Capital Allowances - Tenant/Landlord in Offices/Commercial Buildings

System

Can anyone help me with a query regarding capital allowances?

I work on behalf of a number of companies who occupy space in multi-let office buildings and are required to contribute to a SERVICE CHARGE, in addition to rent, under the terms of their lease. Service charge payments are collected quarterly (on-account)in line with the budget. Then, once the accounts have been prepared at year end, a balancing charge/credit is issued. Still with me?! :?

The service charge usually covers expenditure incurred in the day to day operation of the building, such as repairs and maintenance, security guarding, utilities and repairs. However, sometimes, my clients are required to contribute to some capital expenditure, such as lift replacement, boiler replacement or internal/external refurbishments.

All service charge contributions are assessed as revenue expenditure and my question is two-fold.

Firstly, should the tenant be claiming any contribution to capital expenditure, rather than lumping it all in as revenue and secondly, should they be able to claim capital allowances arising from this?

Obviously the Landlord can declare it as capital expenditure, but why shouldn't the tenant, if they have contributed to the cost?

But then this would mean that the allowances had been claimed twice!

I've searched the HMRC website and I can't find the answer.

Does anyone know about landlord/tenant rules governing commercial buildings?!!

System

Re:Capital Allowances - Tenant/Landlord in Offices/Commercial Buildings

I would say they would not be eligible to claim for capital allowances. The expenditure will simply be written off to the P&L and tax relief granted against the expenditure in the year it is incurred.

In order for capital allowances to be claimed, an asset has to be recognised in the financial statements. For a service user contributing to,say, a lift, the service user does not actually own the lift, they've simply contributed to the cost of the lift through the service charges. The new lift in question is not an asset to your client(s) trade - it is for communal use in the building in which your client(s) rents their office. The landlord will own the lift, claim the capital allowances on the asset addition in their balance sheet and then pay tax on the income over and above the normal service charge income from the tenants.

Usually the lease will have provisos in them stipulating exactly what service charges are expected to cover and they will usually have provisions in them relating to capital expenditure.

Kind regards
Stev

System

Re:Capital Allowances - Tenant/Landlord in Offices/Commercial Buildings

I'm with Steve on this. I would simply write off the costs through P&L.

Claudia

System

Re:Capital Allowances - Tenant/Landlord in Offices/Commercial Buildings

Surely it's a better prospect tax wise to write it off as revenue expenditure too. I wouldn't fight too hard to make it capital for all the reasons Steve has said as well as the fact that you are probably better off writing it off in the year anyway.

Annette

System

Re:Capital Allowances - Tenant/Landlord in Offices/Commercial Buildings

Thank you all!

System

Re:Capital Allowances - Tenant/Landlord in Offices/Commercial Buildings

Steve,

Thank you for your advice on this matter.

I was querying this with regard to the 2007 budget, as the new rules appear to give the Landlord every incentive for capital expenditure, on which they can then claim their capital allowances and re-charge the money to the tenants.

Hardly fair - tenants will need to be very wary.

System

Re:Capital Allowances - Tenant/Landlord in Offices/Commercial Buildings

Hi Bowiebennett,

Yes, I see what you mean. The Budget 2007 reforms effectively mean that hot water system insulation, draught proofing, solid wall and floor insulation may be classed as energy-saving items and may be deducted by landlords for income tax purposes. The Government is actively pursuing the "Green" issues at present and therefore looks favourably on such items. As these are effectively charged to the landlords profits in the year of expenditure, they wouldn't claim capital allowances on them as they aren't capitalised. They will simply be "Repairs and Renewals".

The tenant, however, doesn't lose out entirely by contributing to such assets, as they will receive full tax relief at their respective tax rates on the expenditure charged in the service charges.

Best regards
Steve