Capital Gains and other taxes manual

Section 3

The Valuation Office Agency's (VOA) technical manual used to assess Capital Gains and other taxes.

##Part 1: Capital allowances - introduction

3.1 General

It is a basic rule of taxation that capital expenditure on the cost of constructing or acquiring a building, or any other asset, is not allowable as a deduction when calculating the taxpayer’s taxable income or profit. To provide a measure of relief for the depreciation of capital assets, certain classes of property and assets, including buildings, plant and machinery and mineral deposits qualify for capital allowances. These allowances are calculated as a percentage of the capital expenditure and are set against the income or profit figure. Although primarily aimed at providing relief for the cost of these depreciating capital assets, in some instances allowances are also designed to encourage investment in particular types of assets.

If capital expenditure is incurred on purchasing a property or properties, where part of the expenditure qualifies for allowances of one sort or another, and part does not, then it is necessary to apportion the purchase price between the qualifying and non-qualifying elements. DVs may be asked to provide advice on any such apportionments.

3.2 Type of allowances

The capital allowances relating to property on which the advice of the DV may be required are:

• Industrial Building Allowances (including qualifying hotels).
• Industrial/Commercial Buildings (including qualifying hotels) situated within Enterprise Zones.
• Plant and Machinery Allowances.
• Scientific Research Allowances on plant and machinery and buildings used for such research.
• Mineral Extraction Allowances.
• Agricultural and Forestry Buildings Allowances.

The following paragraphs (3.3-3.7) give a brief explanation of each of the above allowances except Mineral Extraction Allowances which are explained in more detail in Part 2.

3.3 Industrial building allowances

A taxpayer may be able to claim Industrial Building Allowances (IBA) on expenditure incurred on the construction of an industrial building or structure (including qualifying hotels), on the cost of purchasing such a building or structure before it is first used, or on the cost of purchasing a used industrial building or structure. Only “buildings” will be referred to hereafter but buildings should be read as including structures.

The definition of ‘industrial building’ is set out in Section 18 CAA 1990, and of ‘qualifying hotel’ in Section 19 CAA 1990. Section 18 lists the purposes for which a building must be used if it is to qualify as an industrial building. The section also provides that a building used or used partly as a dwelling house, retail shop, non-qualifying hotel or office is not an industrial building, unless the construction costs of the non-qualifying part are 25% or less of the total construction costs for the whole building. Any expenditure incurred on the acquisition of land or rights in or over land does not qualify for allowances (Section 21 CAA 1990).

In the past IBA has been available as an initial allowance and as writing down allowance.

Initial allowance was provided at a higher rate, between 20% and 100%, and broadly speaking, was available for the year in which a new building was constructed or in which an unused building was purchased. At present initial allowances are available only where the construction expenditure is incurred in an enterprise zone (see para 3.4 below). Writing down allowances are given each year, provided that the building continues to be used as an industrial building, on 4% of the qualifying expenditure per annum (25% in an enterprise zone), calculated on a straight line basis.

3.4 Industrial/commercial building in enterprise zones

Within Enterprise Zones, IBA is available not only for expenditure on industrial buildings and qualifying hotels but on all commercial buildings. A taxpayer may be able to claim an initial allowance on expenditure incurred on the construction of a qualifying building, on the costs of purchasing a new unused building, or, subject to certain conditions, on the cost of purchasing a used building within 2 years of first use. Land in an enterprise zone is treated no differently than land elsewhere, IBA is not available on expenditure incurred on its acquisition.

If a taxpayer is entitled to allowances, they may claim either an initial allowance of 100% of the qualifying expenditure, or, if they prefer, a smaller initial allowance with a writing-down allowance of 25% per annum based on the remainder (calculated on a straight-line basis). If capital expenditure has been incurred on assets which, as a matter of fact, are both items of plant and represent part of the construction costs of the building (for example built-in heating and ventilation systems) the claimant may claim either plant and machinery allowances or industrial buildings allowances, but not both.

In certain circumstances, Enterprise Zone Allowances (as IBA in Enterprise Zones is sometimes known) may still be claimed even though the designation of the zone has expired. Allowances are available for expenditure incurred in the 10 years following the end of the life of the zone providing that the construction expenditure was incurred under a contract entered into during the life of the zone.

CAA 1990 includes provisions which exclude from the price paid for a property any increase in its value attributable to arrangements containing a provision which has an artificial effect on the price. (Section 10(D) CAA 1990, inserted by FA 1995). These provisions also apply to IBA claims outside enterprise zones, but in practice they are only likely to be encountered on schemes within the zones where 100% initial allowances are available.

3.5 Machinery and plant allowances

A taxpayer may be able to claim allowances on capital expenditure incurred “on the provision of machinery or plant” where that machinery or plant belongs to him and is used, or is deemed to be used, for his trade. (Section 22 and Section 24 CAA 1990). This may include the purchase of a building containing plant and machinery.

