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Radical changes to capital allowances rules set to hit retail businesses

While I’m always reluctant to add yet another task to retailers’ burgeoning “to do” lists, I want to flag up some proposed tax changes this week which could have an impact upon the retail sector, as it’s something that businesses need to be looking at now. By Helen Dickinson


Radical changes to capital allowances rules set to hit retail businesses

Following the recent publication of a consultation document on capital allowances, Her Majesty’s Revenue and Customs (HMRC) has recently proposed changes to capital allowances rules which would affect the way tax relief can be claimed for expenditure on new business fixtures.  As most retailers tend to have a rolling programme of updating and refreshing their stores across lots of locations, it’s a particularly pertinent issue for businesses in the sector.

The proposed changes are due to take effect next April so businesses must act now to ensure they do not miss out on the relief currently available.  At the same time, under the new proposals to introduce time limits on claims, retailers may have to quantify allowances that they may not even be in a position to use now.

Capital allowances operate by allowing companies to reduce their taxable profits, but loss-making businesses are unable to utilise them, meaning that many businesses in the sector are not currently claiming them.  At present, there is no time limit in which to make a claim during the period of ownership, and many companies are still making new claims for tax relief on expenditure that was incurred many years ago but the consultation proposes a shorter period from acquisition in which to make a claim. 

The document suggests new rules under which businesses must pool their expenditure on fixtures and make their claim within a time frame of just one to two years in order to qualify for capital allowances on the spend.  Currently there is no such pooling requirement and no time limit imposed.

Imposing a time limit on claiming capital allowances would mean that loss-making retail businesses would need to quantify qualifying expenditure now to “bank” the allowances for future use if and when they return to profitability.  Making these claims often incurs a cost as they can be complicated and require professional advice. 

And suggestions that there should be a mandatory record of agreement of the value of fixtures in property transactions could lead to additional complications and increase the compliance burden on M&A activity in the retail sector.

Although M&A isn’t particularly high on most retail businesses agendas at the moment, another point to consider is that the consultation document contains proposals under which all property transactions involving the transfer of fixtures will require both the vendor and the purchaser to jointly agree the market value for the fixtures and notify HMRC.  The proposals could lead to a distortion of power in the negotiation process for some transactions in the retail sector and also lead to additional complications and compliance throughout the M&A process.

Because these proposals require both parties to agree, there is the potential for the vendor to hold the balance of power as without mutual agreement, so the purchaser could lose the right to claim the often very valuable capital allowances associated with the fixtures of the property.

Retailers which are likely to be hit by these proposed changes would do well to make representations to HMRC and as these proposed rules are due to come in from next April so there is not much time for a rethink. 

The tax authorities are inviting comments on their proposals via their consultation document here.


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