How to maximise profits from taxation changes; Partner with cost and project management consultants Chandler KBS, Dylan Davies, assesses the impact of recently introduced changes to capital allowances.
IN LAST year's Budget then- Chancellor Gordon Brown made changes to the existing corporation tax and capital allowances regime.
Now some sectors of the property market are counting the cost of these changes, which came into effect in April.
Capital allowances are a relief against the corporation tax burden and are available to all taxpayers incurring capital expenditure on eligible assets. The allowances work by reducing a company's pre-tax profits to which the corporation tax rate is applied. This in turn increases post-tax profits.
Although the size of an investment can influence the amount of potential allowances, the ability to reduce the tax burden is extremely important to all taxpaying businesses. The maximisation of all potential allowances could turn a marginal scheme into a viable proposition with increased investment yields.
From April, the Government introduced a welcome 2% reduction in corporation tax. However, this decrease was at the expense of, and some say paid by, changes to the rates of capital allowances.
This has resulted in redistribution of the corporation tax burden between different sectors of the UK economy, creating industry- specific issues. The main changes were the decrease in the rates for plant and machinery allowances from 25% to 20%, the gradual withdrawal of industrial buildings and hotel allowances and the introduction of a new allowance called "integral features" which will attract a 10% rate.
Take the hotel sector for example, where hotel buildings allowances are gradually being withdrawn and will be abolished by 2011. An investor who built a hotel for pounds 10m in 2006 would have typically included within the finance model or business plan annual hotel allowances of circa pounds 240,000. These allowances would have totalled pounds 6mover the following 25 years. The 2% drop in corporation tax may not offset the loss of circa pounds 5.2m of hotel allowances post-2011. This change could now have an impact on the investor's level of profitability with implications for the wider economy in a challenging economic climate. In addition, what amounts to a retrospective change in tax does not provide stability with regard to investment decisions. Indeed, many would argue that this move fails to provide effective incentive for continued business investment in property acquisitions and new buildings. A particularly moot point as the industry gears up for the 2012 Olympics. To mitigate the impact of the withdrawal of hotel buildings allowances, the hotel sector must ensure that all opportunities to optimise plant and machinery and other types of allowances are optimised.
While the number of assets which can attract tax relief has increased due to the introduction of "integral features", the rate at which the relief is obtained on certain assets has been slashed from25%to 10%. Expenditure on assets which will suffer this reduction include lifts, escalators, hot water and powered ventilation systems which previously were treated as plant and machinery.
But it's not all bad news. The new integral features allowances includes assets which, depending on the particular characteristics, may not have previously attracted any tax relief. These include certain electrical systems, cold water systems, external solar shading and active facades.
Consequently, certain sectors are left significantly worse off by the recent capital allowance changes, while others stand to prosper.
However, although the above changes could result in a reduction in the value of allowances for some investors, we continue to encounter examples where the full range of available tax savings have not been optimised. For example, most properties contain assets or technologies which can attract enhanced capital allowances which provide 100% first year tax savings.
This initiative includes a range of energy and water saving technologies such as boilers, combined heat and power, heat pumps, lighting, motor and drives, efficient showers and toilets, flow controllers and rainwater harvesting equipment. The initiative was given a welcome boost in the 2007 budget with the introduction of a 19% payable tax credit for loss making companies.
In addition Land Remediation Relief provides up to 150% tax relief, or if a company is loss making, a 16% tax credit. This aim of this relief is to encourage the development of brownfield sites through the provision of tax relief for tackling contamination.
Housing developers are also entitled to this form of tax relief. The Government has also said it is considering extending the coverage to include the treatment of Japanese knotweed.
With regard to Business Premises Renovation Allowances (BPRAs) which came into effect in April 2007, 100% first-year allowances are available on the cost of bringing back into use commercial properties which have been unused for 12 months or more. This relief applies to areas that are designated as disadvantaged.
A significant proportion of Wales is covered by the Assisted Areas Order which lists the development areas.
The key in optimising a capital allowances claim lies in the preparation.
Even if a claim is entirely justified, its success often relies on the supporting evidence.
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|Publication:||Western Mail (Cardiff, Wales)|
|Date:||Aug 13, 2008|
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