There is no definition of ‘machinery or plant’ in the Taxes Acts but the meaning of ‘plant’ has been considered in numerous cases before the Courts. One principle that has emerged from these decisions, is that it is a question of fact and degree as to whether any particular asset is machinery or plant and that this question is to be addressed by considering:

• the nature of the asset,
• the nature of the trade in which it is used,
• the way in which the asset is used in the trade.

One of the earliest cases in which the meaning of plant was considered, and a case which set out the tests which are still considered to be applicable, was Yarmouth v France (1887) 19QBD 647. Lindley LJ defined plant as including:

‘Whatever apparatus is used by a businessman for carrying on his business, not his stock in trade which he buys or makes the sale; but all goods and chattels fixed or moveable, live or dead which he keeps for permanent employment in his business’.

From this and subsequent cases on the meaning of ‘plant’ it is considered that for an asset to be plant it must:

• not be stock in trade,
• not function as the premises in which or on which the trade is carried on, and
• be used for the purposes of the trade.

From 30 November 1993, FA 1994 amended CAA 1990 to provide statutory support for the Revenue’s view of what constituted the boundary between plant, and buildings and structures. (Section 83(7) and Schedule AA1 CAA 1990). The Schedule provides that expenditure on buildings and structures is generally not expenditure on machinery and plant. The Schedule includes two Tables and in Column 1 of each Table the items which are specifically excluded from being machinery and plant are set out. Items in Column 2 of the Tables are assets which, following Court decisions and long standing Revenue practice, may be plant, depending upon the facts of the case.

It should be noted the definition of machinery and plant for Revenue purposes is very different to that used for rating.

If a taxpayer is entitled to machinery and plant allowances, they may claim a writing down allowance on the qualifying expenditure at the rate of 25% per annum, calculated on a reducing balance basis.

3.6 Scientific research allowances

A taxpayer may be able to claim allowances on expenditure incurred, broadly, on scientific research carried on in connection with a trade. This may include expenditure on constructing or purchasing a building or on providing machinery or plant for such purposes. Any expenditure incurred on the acquisition of land or rights in or over land does not qualify for SRA (Section 137(2) CAA 1990).

If a taxpayer is entitled to SRA they may claim a deduction of 100% of the qualifying expenditure. The taxpayer must take the full deduction in the year for which it is available. The deduction cannot be deferred to later years; no writing down allowance is available.

3.7 Agricultural and forestry building allowances

A taxpayer who has a ‘major’ interest in agricultural land may be able to claim allowances on expenditure on farm houses, farm buildings, cottages, fences and other works (eg drainage). The buildings must be used for husbandry on agricultural land. Broadly speaking, a major interest is a freehold or a leasehold interest, together with their Scottish equivalents.

If a taxpayer is entitled to agricultural building allowances they may claim writing down allowance on the qualifying expenditure at a rate of 4% per annum, calculated on a straight line basis. If the expenditure is on a farm house, allowances are only given on one-third of the expenditure (or less than one-third if the accommodation and amenities are out of due relation to the nature and extent of the farm).

From 1988, income from commercial woodlands was progressively removed from the scope of income and corporation tax. Until this time forestry building allowances had been available to set against income from forestry land. No relief has been available since 5 April 1993.

3.8 Balancing adjustments

Balancing adjustments are a feature of each of the allowance codes described above, although the details vary between allowances. The aim of a balancing adjustment is to ensure that the seller of an asset has received an amount of allowance that fairly reflects the actual depreciation or appreciation between acquisition and disposal.

The need to make a balancing adjustment may be triggered by various events, with the most common being a sale of the asset by the taxpayer. A balancing adjustment may take the form of either a balancing charge (essentially an addition to the taxpayer’s income or profits effectively giving rise to a repayment of some or all of the allowances received) or a balancing allowance (essentially a further allowance of some or all of the original qualifying expenditure that remains unclaimed at the date of the sale).

For IBA, and for ABA (provided that the buyer and seller have elected for there to be a balancing adjustment), the total allowances available are limited to the original cost of the building etc regardless of the number of owners and the intervening purchase and sale prices.

To establish the IBA or ABA balancing adjustment to be made, it is necessary to determine the sum received by the vendor for the assets on which the allowances are being claimed. Broadly speaking, if this sum is greater than the amount of expenditure on which allowances have yet to be made to the vendor, then it will give rise to a balancing charge, but if it is less, it will give rise to a balancing allowance. From the vendor’s point of view it is therefore usually preferable to attribute a low figure to the qualifying assets, but of course if the purchaser intends to claim allowances then they may wish to attribute a higher figure.

For IBA and ABA the balancing adjustment will affect the amount on which the purchaser may claim allowances. If there is a balancing charge it will increase the amount, but if the vendor receives a balancing allowance the figure on which a purchaser can claim allowances will be reduced.

