Despite publicity, it is a fact that many care home owners have overpaid their tax by many thousands of pounds, due to having failed to claim all their tax allowances.
The tax allowances in question are ‘capital allowances’ relating to items of plant and machinery in the fabric of the building, which can include heating and lighting, water systems and sanitary ware, and much more.
Capital allowances reduce your tax bill by letting you write off the cost of capital investments buying, building or refurbishing care premises. They effectively convert capital costs to trading expenses in your tax return.
This reduces your taxable profit/income and the tax you pay. Importantly they are a tax adjustment only and have no effect on the profits shown in your financial accounts, or on the market value of your property.
The larger care home chains will be claiming these allowances as a matter of routine. However, smaller operators have historically missed out by underclaiming or not claiming at all, not because they are not entitled, nor because the amounts aren’t worthwhile.
Rather they have missed out, because like many small businesses, they have other more obvious priorities and have relied entirely on their accountants to deal with every aspect of tax.
Most accountants are general practitioners, not specialists. And as in healthcare, there are times when you need to call in a specialist.
The basic problem is as follows. You buy or build a care home for say £800,000. Now part of that £800,000 relates to the plant and machinery in the building, but how do you identify how much?
The answer, set out by legislation, is to apportion the money spent to plant “on a just and reasonable” basis. For purchases of second-hand properties HM Revenue instructions go into more detail, and basically require a tax valuation to be carried out by a qualified specialist.
What is it worth? Every case is different, but you could be looking at a tax saving or repayment of 10-15% of the purchase price. So, say you bought a home for £800,000 you could save tax of £120,000 – not to be sniffed at.
Your accountant may be doing an excellent job generally and identifying some fixtures and fittings that qualify for capital allowances (e.g. furniture and furnishings), but as a general practitioner he might not be aware of the need to prepare an apportionment of the purchase price.
And he certainly will not be able to survey a building and value all the plant and machinery that is part of the building’s fabric. Or you may know a general practice or quantity surveyor, but he of course, cannot be expected to have the right mix of surveying skills or required tax knowledge.
So the solution is to find a competent capital allowances expert.
There are a number of firms offering this specialist service, but like all professional advisers they vary in suitability – so look for relevant care industry experience and professional qualifications, including surveying (i.e. FRICS or MRICS) and tax (e.g. FTA/CTA, ATT or FCA/ACA), but also assess whether they will work with your existing accountants, rather than against them.
Although money spent recently (e.g. within the last six years) is easiest to review and often generates the largest tax saving, it is possible to go back indefinitely. So you can still benefit from this opportunity by reviewing expenditure on buying, building or refurbishing care premises at any time in the past.
However, you must still own the assets when the claim is made (i.e. the property must not have been sold, or the plant and machinery stripped out).
The whole process, from appointing a specialist to submitting a claim for tax relief, can take only a couple of weeks, and all you need to do is provide information to the specialist.
Many specialists will give you a free-of-charge up-front estimate of the tax savings they would expect, and if you prefer, will charge for their services as a percentage of the tax savings they achieve, so you have nothing to lose by involving them. With an efficient specialist, a substantial repayment from the taxman could be only six weeks away.
Many care home owners rightly query whether this opportunity is too good to be true, or whether making a claim will sour relations with the taxman.
The truth is that successive governments have confirmed the right to claim these tax allowances, and they are in no way controversial. They are just not widely understood by the owners and managers of many small and medium sized businesses, or their accountants, but are a routine area for capital allowances specialists.
Martin Wilson MA FCA and Adam Garrad BSc MRICS ATT are partners in cap2 LLP (www.cap-allow.com), and can be contacted at firstname.lastname@example.org or by phoning 07799 473561/473562.