Case: Pre-owned fixtures claim not limited to disposal value recognised by vendor

[2019] UKFTT 0059 (TC)

Judge Philip Gillet

Decision released 28 January 2019

Corporation Tax – Capital allowances – Expenditure on fixtures on which capital allowances had been claimed by previous owner – Claim limited to amount which vendor had been required to bring into account – Whether or not this was determined by allocations in contract between the parties – Held not – Whether or not this was determined by amount actually brought into account by vendor – Held not – Appeal allowed in part

Glais House Care Limited [2019] TC 06945

Summary

The appeal related to a partial disallowance of a capital allowance claim in respect of fixtures totalling £318,792 that the appellant had claimed in respect of a care home that it had acquired in the year ended 31 March 2012.

The care home had been previously acquired by a company called KCH. KCH had claimed capital allowances in respect of fixtures and other items totalling £238,912.

KCH went into administration. The appellant purchased the business and assets of the residential nursing home from the administrators of KCH for a total consideration of £1.7m, which was apportioned in the contract as follows:

£1 for the contracts;

£35,000 for the equipment (machinery, computer hardware, telecoms equipment, furniture, loose tools and any other equipment used by the vendor for the business);

£1 for the fixed assets (fixtures and fittings, plant, machinery, equipment and other assets physically attached to the building);

£164,996 for the goodwill;

£1 for the intellectual property;

£1 for the licences [to carry on the business];

£1,500,000 for the property.

Based on the balancing charge claimed by KCH, the parties agreed that a disposal value of £35,001 was used by KCH (£35,000 corresponding to the figure for equipment and £1 corresponding to the figure for fixed assets).

The appellant made a claim for capital allowances on fixtures of £318,792 based on an independent valuation report. The aggregate value was agreed by the District Valuer albeit by a different methodology.

The parties agreed that the appellant had incurred expenditure of £318,792 on fixtures, including £13,226 on the cold water system and £17,006 on the mains electrical system plus £35,000 on equipment.

KCH’s qualifying expenditure had been £220,454 on fixtures including £15,000 on the cold water system and £18,458 on equipment.

The capital allowances legislation restricts claims for capital allowances on fixtures where the vendor has previously claimed allowances in two ways. The claim is limited to the disposal value that the past owner has been or is required to bring into account by CAA 2001, s. 185. The disposal value itself is limited to the qualifying expenditure incurred by the person on its provision by CAA 2001, s. 62(1).

HMRC argued that the appellant’s claim was limited to the £35,001 disposal value that KCH had brought into account.

The appellant claimed that the figures in the contract should be overridden by CAA 2001, s. 562 that provides apportionment on a just and reasonable basis where property is sold together. The FTT agreed that this should be the starting point for the claim, acknowledging that this did not deliver symmetry.

The FTT concluded that the net cost of the fixtures (excluding the cold water system of £13,226) was £305,556. However, the claim was restricted by CAA 2001, s. 62(1) to the amount of expenditure incurred by KCH of £205,912 (excluding the cold water system).

As technically KCH should not have claimed allowances on the cold water system, the FTT considered that the appellant’s claim was not limited by CAA 2001, s. 62(1) and 185. By the time that the appellant incurred expenditure, a claim was possible. The FTT found that the appellant could claim allowances of £13,226 in respect of the cold water system.

KCH’s claim for capital allowances in respect of expenditure on the mains electrical system had been denied by HMRC, but like the cold water system, by the time the appellant incurred expenditure, a claim was possible. The FTT considered that a claim of £17,006 could be made by the appellant.

The FTT also addressed the treatment of non-fixed equipment for completeness. The valuation report did not cover the value of equipment. The FTT concluded that any claim must be limited to the lower of a just and reasonable apportionment of the purchase price to that equipment and the £18,458 incurred by KCH (i.e. ignoring the £35,000 attributed to equipment in the contract).

The appeal was allowed in part.

Comment

This decision predates the changes to the rules for pre-owned fixtures introduced by Finance Act 2012. However, it potentially opens up an opportunity to make claims for purchases that occurred prior to the introduction of those rules based on the lower of:

a just and reasonable apportionment of the consideration for the assets; and

the qualifying expenditure incurred by the vendor.

This would be instead of restricting the value to any disposal proceeds recognised by the vendor. HMRC’s Capital Allowances Manual states at CA26400 that where:

‘the taxpayer does not provide details of the disposal value, no allowances should be given as the previous disposal value may be nil or negligible.’

Based on this decision, the disposal value recognised by the vendor is irrelevant, although the purchaser would still require details of the qualifying expenditure incurred by the vendor.

Claims for capital allowances can generally be made in a later chargeable period provided that the asset is owned at some time in that period.

For commentary on the capital allowance rules for fixtures, see In-Depth at ¶242-800ff.

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