Generally speaking, machinery and plant allowances are not calculated on each individual item separately. Instead, for a particular business, the expenditure on all but a few specified classes of assets will be pooled, and writing down allowance given based on the total value of this pool, after adding any new expenditure and subtracting any sale proceeds for assets disposed of. Thus, for a continuing business, balancing adjustments will usually only arise when the disposal proceeds in a particular year exceed the amount in the pool, or on the disposal of one of the few classes that are not pooled.

For machinery and plant, the allowances due to the purchaser are usually limited to what was paid for the asset by the purchaser, rather than to the original cost of the asset, if this is different. In some circumstances, particularly where the cost of machinery and plant is determined by apportioning the total cost of an appreciating building, this may result in allowances being given on more than original cost.

3.9 DV’s role in capital allowances claims

The Inspector will normally seek the advice of the District Valuer whenever a claim for capital allowances is based on the price paid for a property and it is necessary to apportion the purchase price between qualifying and non-qualifying expenditure.

In such cases it is still the responsibility of the Inspector to decide:-

Whether or not a taxpayer is entitled to claim allowances.

Which buildings or items of plant and machinery qualify for allowances.

However the District Valuer or Regional Building Surveyor may provide any factual advice requested (eg. on the use of a particular building or the construction or function of an item of plant) to assist the Inspector, in making the above decisions.

3.10-19 Reserved

Part 2: Mineral Extraction Allowances

3.20 General

The current provisions are contained within Part IV of the CAA 1990.

The main features of these allowances are:

• a writing-down allowance of 10% per annum for qualifying expenditure on the acquisition of minerals or rights over them, and a rate of 25% per annum in relation to all other qualifying expenditure (s.98);
• relief to commence generally when the expenditure is incurred, whether or not mineral planning permission has been granted or applied for;
• no relief for the land element of the interest;
• a statutory definition of the ‘undeveloped market value’ (broadly the value of the surface land element) which is to be excluded from qualifying expenditure on the acquisition or disposal of mineral bearing land (s.110).

3.21 Assistance to inspectors of taxes

The assistance of the DV will be sought in all cases where an interest in land is acquired which represents expenditure on the acquisition of a mineral asset as defined in s.121(1). The request will normally be on Form 453 (see Appendix 2) and the DV will be asked for an opinion of the undeveloped market value of the subject land based on s.110(2) (see para 3.108 below). The Inspector will advise the DV of all relevant information including, in particular, the following:

• a precise identification of the land in question including a copy of the site plan;
• the date of acquisition (or alternatively the date when the value is required);
• a description of the current state of development of the land including reference to any planning permission in force at the date of acquisition;
• the treatment to be accorded to any building or structures existing on the land;
• the taxpayer’s suggested valuation together with details of any apportionment etc;
• the nature of the interest together with details of any subsidiary interests or tenancies.

The DV may be asked to produce either a “not negotiated” or an “agreed” valuation.

3.22 Undeveloped market value

The definition of the undeveloped market value to be excluded from qualifying expenditure contained in s.110(2) is that “In relation to the acquisition of an interest in land, the undeveloped market value means the consideration which at the time of the acquisition the interest might reasonably be expected to fetch on a sale in the open market on the assumptions:

• that there is no source of mineral deposits on or in the land; and
• that it is and will continue to be unlawful to carry out any development of the land other than:-
• development which, at the time of the acquisition, has been or has begun to be l awfully carried out; and
• any other development for which planning permission is granted by a development order which is made as a general order and is in force at that time.”

This definition also applies where it becomes necessary to determine the undeveloped market value of an interest on a subsequent disposal of the land in question in accordance with s.112.

3.23 Provisions relating to buildings or other structures on the land

There are special provisions relating to any buildings or other structures situated on the relevant land.

i) S.110(4) states that where at the time of acquisition of the interest in land or at any time thereafter the undeveloped market value of the interest in land includes the value of any buildings or other structures and those buildings cease permanently to be used for any purpose then their value shall be included as qualifying expenditure for the allowance.

(ii) S.105(5) sets out expenditure not qualifying for allowances - this includes that relating to any building or structure provided for occupation by or for the welfare of workers, any expenditure on a building, where the whole of the building was constructed for use as an office or any expenditure on so much of a building or structure as was constructed for use as an office unless capital expenditure on the construction of the part of the building or structure constructed for use as an office was not more than one-tenth of the capital expenditure incurred on the construction of the whole building or structure.

In (i) above it is the “unrelieved value” of the buildings or structures that will be treated as qualifying expenditure. The “unrelieved value” is the value of the buildings or structures at the date of acquisition of the buildings or structures (without regard to any value properly attributable to the land on which the buildings or structures stand) less the net amount of any capital allowances received in this respect by the person incurring the expenditure.

