The Finance Bill includes draft legislation, specifying conditions which need to be satisfied for a buyer of fixtures to be able to claim capital allowances on expenditure incurred by him on those fixtures. The measure is to apply to expenditure incurred on or after 1 April 2012 (in the case of corporation tax payers) or 6 April 2012 (in the case of income tax payers, e.g. non-UK resident corporate investors as well as individuals).
The measure takes effect in two stages.
Stage 1: With effect from 1 or 6 April 2012, any buyer of fixtures on which the seller has claimed allowances will only be entitled to claim allowances on his acquisition expenditure on the fixtures (corresponding to the seller's disposal value) if:
within two years of the sale:
- the parties have entered into an election in accordance with (the existing provisions in) section 198 or 199 Capital Allowances Act 2001 to fix the disposal value of the fixtures (so that £1 elections will still be possible); or
- one of the parties has applied to the Tax Tribunal to determine the disposal value of the fixtures; or
- (in a limited range of cases, e.g. when the seller has permanently ceased his business activity) the seller has made a written statement of the disposal value of his fixtures; and
- on request, the buyer produces a copy of the election, Tribunal decision or statement to HMRC.
Stage 2: With effect from April 2014, a buyer will only be able to claim allowances on his expenditure on fixtures if the seller (where entitled to claim allowances) has allocated his expenditure to a recognised allowance grouping within the legislation (“a pool”) before the sale (other than in the limited circumstances where “first year allowances” are claimed on the fixtures).
There are uncertain aspects of the draft legislation. We have sought (and await) clarification from HMRC on some aspects (in relation to both tax exempt entities such as pension funds, and taxpayers). It may be revised, although we expect the key features to remain unchanged. Guidance from HMRC on the legislation is expected later this year.
At this stage the following points appear key:
• taxpaying owners of new fixtures or second hand fixtures will need to ensure that they have in place systems which capture the full extent of the expenditure incurred, and allowances claimed by them, on the fixtures, so that they can (potentially) be passed on (in general by means of a section 198/199 election) to any buyer. Failure to have this information and make the election might leave the seller exposed to a price chip (assuming he does not want the buyer to apply to the tribunal for a decision);
• tax exempt sellers such as pension funds are not required to bring into account any disposal value and so will be unable to enter into a section 198 election. You will, however, need to ensure (where there has been a claim in respect of the fixtures by a past owner in or after April 2012) that you have a copy of the last section 198/199 election entered into or tribunal decision (as applicable) in respect of the fixtures, and supporting information held by the seller, in order to be able to pass on the allowances to a future buyer;
• buyers who acquire fixtures in or after April 2012 and wish to claim allowances on the fixtures or (say, because they are tax exempt funds) wish to be able to pass them on when they sell will generally require any seller who has claimed allowances on the fixtures to enter into a section 198/199 election to fix the value of the fixtures at a substantial amount (e.g. tax written down value); and
• seller warranties are likely to be sought to a significantly greater extent by buyers (e.g. as to the validity of the election or, where the seller (and any seller in relation to any previous sale of the fixtures in or after April 2012) has not been entitled to claim allowances), a warranty (or warranties) to that effect). There may be due diligence implications too.
The right of either of the parties to seek a determination by the tribunal (as an alternative to a section 198/199 election) might be used as “leverage” by a party with less “commercial” bargaining power to achieve a more favourable fixtures apportionment in any section 198/199 election made by the parties. In any event, that right can be expected to have some impact on the dynamics of the negotiations and tactics generally where the parties are at odds on the fixtures apportionment.