Your landlord has agreed to you making improvements to your business premises. These include plant and equipment fixed to the building. What steps are required for you rather than your landlord to receive tax relief for these?
Capital expenditure
When you improve a building which your business occupies under a lease, special rules determine what type of tax deduction you can claim and, more importantly, who can claim it, i.e. you or your landlord. For improvements to the fabric of the building, either of you might be entitled to the new structures and buildings allowance (SBA). If not, the expense will usually be deductible for capital gains tax purposes. But for expenditure on plant or machinery (P&M) attached to the building tax relief is given as capital allowances (CAs) (the tax equivalent of deprecation costs).
Ownership is nine-tenths of the law
Before you can think about CAs you need to understand a key principle of property ownership. In broad terms, the law says that anything fixed to a building belongs to the owner of the freehold. So if you rent a factory and pay for and install a ventilation system it’s the freeholder and not you who owns it.
Ownership and CAs
Tax law differs from property law. For CA purposes the owner of equipment fixed to a building is not the freeholder’s, but belongs to the person or company with the lowest interest in the property. A freehold is the highest interest, a leasehold is lower and a sub-leaseholder is lower still. However, this doesn’t mean that the person with the lowest interest can claim CAs for equipment paid for by someone else. You can only claim CAs if you incurred the expenditure, are the owner (for CA purposes) and use the P&M in your business.
Lease or licence?
Paying rent to occupy a building might not be sufficient to qualify you for CAs on fixed P&M which you install. Where you occupy a property under a licence, i.e. you don’t have a lease but instead a rental agreement which allows you use of part of the building (typically for a relatively short period), this won’t count as an “interest” in the property for CA purposes. This means you aren’t entitled to claim for the cost of, say, installing specialist lighting.
Special licence
If you have a licence for a building which gives you the sole right to use it, HMRC’s guidance says it will accept this as sufficient to qualify as an interest in the property. This means you can claim CAs on any P&M you pay for and install. On the other hand, if the terms of the licence agreement don’t qualify as an interest in the property, and you intend to install P&M in the building, you might still be able to claim CAs with the co-operation of your landlord.
Tip. Ask the person who is the property owner for CAs purposes to install the equipment on the understanding that you’ll reimburse them the cost. That way it brings into play the “contribution rule”. This can override the ownership rule and says that where you use the P&M in your business and contribute to the cost, you and not the property owner can claim the CAs.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.