Are you claiming all your capital allowances?

Capital allowances specialist Stuart Rivers advises firms working to tight budgets to consider the tax savings their clients can make.

How often do contractors advise their clients about the tax breaks available before their client incurs the expenditure? The answer is probably not at all. Perhaps it’s time to consider doing things differently.

There are significant financial savings in the form of tax relief that can be claimed when installing plant and equipment, but woefully few developers and contractors seem to be aware of this. When expenditure is incurred on plant and machinery installed in a building, capital allowances can be claimed based on that expenditure, which have the effect of reducing taxable profits. It is estimated that billons of capital allowances go unclaimed in the UK.

It is important to seek advice before signing up to a contract, because there are a range of capital allowances available depending on the equipment purchased. Armed with the correct information, these choices could make a big difference to cash flow, the overall cost of a project, and even its fundamental viability, but this is an angle that few construction companies bring to their clients.

For example, a restaurant refurbishment we advised on involved the installation of M&E equipment such as a kitchen hoist, fire alarm, smoke protection systems, heating and lighting costing £754,000. The project generated capital allowances of £390,000 and therefore an overall tax saving of £78,000 was achieved, of which the owner received £9,750 in the first year. This client came to us for advice four years after completion. However, if they were completing the project today, the first year’s tax saving would have increased to the full £78,000 rather than £9,750 as recent changes have made claiming capital allowances far more beneficial.

Savings for eco-efficiency

There are also accelerated tax savings for installing eco-efficient items. These are referred to as enhanced capital allowances (ECAs) and are set out at www.etl.decc.gov.uk. They provide an incentive for investing in energy and water efficient technologies such as air-conditioning units, heat pumps, boilers, pipework insulation, refrigeration equipment, toilets and taps. All of these qualify for 100% tax relief in the year of expenditure. The key to maximising the benefits of ECAs, whether for existing premises renovations or new builds, is for accountants or specialist advisers to become involved with design teams as early as possible.

Keep up with the tax changes

New items are added annually to HMRC’s list of plant, equipment and technology eligible for allowances. From this summer, air-conditioning systems that incorporate active chilled beams and desiccant air dryers with energy saving controls now also qualify. In addition to ensuring upgraded facilities meet the ECA requirements it is important to check that all the necessary documentation is provided with the products purchased.

The 2014 budget provided further encouraging news for building owners looking for increased tax savings with the rise in the annual investment allowance (AIA). Not only has it doubled, increasing from £250,000 to £500,000 but the qualifying period for this rise has been extended from April 2014 to 31 December 2015. This means that the first £500 000 of expenditure that qualifies for capital allowances will do so at 100% rather than on a writing down basis. This was designed as an incentive for property owners to invest so that any business incurring expenditure either buying, building or refurbishing property will benefit from tax relief. Be warned though, this capital allowance will diminish quite considerably at the end of 2015, and may return to a more meagre £25,000 thereafter.

It may seem that the capital allowance landscape for M&E equipment is complicated, but the financial benefits surely make pursuing them worthwhile.

Surveyor Stuart Rivers is senior partner of Harrogate-based Stuart Rivers Associates