Capital Allowances

Capital allowances on fixed plant and machinery


A recent case illustrates the risks for businesses of buying a property without obtaining information about the capital allowances history of the fixtures being bought.  A tax tribunal ruled that the buyer of a business, which included a property, could not claim plant and machinery allowances on certain fixtures. The buyer failed to obtain information about the seller's capital allowances claims and could not show that the seller had not previously claimed allowances on those fixtures.

What is a capital allowance?

• A business is not allowed to make any deduction or allowance for the depreciation of capital items when calculating its taxable profit or loss.

• However, a business can claim capital allowances, which are deductible when computing taxable profits, on certain types of capital expenditure.

• Capital allowances are available (in the form of an annual writing down allowance) for expenditure on plant and machinery. The rate of the allowance depends on the type of expenditure. For example:

o the general rate is currently 20%; and
o the rate for integral features and long-life assets is 10%.

• Although most fixtures will only qualify for the 10% rate, depending on the type of building, fixtures can represent a significant proportion of its value.

Practical tips to consider when buying a business

As previous owners' claims can restrict the amount of a claim for capital allowances, you should:

• Carry out proper capital allowances due diligence.
• Follow-up blank or inadequate replies to your enquiries.

It is sometimes thought that it is better not to discuss allowances with a seller, as a seller may then recognise their value, compromising your negotiating position. However, this case shows that if you adopt this approach, you risk being unable to establish entitlement to allowances.

If you have any queries about the content of this e-mail, please contact our Business Law Team.

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