Where the Inspector is satisfied that the buildings or structures have permanently ceased to be used for any purpose, the taxpayer will be asked to provide a valuation of them as at the date of acquisition of the land. In this situation, a further reference will be made to the DV by the Inspector requesting an opinion of value, as at the time of acquisition, of the buildings or structures on the land, but excluding any value attributable to the land on which the buildings or structures stand. The figure provided by the DV will then be the additional amount of qualifying expenditure, subject to any restriction under s.110(5).

3.24 Resale reflecting little or no mineral value

In a case of a resale reflecting little or no mineral value (ie it was mainly or wholly for some form of alternative development or tipping, etc.) the DV should consult the MV for advice as to any non-exhausted mineral value. Where the DV is advised that the remaining mineral value is nil or de minimis, the Inspector should be advised accordingly prior to the DV making the valuation.

3.25-29 Reserved

Part 3: Approach to apportionments

3.30 General

Apart from the special provisions for Mineral Extraction Allowances the CAA 1990 does not specify any method of apportioning the price paid for a property between qualifying and non-qualifying expenditure. The only requirement is that it should be a ‘just apportionment’.

In accordance with the decision in Salts v Battersby the underlying aim of any method of apportionment should be to apportion the purchase price in proportion to the values of the constituent parts that go to make up the property. The DV should seek to arrive at the contribution that each part of the property makes to the value of the whole. It is considered that a just apportionment will in the majority of cases be achieved by applying the formulae set out in the following paragraph. However, the DV should always stand back and carefully consider whether the answer produced is reasonable in the particular circumstances of each case. A consistent approach should be maintained whether the apportionment is for the purpose of a capital allowances claim or a balancing adjustment.

3.31 The formula approach

Depending on which allowances are being claimed, it may be necessary to apportion a purchase price either between the land and the building or between the land, the building and the qualifying items of plant and machinery:-

a) For the purposes of Enterprise Zone Allowances, when it is necessary to simply apportion a purchase price between the qualifying building (including all plant and machinery) and the non-qualifying land, the approach should usually be to apply the following formula:

**Apportioned value of the building =

Purchase price X (A ÷ (A+B))**

Where

A = The replacement cost of the building C = The bare site value

b) For the purpose of Plant and Machinery Allowances, when it is necessary to apportion a purchase price between the qualifying items of plant and machinery and the non-qualifying building and land, the approach should usually be to apply the following formula:

d) When Industrial Buildings Allowances are being claimed it may be necessary to arrive at a separate value for the building excluding the items of plant and machinery on which Plant and

Apportioned value of the Plant and machinery =

Purchase price X (A ÷ (A +B+C))</strong>

Where

A = The replacement cost of qualifying items of plant and machinery

B = The replacement cost of the whole building excluding qualifying items of plant and machinery

C = The bare site value

c) For simplicity the above formula can be abbreviated to the following:

Apportioned value of the Plant and machinery =

Purchase price X (A ÷ (B+C)</strong<

Where

A = The replacement cost of qualifying items of plant and machinery

B = The replacement cost of the whole building including plant and machinery

C = The bare site value

d) When Industrial Buildings Allowances are being claimed it may be necessary to arrive at a separate value for the building excluding the items of plant and machinery on which Plant and Machinery Allowances are being claimed. The approach should usually be to arrive at the plant and machinery value as above and then, applying the same principles, to arrive at the apportioned value of the building as follows:

Apportioned value of the building =

(Excluding Plant and Machinery)

Purchase Price x (B ÷ (A + B + C))

A = The replacement cost of qualifying items of plant and machinery

B = The replacement cost of the building excluding the qualifying items of plant and machinery

C = The bare site value

3.32 Effects of the application of the formulae

The following examples illustrate the practical effects of applying the different formulae set out in paragraph 3.31 above:-

a) Example 1

A taxpayer acquires a new property which qualifies for Enterprise Zone Allowances. The property is purchased for £10 million, the estimated replacement cost of the building is £6 million and the value of the bare site is £2 million.

Apportioned value of the building:

£10 Million x ( £6m ÷ ( £6m + £2m) ) = £7.5m</strong>

As can be seen, the apportioned value of the building is £7.5 million compared with it’s cost of £6 million. Had the taxpayer chosen to purchase a site and erect the building himself then he would of course only be able to claim allowances on the cost of constructing the building. The downside, from the taxpayer’s point of view, is that the apportioned value of the disallowable land element is higher than the bare site value. The difference between the total of A + B in this example, that is £8 million, and the purchase price of £10 million broadly speaking represents the developer’s profit. The developer has created the property by combining the land and building and the effect of the formula is to apportion that profit between the two elements that go to make up the property.

b) Example 2

This example is to illustrate the effects of the formula in a situation that has arisen in some cases as a result of a fall in the property market. In this example the taxpayer has again acquired a new property which qualifies for Enterprise Zone Allowances. The estimated replacement cost of the building is again £6 million and the value of the bare site is £2 million, but the purchase price is only £7.5 million.

