The First-tier Tribunal (FTT) has released its decision in the case of Glais House Care Limited (GHC) v HMRC. The case deals with the sale of a second hand property and the value ascribed to the plant and machinery fixtures for capital allowances purposes. The seller (Kappians Care Homes (KMH)) originally incurred qualifying expenditure totalling £238,912 on the fixtures, the sale contract attributed £35,001 to these fixtures and the purchaser (GHC) had commissioned a capital allowances analysis valuing the fixtures at £318,792. HMRC sought to argue the sale contract allocation should be taken as the maximum claim for the purchaser, whereas the appellant sought a value equal to the specialist capital allowances valuation on acquisition. The FTT has partially allowed GHC’s appeal, but capped the capital allowances able to be claimed by GHC at KMH’s original cost (in accordance with CAA2001 s62(1)).
The key technical matters that came out of the case include:
- KMH had brought into account a disposal value in line with the sale contract valuation of the plant and machinery (being £35,001). The claim available to GHC as purchaser is limited by CAA2001 s185 (limited to ‘the disposal value, the past owner has been or is required to bring into account’). HMRC contended that KMH was required to bring into account a disposal value equal to the sale contract valuation, given this was the only valuation information available to them and was commercially agreed between the parties. This would therefore cap GHC’s claim at £35,001. However the appellant argued, and the FTT agreed, that the sale contract apportionment should be disregarded for the purposes of calculating the correct disposal value, given CAA2001 s562(3) provides that all property sold as a result of one bargain is to be treated as sold together for capital allowances purposes, even if separate prices are purported to be agreed between the parties for separate items of plant and machinery. Accordingly, a just and reasonable apportionment was correctly undertaken by the appellant through their commissioning a specialist capital allowances analysis of the purchase consideration, identifying £318,792 of expenditure on plant and machinery;
- The FTT noted that the conclusion of this assessment was that there would be a lack of symmetry between KMH’s and GCH’s capital allowances positions, however they considered that the legislation at the time of the transaction (being pre-1 April 2012) did not require such symmetry; and
- Despite the above conclusion, the FTT was also referred to CAA2001 s62(1), which imposes an additional limit to GCH’s capital allowances claim being ‘the qualifying expenditure incurred by the person on its provision’, with the ‘person’ being KMH in this instance. Accordingly, the FTT ruled that GCH’s capital allowances valuation on acquisition of the property was capped at the original cost incurred by KMH, being £238,912, thus the appellant’s case was only partially allowed.
The case relates to a sale of second hand property in May 2011, which was prior to the introduction of the capital allowances second hand fixtures rules (CAA2001 s187A and s187B). Broadly speaking, these rules should prevent second hand property sales after 1 April 2012 falling into the same situation as was found in this particular case.
Where a capital allowances claim on acquisition of a second hand property for a pre-1 April 2012 transaction is being considered, the pertinent points of this case should be taken into account. In addition, the case does give us guidance which could apply in other situations:
- An allocation of purchase consideration in any sale contract may not be determinative for the capital allowances position on acquisition of second hand property. A just and reasonable allocation of the purchase consideration in accordance with CAA2001 s562 should be undertaken to determine the correct claim value for the purchaser (subject to prior owner restrictions);
- Capital allowances claims made invalidly by a prior owner (as was the case for KMH in respect of cold water systems, which did not qualify for capital allowances at the time the expenditure was incurred) create no restriction on a future purchaser’s capital allowances claim, assuming that the asset does now qualify. This is the case even where HMRC mistakenly allow the original claim to be made; and
- Where a second hand property is being acquired, a full capital allowances entitlement review requires that the ownership and capital allowances history of a property is tracked back to 24 July 1996. When performing such entitlement reviews, the conclusions from this case should be applied to any pre-1 April 2012 transactions in order to calculate any relevant restrictions to the current owner’s capital allowances claim.
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