowances claimed on plant on the subcontractor’s direct cost of installation, ignoring the main contractor’s costs of adapting the building work to the subcontractor’s specifications, and also ignoring the cost of overheads, such as professional fees and preliminaries, which can account for as much as 20% of the total cost of a new building. We have known as much as 50% of the true cost of providing the plant to be missed.
Of course, there is no easy short-cut. The dissection of the cost of a new building for the purposes of a claim is a vast and time-consuming job, but a necessary preliminary to the submission of figures to the Inland Revenue, who will wish to be perfectly satisfied that the cost figures quoted are reliable. Some tax advisers enter into explanations and negotiations without the assistance of specialist quantity surveyors — but they do so at their peril.
Buildings have become increasingly highly serviced over recent years and contract arrangements have become more complex. To unravel these complexities and to extract the maximum relief it is necessary for the tax adviser to involve a quantity surveyor who fully understands the problem and can formulate a successful claim for allowances in the required depth of detail. If the Inspector of Taxes knows the work of those who compiled the claim, a simple explanation of the methods used will often suffice, without the need for a searching examination of the figures. Conversely, frivolous and ill-founded claims will undermine the credibility of the tax adviser, however solid the work done by his quantity surveyor colleague in producing costs. We see it as a team game.
Where particular difficulty may be experienced is in relation to an analysis of the plant content of a building purchased secondhand. Various techniques for estimating the relevant costs are used. Some result in what the Inland Revenue regard as over-estimations — the “cost” figures can be greater than the cost of installation of equivalent plant in a new building — and it can happen that claims have to be reduced by negotiation.
Even so, substantial reliefs may be conjured quite legitimately from the most unpromising material. Pre-war low-tech buildings may still yield a claim of 15% or so of cost. Substantial refurbishments can, of course, produce percentages nearer to 100% than 50%.
The acquisition of property is a feature of most businesses from time to time and a regular feature for a smaller number of businesses. Awareness of the scope for claims is half the battle. The other half is in ensuring the expert compilation of the claim. It may even be helpful to consult the experts before and during construction with a view to extracting the relevant information for compiling in the most effective way and, perhaps, in order to fine-tune the design of the plant content, to give it the best possible chance of qualifying for relief.
Even if property is theft, it is a crime to let reliefs which are available go by default. The opportunities are there. Don’t miss them!
