When buying or selling a commercial property, there is an enormous amount of information for the legal teams to gather and review.
Title.
Leases.
Planning.
Environmental matters.
VAT.
Building issues.
And then there are the Commercial Property Standard Enquiries, commonly known as CPSEs.
For many property professionals, CPSE replies are a familiar part of the transaction process.
But one section deserves particular attention from buyers, sellers, solicitors and accountants: Capital Allowances.
A poorly considered response to the capital allowances enquiries can create uncertainty at exactly the point when the parties should be establishing what tax relief may be available to the buyer.
More importantly, capital allowances are an area where some decisions need to be addressed before the transaction completes.
What Are CPSEs?
Commercial Property Standard Enquiries are a set of standard pre-contract enquiries used in commercial property transactions.
The current CPSE suite includes CPSE.1, which covers general pre-contract enquiries for commercial property transactions, alongside supplementary forms for particular transaction types. The current CPSE.1 is version 4.2.
The CPSEs are designed to obtain information about the property and transaction before contracts are exchanged.
They are prepared by members of the Property Support Lawyers Group and endorsed by Real Estate:UK.
For a buyer, the replies form an important part of the wider due-diligence process.
Where Do Capital Allowances Appear in the CPSE?
In the current CPSE.1, Section 33 deals specifically with capital allowances.
The section asks questions about matters including:
- whether the seller holds the property as an investor/owner-occupier or as trading stock;
- whether capital allowances have been claimed on plant and machinery fixtures;
- whether expenditure has been pooled;
- whether relevant expenditure remains unpooled;
- whether previous owners claimed allowances;
- whether Section 198 elections have been entered into;
- and whether the property qualifies for Structures and Buildings Allowance.
The section also asks for supporting information in relation to qualifying fixtures and, where relevant, the seller’s capital allowances adviser.
This means that CPSE replies aren’t simply a box-ticking exercise.
They can provide important information about the property’s capital allowances history.
Why Does the CPSE Reply Matter to the Buyer?
A commercial property buyer may assume that if a building contains expensive fixtures and equipment, they will automatically be able to claim capital allowances.
That isn’t necessarily the case.
There are specific rules governing the transfer of fixtures between owners.
HMRC states that, for sales after 1 April 2014 for Corporation Tax purposes (and 6 April 2014 for Income Tax), a buyer’s ability to claim plant and machinery allowances on second-hand fixtures is generally conditional on the previous owner having pooled the relevant expenditure before the transfer and the parties meeting the relevant fixed-value requirements.
This is why the capital allowances questions in the CPSE can be so important.
They can reveal whether the necessary steps have been taken or whether further investigation is needed.
“There Are No Capital Allowances” Is Not Always the End of the Conversation
One response that can cause concern is a simple: “No capital allowances are available.”
But what does that actually mean?
It could mean:
- the seller has claimed all available allowances;
- the seller believes there are no qualifying fixtures;
- expenditure has never been pooled;
- a previous owner may have claimed allowances;
- the seller has not investigated the position;
- or the person completing the CPSE simply does not have the necessary information.
These are very different scenarios.
The wording of the response should therefore be considered carefully.
A buyer should not necessarily treat an unexplained “no” as evidence that the property contains no qualifying expenditure.
The CPSE itself asks detailed questions about the underlying position for precisely this reason.
Why “Not Applicable” Can Require Further Investigation
The same applies to a response such as: “Not applicable.”
If the property is a substantial commercial building, it may be reasonable to ask why the capital allowances questions are considered not applicable.
The answer might be perfectly valid.
But it should be understood.
Capital allowances can potentially apply to fixtures such as:
- heating systems
- air conditioning
- electrical systems
- lighting
- lifts
- fire alarm systems
- CCTV
- fitted kitchens
- and other qualifying plant and machinery.
HMRC specifically identifies integral features including lifts, heating and cooling systems, hot and cold water systems, electrical systems and external solar shading.
Therefore, the existence of qualifying fixtures is not unusual in a commercial building.
The key question is who has entitlement to claim, and what steps have been taken to preserve that entitlement?
The Importance of Pooling
One of the most important concepts for buyers to understand is pooling.
Under the fixtures rules, where the relevant conditions apply, a buyer’s ability to claim allowances on second-hand fixtures is dependent on the previous owner having pooled the qualifying expenditure before the transfer.
HMRC describes this as the pooling requirement.
This matters because a seller cannot necessarily simply decide, after completion, to allocate a value to fixtures that were never properly brought into its capital allowances pool.
The transaction therefore needs to be considered in the context of the seller’s existing tax position.
Where Does Section 198 Come In?
Once the pooling position has been established, the parties may need to address the fixed value requirement.
In many transactions, this is dealt with through a joint election under Section 198 of the Capital Allowances Act 2001.