Apportioned value of the building:

£7.5 Million x ( £6m ÷ ( £6m + £2m) ) = £5.625m</strong>

As can be seen, the apportioned value of the building is reduced below its replacement cost and the apportioned value of the non-allowable land element is of course also reduced below the bare site value.

c) Example 3

This example is to illustrate the effect of the formula for arriving at the plant and machinery value on the acquisition of a building that is say 20 years old. The total replacement cost of the building is £6 million, the replacement cost of the qualifying items of plant and machinery is £1.5 million and the bare site value is £2 million. The purchase price, as the building is now 20 years old, is however only £5 million.

Apportioned value of the Plant and Machinery:

£5 Million x ( £1.5m ÷ ( £6m + £2m) ) = £937,500</strong>

As can be seen, the apportioned value of the plant and machinery is £937,500 compared with it’s replacement cost of £1.5 million, reflecting the fact that its value will be less due to its age. That value, however, is probably considerably higher than the original cost of the plant and machinery 20 years ago.

Even though we are dealing with an ageing building, the replacement costs used in the formula are not written down because the obsolescence factor is reflected in the purchase price. The effect of the formula is therefore to reduce the value of the plant and machinery in the same proportion that the purchase price bears to the total of the replacement cost of the whole building and the bare site value. The effect of the formula is also to write down the values of all the elements of the property, including the land. Although land does not of course depreciate in value with age the bare site in this case is encumbered by an ageing building. The full bare site value is not actually realisable because it would not be economic to demolish the building until it’s value was exhausted.

d) Example 4

The final example assumes a new property which qualifies for Industrial Building Allowances and includes qualifying items of plant and machinery. It is acquired for £10 million, the replacement cost of the building (excluding the plant and machinery) is £4.5 million, the replacement cost of the qualifying items of plant and machinery is £1.5 million and the bare site value is £2 million.

Apportioned value of the Plant and Machinery:

£10 Million x ( £1.5m ÷ ( £1.5m + £4.5m + £2m) ) = £1.875m</strong>

As can be seen, the value of the plant and machinery in this example is higher than its cost. Like in the very first example, the total of A + B + C on the bottom line in the formula are less than the purchase price. The effect of the formula is therefore to apportion the element of developer’s profit on a pro-rata basis between the three elements of the property.

The apportioned value of the building, excluding the plant and machinery, is then calculated in the same manner.

Apportioned value of the building:

£10 Million x ( £4.5m ÷ ( £1.5m + £4.5m + £2m) ) = £5.625m</strong>

Again it can be seen that the effect of the formula is to increase the apportioned value above the cost.

3.33 Valuation of the bare site

The bare site value, for use in the apportionment formulae described in paragraph 3.31 should be taken as the open market value of the actual site as at the date of purchase of the property making the following assumptions:

• The site is cleared of all building and external works.
• Access and services are available up to the actual boundary.
• Planning permission is available for the existing type of development. (If the bare site would have a higher value for an alternative type of development it is necessary to consider whether this is reflected in the purchase price being apportioned. If it is, then it should be reflected in the bare site value).

Any reclamation works which have been carried out on the site which permanently enhance the value of the land (eg. removing underground obstructions or treating contamination) should be reflected in the valuation of the bare site.

The valuation of the bare site should normally reflect the circumstances existing at the date of valuation except when the purchase price being apportioned reflects Enterprise Zone benefits even though the Enterprise Zone status has expired at the date of purchase (see para 3.4). In such cases to achieve a ‘just apportionment’ the bare site value should assume the benefits of Enterprise Zone status as they are reflected in the purchase price.

The interest to be valued will be the interest actually acquired. If the interest is long leasehold at a ground rent then it is necessary to take account of the ground rent payable when considering the bare site value.

3.34 Replacement costs

The replacement costs for use in the apportionment formulae described in paragraph 3.31 should be taken as the estimated cost of replacing the building if work had commenced at the appropriate time so as to have the building available for occupation at the valuation date (ie. the date of purchase). The replacement cost should include:

• The cost of external works but not reclamation works which permanently enhance the value of the land.
• An addition for professional fees.
• An addition for finance charges.

If, due to the use of modern materials and building techniques, the cost of erecting a modern substitute building (of the same gross internal area) would be less than the cost of erecting an identical replacement building then the cost of or modern substitute should be adopted.

3.35 Adjustment of replacement costs for depreciation

As explained in paragraph 3.32 above the replacement costs used in the formula are not usually depreciated because any obsolescence is reflected in the purchase price and through the application of the formula this is then reflected in the apportioned values of the elements of the property. However, when a building is near the end of its life the purchase price may reflect substantial redevelopment value. In such circumstances the buildings obsolescence may not be truly reflected in the purchase price and the application of the formula will over state the value of the building and items of plant and machinery. Clearly, if the purchase price is based largely or wholly on the value of the land then the obsolete nature of the building will not be reflected in that price. In such circumstances it may then be necessary to adjust the replacement costs to allow for obsolescence.

