Clause 43 - Plant and machinery allowances: fixtures

Finance Bill – in a Public Bill Committee at 1:30 pm on 14th June 2012.

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Question proposed, That the clause stand part of the Bill.

Photo of Sir David Amess Sir David Amess Conservative, Southend West

With this it will be convenient to consider that schedule 10 be the Tenth schedule to the Bill.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

The clause amends capital allowances rules on fixtures attached to properties. As I understand, it is designed to ensure that capital allowances rules for fixtures achieve their original purpose of limiting allowances overall to the fixture’s original cost. In other words, the cost of a fixture should be written off once, and once only.

I support the Government’s efforts, in the words of the explanatory memorandum,

“to protect the Exchequer from further tax leakage and to make the rules fairer and clearer for businesses to understand and operate” but I wish to ask what steps are in place to ensure that that does not give rise to “disproportionate administrative burdens.”

The provisions will impact on all real estate transactions in the UK, with no de minimis. They are complex provisions and small businesses are likely to be less well advised than their larger counterparts. More due diligence work will be required when acquiring a property, including consideration and further work to give the purchaser an understanding of the allowance profile of the property during negotiations, and the value to be formally agreed  on and included in the contract for sale. The purchaser needs to satisfy himself or herself that the vendor has claimed, because if they have not, the value to be formally agreed is potentially invalid. There is a risk that if the formal value is not provided for in the sale and purchase agreement, post sale, the vendor might refuse to agree it. The only other option—a tribunal process—could be costly and, for smaller deals, often not worthwhile.

To reiterate, what additional costs does the Minister expect this measure to impose on businesses when carrying out due diligence at the time of sale? What steps will HMRC take to ensure that this measure has no unintended consequences, and that the administrative burden is limited, particularly for small businesses?

Photo of David Gauke David Gauke The Exchequer Secretary

As we have heard, clause 43 makes changes to ensure that the capital allowances rules for fixtures in buildings work as originally intended. The changes seek to ensure that the original cost of a fixture is written off only once against businesses’ taxable profits over the asset’s economic life.

The existing rules seek to achieve that by providing that when a building containing fixtures is sold, the purchaser’s acquisition cost for the fixtures must not exceed the seller’s disposal value for the same assets. Unfortunately, the current rules do not place any time limits on when a current owner must pool his expenditure on fixtures—that is, to bring it into account for tax purposes—nor do they provide any limits on when and how a seller and buyer should agree the sale value of the second-hand fixtures. That has led to a large number of late or retrospective fixtures claims being made, often many years after the purchase of a building. By that time, it is often practically impossible for the current owner to engage with the past owner in order to ascertain the disposal value that the seller brought into account, or what assets the value related to. That creates difficult issues of proof for all concerned.

In practice, the seller will often have brought into account a low disposal value for fixtures in order to retain and maximise their capital allowances. The buyer, however, will want to adopt as high a value as possible to maximise their allowances for the future. If each party adopts a different value in that way, allowances are being duplicated. Identifying each case is not possible, so significant numbers of duplicate claims could be going undetected. Equally, if a business is required to prove its right to make a late claim, it may be unable to do so. The situation is clearly unsatisfactory. It gives rise to uncertainty and an unlevel playing field, and it could also result in significant tax loss to the Exchequer. The changes introduced by the clause are therefore necessary to rectify the situation.

The main changes in the clause will make the availability to capital allowances on fixtures dependent on two conditions. First, the previous business owner must have pooled their expenditure on fixtures before a subsequent transfer to another person. Second, the buyer and seller must use one of two existing procedures to fix their agreement about the value of fixtures transferred, within two years of the transfer. In that way, a single value for fixtures on transfer will be formally established near to the time of sale, and the duplication of allowances will be avoided.

There are also some rules to cover certain exceptional cases, and a technical amendment to enable allowances to be claimed by a new owner on any fixtures expenditure not relieved under the business premises renovation allowance scheme when a past donor has claimed under that scheme. The changes are estimated to increase Exchequer receipts by approximately £30 million a year by 2015-16.

It was asked whether there could be an impact on businesses—smaller ones in particularly. It is expected that the one-off cost for businesses to become familiar with the new rules will be negligible. The extra administrative costs to businesses of formally recording and signing up to what should currently be established and agreed less formally have been estimated at between £50,000 and £250,000 per year. I appreciate the concern raised by the hon. Member for Leeds West about whether smaller, less sophisticated businesses in particular might lose allowances to which they are entitled, but no business that seeks to agree a fixtures value at the time of a property acquisition will lose out. The new rules are designed to prevent duplicate or excessive allowances on fixtures and not in any way to deprive businesses of allowances that are rightfully due.

As I have said, the new rules highlight two clear, alternative procedures that all businesses, including smaller ones, should use to agree a fixtures value: a business should either use the existing election procedure or apply to a first-tier tribunal to determine the fixtures value. One or other route should ensure an acceptable result for both sides in all cases. The current rules, which impose no time limits on when a fixtures value should be agreed after a property acquisition, can make it difficult for buyers, who delay to discover a past owner’s disposal value and demonstrate their right to claim on second-hand fixtures. If a buyer cannot demonstrate any right to claim, allowances might be lost altogether, and that is not a situation that the Government wish to see continue.

The Government are grateful that commentators have positively welcomed the revised proposals in the clause as being simpler and better targeted at achieving our desired policy objective of avoiding the duplication of allowances. It is a change that protects revenues, and makes our tax rules work as they should.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.

Schedule 10 agreed to.