Have you considered the benefits to your clients from properly claiming capital allowances on projects? You may be claiming or assisting with a claim, but are you claiming the full entitlement on your client's behalf?
This article should be of particular interest to:
- Engineers designing and specifying plant and machinery on building projects;
- Cost consultants advising their clients on costs and benefits arising from development;
- Property developers developing new buildings, retro-fitting or renovating existing buildings;
- Landlords/owner-occupiers carrying out refurbishment or fit-out projects;
- Tenants who carry the burden of ‘wear and tear’ of qualifying plant and machinery (P&M); and
- Funds and real estate investment trusts (REITS) considering the future sale of a building.
Capital allowances are offset against taxable profits by providing for the full write-off of the qualifying expenditure on P&M over a period of eight years at 12.5% per annum.
Maximising a claim for capital allowances may assist in the viability of a project, therefore its importance cannot be overstated. Cash benefits can arise in the form of significant tax savings.
Accelerated capital allowances
Where expenditure is incurred on certain energy efficient equipment, accelerated capital allowances (ACAs) in the form of a 100% write-off may be claimed in the year when the item of plant first comes into use.
Certain costs on installations such as light fittings would not generally qualify as plant and machinery for capital allowances purposes. However, where the light fitting is energy efficient and is listed on the
Sustainable Energy Authority of Ireland's (SEAI) website at the time of purchase then it can qualify for ACAs. The person entitled to the capital allowances may claim a 100% write-off of the cost.
On a recent construction project, much of the expenditure on P&M should have qualified as being energy efficient for ACAs purposes, however none of the P&M was listed on the SEAI website. Of the entire spend on mechanical and electrical plant, only a surface mounted plant room luminaire qualified for ACAs.
Whilst there is clearly scope to increase the listing on the SEAI website, there is also scope for increased awareness among engineers of ACAs and the potential benefits to their clients in specifying qualifying P&M.
If an item of plant is not currently listed on the SEAI website, a submission may be made to have a particular item of P&M included by virtue of its energy efficient credentials. The eligibility criteria for the 10 different categories of P&M is provided.
Of the ten categories, five are particularly relevant to buildings:
- Buildings Energy Management Systems;
- Information and Communications Technology;
- Heating and Electricity Provisions;
- Process and Heating, Ventilation and Air-conditioning (HVAC) Control Systems; and
- Refrigeration and Cooling.
Maximising a claim
Expenditure on P&M that qualifies for capital allowances and ACAs may reduce a client's income tax or corporation tax liability significantly. Given that corporation tax on rental income is taxed at the higher rate of 25%, availing of capital allowances to reduce profits arising from rental income can be hugely beneficial and result in large tax savings for a client, thereby, increase the viability of projects.
If there is insufficient income, unused capital allowances can be carried forward indefinitely and used to shelter future taxable profits.
By identifying and quantifying additional costs over and above the direct cost for an item of P&M, a capital allowances claim may be increased significantly. Costs which may be included in a claim for a particular item of P&M are:
- The direct cost for the P&M;
- Transportation costs;
- Installation costs;
- Structural supports for that P&M such as a dedicated platform;
- Safe access to that platform; and
- Professional advice in the design and installation of that P&M.
A properly prepared and detailed report itemising the various additional costs would be required to substantiate a claim and mitigate potential issues and errors.
All members of the design team can feed into this process and assist in the preparation of a comprehensive Tax Depreciation Report.
Where errors may arise
A claim for capital allowances is potentially a valuable asset in reducing tax liabilities. As such, the Revenue Commissioners are active in auditing claims in this area. There are a number of pitfalls which may inadvertently weaken the claim, such as:
- A lack of sufficient documentation in supporting a claim, casting doubt over its eligibility and impacting its ability to withstand scrutiny;
- An excessive claim leaving one open to payment of back-taxes due, interest, penalties and, in extreme cases, publication in the list of tax defaulters; and
- Incorrectly treating certain types of expenditure resulting in inadequate claims and under-claiming of allowances.
Knowledge of tax provisions alone is not sufficient to prepare an accurate claim for capital allowances. There are various stages involved in preparing a Tax Depreciation Report including:
- Meeting with the engineers, architects and cost consultants to review construction drawings and cost reports;
- Visiting the site to get a sense of the construction methodology and plant installed; and
- Applying relevant case law to the facts.
Conclusions
The concept surrounding capital allowances can be very complex. However, the benefits arising from maximising a claim should not be ignored as it can result in huge tax savings for a client. A properly executed Tax Depreciation Report can maximise a claim and provide supporting evidence and documentation to stand up to scrutiny, and as such can be a valuable asset in its own right.
Dominic O’Shaughnessy is a chartered engineer CEng MIEI and chartered tax adviser CTA AITI. He previously worked as engineering director in a multi-disciplinary consultancy. He currently acts as tax consultant in the Property Tax Department in William Fry Tax Advisors and specialises in the area of capital allowances, VAT on property and relevant contracts tax.
William Fry Tax Advisors specialises in providing practical and concise taxation advice to the corporate and construction sectors in general. William Fry Tax is, exclusively, Taxand Ireland. With more than 400 tax partners and over 2000 advisers in nearly 50 countries, Taxand is the world’s largest independent organisation of tax advisers to multinational businesses.