3.36 Cases of doubt or difficulty

In any cases which give rise to doubts or difficulty concerning the approach to an apportionment the advice of CEO should be sought via the RD/CV(S), at an early stage.

3.37-39 Reserved

Part 4: Procedure - general

3.40 Requests for assistance

Inspectors may ask DV’s to give the following advice when needed in respect of claims for Capital Allowances:

Not negotiated apportionment’s or opinions of value.

Agreed apportionment’s or valuations.

Cases will normally be referred in memo form or on a Form 453 in Mineral Extraction Allowances cases.

3.41 Adoption of standard CGT case procedures

All cases within the scope of this Section should be dealt with in accordance with the standard procedures for CGT cases (as set out in Section 6 of this Chapter) except where they are varied by the particular instructions in this Part.

3.42 Time limits

The standard time limits of 42 days for not negotiated cases and six months for cases where negotiations are required will apply to all cases within the scope of this Section. In not negotiated cases where advice is required from the RBS the DV will need to take early action to ensure that the six week time limit is met.

3.43 Information to be provided by the inspector

Wherever possible the Inspector will provide the following information:

The name of the taxpayer and any agent.

The address of the property which is the subject of the claim (together with a location plan, if necessary, to identify the property).

Details of the taxpayers interest in the property and any known lettings.

The amount of the purchase price to be apportioned and the date of purchase by the taxpayer.

Details of the allowance claimed and the apportionment on valuation required (in capital allowances cases this will include details of which buildings or items of plant and machinery the Inspector accepts as qualifying for allowances).

The apportionment or valuation put forward by the taxpayer together with copies of any professional valuations.

The name and address of the person with whom the apportionment or valuation should be negotiated, when appropriate.

3.44 Advice to be provided by the DV

The role of the DV is to provide the Inspector with an apportionment of the purchase price between the qualifying and non-qualifying elements of the property in Capital Allowances cases or, in Mineral Extraction Allowance cases, a valuation of the undeveloped market value. The apportionment’s that are required for the various Capital Allowances are described in Part 1 and guidance on the approach to be adopted to arrive at a ‘just apportionment’ is described in Part 3.

In cases where a not negotiated apportionment or valuation is required there should be no contact with the taxpayer and no internal inspection of the property. In such cases the aim is to decide on the basis of any information provided by the taxpayer, together with knowledge of the property and office records, whether the taxpayer’s apportionment or valuation may be accepted as falling within reasonable valuation tolerances. Clearly in cases involving claims for Plant and Machinery Allowances it will often be necessary to rely on any factual information regarding the items of plant and machinery that is provided by the taxpayer.

The question of which buildings or items of plant and machinery qualify for Capital Allowances is the Inspector’s responsibility. The DV or RBS may however provide any assistance required to enable the Inspector to reach a decision. If the Inspector has not advised which buildings or items of plant and machinery are accepted as qualifying for allowances, or if the DV or RBS consider that the Inspector has accepted a building or item which clearly does not qualify for allowances, the papers should be referred back to the Inspector with an appropriate covering memo and the case cancelled. It should, however, be remembered that in any Plant and Machinery Allowance claim there may be a number of items which are open to debate as to whether or not they qualify for allowances. In such circumstances the Inspector may well reach a compromise with the taxpayer and accept some items but reject others. The DV or RBS should therefore only seek clarification in respect of any accepted items which clearly do not qualify for allowances.

3.45 Inspections and confidentiality

When, on a request for a negotiated apportionment or valuation, an internal inspection is necessary the District Valuer should liaise with the RBS (or MV) to arrange a joint inspection if possible.

No information as to the reason for the valuation/costing should be given to any person other than the taxpayer or an “interest person” (see par 3.412). DVs need not obtain the concurrence of the taxpayer to approach occupiers to arrange an inspection although they may at their discretion inform the taxpayer of their intention as a matter of courtesy.

3.46 Enquiries addressed to present occupiers

If the DV (or RBS/MV) considers it necessary to make enquiries of the tenant or purchaser of a property who is not an ‘interested person’, the DV should confirm through the taxpayer (or agent) that there is no objection to such an approach being made.

3.47 Specialist advice

In most cases the advice of the RBS will be required. The procedures for obtaining the RBS advice are set out in Part 5 of this Section. In some Mineral Extraction Allowance cases the advice of the MV may be required (see Part 2).

3.48 Advice from CEO

In cases of doubt or difficult, particularly where the method of apportionment is challenged, advice should be sought from CEO via the RD/CV(S) at an early stage.

3.49 Liaison with the inspector

On receipt of a request for advice from an Inspector the DV should ensure that the request is clearly understood. Whenever possible any minor errors or omissions should be resolved by telephoning the Inspector.

Where the DV is uncertain as to the effect of any valuation/apportionment will have on the taxpayers claim for allowances the advice of the Inspector should be sought before a figure is given.

3.50 Enquiries from taxpayers

Taxpayers who enquire about Capital Allowances should be referred to their local Inspector. Except when instructed by the Inspector, DVs should not discuss valuations or apportionment’s with taxpayers or their agents either formally or informally.

3.51 Action by inspector on receipt of a not negotiated valuation or apportionment

On receipt of the DV’s report the Inspector will seek to agree the allowances due with the taxpayer. The Inspector will reveal the DV’s apportionment or valuation but will indicate that the advice is based on the information presently available.

3.52 - Interested persons: right to be a party to an appeal

When in a Capital Allowances case there is to be a balancing charge on the vendor of a property the apportionment of the sale/purchase price may affect the tax liabilities of both the purchaser and the vendor. In such circumstances under s.151 CAA 1990 the vendor may apply to be joined in any appeal against the apportionment made by the purchaser as an ‘interested person’ and vice versa.

3.53 Identification and negotiation

The Inspector will advise the DV of the names and addresses of any known interested persons and the apportionment should, where appropriate, be negotiated with them as well as the taxpayer.

If the DV is aware or becomes aware during negotiations of any such person, of whom the DV has not been previously advised, the Inspector should be informed accordingly and then if so instructed the DV should include the person as an interested party and negotiate the appropriate apportionment.

3.54 ‘As returned’ cases involving interested persons

Where the DV is able to accept the apportionment returned by a taxpayer but an interested person has refused to agree, the Inspector should be informed of the circumstances and the interested person notified of the action. The Inspector will then attempt to obtain agreement and if unsuccessful the case will be referred back to the DV for negotiation involving all the parties.

3.55 - Defendable on appeal procedures: general

Where it is clear that agreement cannot be reached and the DV is satisfied that the apportionment or valuation is defendable on appeal, the DV should:

Report the unagreed apportionment or valuation to the Inspector and advise him of the taxpayer’s latest figure.

Forward a VO 1009 Case Summary together with the case file to CEO (Revenue Section), and send a copy of the VO 1009 to the RD/CV(S).

3.56 Action by CEO

On receipt of the DVs VO 1009 Case Summary CEO will liaise with the Inspector and Business Profits Division and then advise the RD/CV(S) and DV of any further action required.

3.57 Appeals

Appeals in Capital Allowances cases are heard by either the General or Special Commissioners.

If any case within the scope of this Section is to be referred to the Commissioners it will be treated as a ‘Divisional Case’ and ad hoc instructions will be issued by CEO. If the DV becomes aware that the Inspector intends to have a case listed for hearing by the Commissioners before instructions are received then CEO should be informed immediately via the RD/CV(S).

3.58-59 Reserved

Part 5: RBS assistance

3.60 General

Requests for assistance in Capital Allowance cases are usually made by the Inspector direct to the DV. Cases will be either for a not negotiated or a negotiated apportionment of a purchase price between the elements of the property which qualify for Capital Allowances and those which do not.

The apportionments that are required for the various Capital Allowances are described in Part 1 and the approach to be adopted by the DV to arrive at a ‘just apportionment’ are described in Part 3 of this Section. To arrive at a ‘just apportionment’ the DV will need advice on the estimated replacement cost of the building and, in Plant and Machinery Allowance cases, a separate figure for the estimated replacement cost of the qualifying plant and machinery.

The DV will request the assistance of the RBS in accordance with the procedures set out in this Section. Occasionally requests for advice may also be made direct to the RBS by CEO.

3.61 Requests for RBS Advice

Requests for advice on the replacement cost of buildings or plant and machinery will be made on Form VO 1040 (Appendix 3). The form should be completed and forwarded to the RBS by the DV within 7 days of receipt of the case from the Inspector.

Occasionally the RBS may in addition be asked to:

• Provide an estimate of the remaining useful life of the building.
• Assist the Inspector in deciding what qualifies as ‘plant and machinery’ for Plant and Machinery Allowances.

Where additional advice under 1 or 2 above is required this should be set out by the DV in Section 12 of the VO 1040 form or in a covering memorandum.

3.62 Information to be provided to the RBS

The DV will provide the RBS with the following information:

• The relevant date at which the estimated replacement cost is required.
• A brief description of the building including details of construction, number of storeys, central heating, air conditioning, standard of finish, car parking etc and any unique features (for example, rebuilt behind a listed facade, stone frontage, extravagant architectural features etc).
• The gross internal area of all floors measured from the internal face of the external walls. This will include toilets, corridors, lift shafts and stairways and may not necessarily accord with the area the DV has used for rating purposes. The DV will make every endeavour to provide the areas in this form but where, on the basis of existing records this is not possible, the DV will provide the best estimate available and advise the RBS accordingly.
• Copies of any available plans showing the layout, sections and elevations of the building which may be of assistance to the RBS.
• Any additional information such as the taxpayer’s schedules of replacement costs which have been forwarded by the Inspector with the request for advice.
• Where known, the taxpayer’s estimate of the replacement cost of the building and, in Plant and Machinery Allowance cases, the taxpayer’s estimate of the replacement cost of qualifying plant and machinery. The DV should ensure that the figures entered on the VO 1040 form are the taxpayer’s replacement cost figures and not the apportioned values on which allowances are being claimed.
• Details of any buildings or items of plant and machinery included in the claim which the Inspector has indicated as not qualifying for allowances.
• The date the case is due to be reported by the DV.
• Whether the Inspector has requested a not negotiated or an agreed apportionment.

3.63 Action to be taken by the RBS

On receipt of a request for advice the RBS should consider whether or not on the basis of the information available any cost estimates provided by the taxpayer are generally acceptable. In Plant and Machinery Allowance cases it will often be necessary to rely on any factual information regarding the items of plant and machinery supplied by the taxpayer and consider whether or not the plant and machinery cost represents a reasonable percentage of the total replacement cost of the building.

After considering the matter the RBS should then either:-

1) advise the DV that the taxpayer’s replacement costs may be accepted or

2) if the taxpayers costs cannot be accepted (or if no replacement cost figures have been suggested by the taxpayer) the RBS should advise the DV of the approximate total replacement cost of the buildings (including any plant and machinery) and, in Plant and Machinery Allowance cases, the approximate replacement cost of the qualifying items of plant and machinery.

3.64 Further information required

If further information is required that only the taxpayer can provide the RBS should advise the DV, setting out exactly what is needed.

If the Inspector has requested an agreed apportionment the DV should seek the information from the taxpayer (or agent). If the Inspector has requested a not negotiated apportionment the DV should inform the Inspector and ask that the case be treated as a request for an agreed apportionment. If the Inspector agrees, the DV should then request the information required by the RBS from the taxpayer. If the Inspector does not wish the DV to treat the case as a request for an agreed apportionment then the Inspector should be asked to obtain the information and the case cancelled. If, however, the Inspector requires a figure urgently the RBS should be asked to make a best estimate of the costs and notify the DV of any assumptions made.

3.65 Inspection

In not negotiated cases an external inspection may be made if necessary but on no account should the RBS carry out a full inspection or contact the taxpayer, agent or occupier. In cases where an agreed apportionment has been requested then a full inspection may be made if necessary. The RBS should liaise with the DV to ensure that joint inspections are made whenever practicable.

No information as to the reason for the costing exercise should be given to any person other than the taxpayer or an ‘interested person’ (see Part 4, paras 3.52 - 3.54).

3.66 Estimated replacement cost

The estimated replacement cost of a building or items of plant and machinery should take account of the following:

1) The RBS should estimate what it would have cost to erect the building if work had commenced at the appropriate time so as to have the building available for occupation at the valuation date.

2) The replacement cost should include site works but not any reclamation works which permanently enhance the value of the bare land (for example, the removal of underground obstructions or treatment of contamination).

3) If, due to the use of modern materials and building techniques, the cost of erecting a modern substitute building (of the same gross internal area) would be less than the cost of erecting an identical replacement building then the lower cost of the modern substitute should be adopted.

4) An addition should be made to the estimated building contract price for professional fees.

5) An addition for finance charges should be made by the DV. The RBS should however advise the DV of the estimated length of the building contract for this purpose.

6) No deduction from replacement costs should be made for any Regional Development Grants that may be available. If it is known that a grant was actually received the RBS should make it clear in his report that the grant has been ignored in the costing.

3.67 Assets qualifying for allowances

It is the Inspector’s responsibility to decide whether any buildings or items of plant and machinery qualify for allowances. The RBS may however assist the Inspector in reaching a decision on any building or item if requested.

If in any case the RBS considers that the Inspector has accepted a building or item of plant and machinery which clearly does not qualify for allowances then the DV should be advised so that the matter can be clarified with the Inspector. It should, however, be remembered that in any Plant and Machinery Allowance claim there may be a number of items which are open to debate as to whether or not they qualify for allowances. In such circumstances the Inspector may well reach a compromise with the taxpayer and accept some items but reject others. The RBS should therefore only seek clarification in respect of any accepted items which clearly do not qualify for allowances.

For advice on which buildings and items of plant and machinery qualify for allowances reference should be made to Part 1 of this Section.

3.68 Time limits

The time limits within which the DV is required to report to the Inspector are 42 days for not negotiated cases and 6 months for cases where negotiations are required. To enable the DV to meet these time limits the RBS should endeavour to report costings to the DV within 4 weeks of receipt of the VO 1040 form (or within 4 weeks of receipt of any further information requested by the RBS).

3.69 Defendable on appeal cases

Before reporting an apportionment defendable on appeal the DV will ask the RBS to confirm that the cost estimates and any estimates of the remaining useful life of the building are defendable on appeal. If the RBS is satisfied that any estimates are fair and reasonable and supported by the best evidence available the DV should be advised accordingly.