HMRC explains that a Section 198 election allows the parties to fix the amount attributable to qualifying fixtures. The election fixes the seller’s disposal value and the purchaser’s qualifying expenditure.
This is a critical point.
The Section 198 election isn’t simply an administrative document that can be dealt with without consideration.
The amount agreed can affect the buyer’s future capital allowances claim.
And there are limits on the amount that can be attributed to the fixture. HMRC states that the amount apportioned cannot exceed the amount on which the seller was able to claim allowances or, where relevant, the sale price attributable to the fixture.
The figure therefore needs to be considered carefully.
Why the Buyer Should Not Automatically Accept the Seller’s Figure
This is where specialist advice can become particularly valuable.
The seller may have an existing capital allowances pool.
But that does not necessarily mean that the buyer should simply accept whatever figure is proposed without investigation.
The buyer needs to understand:
- What fixtures are included?
- What expenditure was originally incurred?
- What has already been claimed?
- What remains in the pool?
- What value should be attributed to the fixtures?
- Does the proposed figure reflect the actual property?
- What evidence supports it?
The CPSE replies can provide some of this information.
A specialist capital allowances review can then help the buyer understand the position in greater detail.
What Happens If the Buyer Doesn’t Have the Evidence?
This is another important consideration.
HMRC states that the current owner must be able to provide evidence that the relevant fixed value or disposal value requirements have been met.
If the current owner cannot provide evidence when requested by HMRC, their entitlement to plant and machinery allowances on fixtures acquired from a previous owner can be nil.
That makes documentation extremely important.
A capital allowances claim isn’t simply about identifying an asset.
It is also about being able to demonstrate the basis on which the claim is being made.
CPSE Replies Should Be Part of the Buyer’s Tax Due Diligence
A useful way of thinking about CPSE Section 33 is: It is the starting point, not necessarily the end point of capital allowances due diligence.
The buyer’s professional team can use the responses to establish what further investigation may be required.
For example:
- CPSE response: “Seller has claimed capital allowances.”
Follow-up questions:
- Which assets?
- How much was pooled?
- When were the assets acquired?
- Is a Section 198 election required?
- What supporting documentation exists?
2. CPSE response: “No capital allowances claimed.”
Follow-up questions:
- Why not?
- Did a previous owner claim?
- Was qualifying expenditure ever pooled?
- Are there unclaimed qualifying fixtures?
- What does the property’s history show?
3. CPSE response: “Not applicable.”
Follow-up questions:
- Why is the enquiry considered not applicable?
- Does the property contain qualifying fixtures?
- Has the capital allowances position actually been investigated?
The answers can materially change the buyer’s understanding of the transaction.
What About Structures and Buildings Allowance?
Capital allowances due diligence shouldn’t necessarily stop with plant and machinery.
CPSE.1 also contains enquiry 33.10, which asks about Structures and Buildings Allowance.
Where relevant, the seller is asked to provide information including:
- total qualifying expenditure;
- dates on which expenditure was incurred;
- who incurred it;
- allowances claimed;
- the remaining qualifying expenditure;
- supporting evidence; and
- the allowance statement required by the legislation.
This can be particularly relevant where a property has been recently constructed or undergone qualifying construction or renovation work.
Why Solicitors Should Pay Attention to the Replies
Solicitors are not expected to become capital allowances specialists.
But they are often coordinating the transaction and reviewing the CPSE responses.
That puts them in an important position.
If the capital allowances responses are unclear, incomplete or inconsistent with the information available elsewhere in the transaction, this can be a useful trigger to seek specialist advice.
The role isn’t necessarily to answer the technical tax question.
It is to make sure the question doesn’t get overlooked.
Why Accountants Should Review the Position Too
Accountants may be the people ultimately responsible for incorporating the capital allowances claim into the client’s tax return.
That makes early visibility particularly useful.
The accountant can work with the capital allowances specialist to understand:
- what expenditure qualifies;
- the relevant pool;
- the evidence supporting the claim;
- the transaction history;
- the Section 198 position;
- and how the resulting claim should be reflected in the client’s tax computations.
Early collaboration can help avoid a situation where the accountant receives a completed property transaction file months later and discovers that an important capital allowances issue was never addressed.
A Practical CPSE Capital Allowances Checklist
For buyers, solicitors and accountants, the following questions can provide a useful starting point:
Before exchange:
☐ Has CPSE Section 33 been answered fully?
☐ Has the seller confirmed whether capital allowances have been claimed?
☐ Has the pooling position been established?
☐ Has any previous owner’s position been considered?
☐ Has the Section 198 position been discussed?
☐ Has any existing SBA position been identified?
☐ Has supporting documentation been requested?
☐ Has a capital allowances specialist reviewed the responses where appropriate?
Before completion:
☐ Is the appropriate wording included in the transaction documents?
☐ Has the Section 198 election been considered and agreed where required?
☐ Is the agreed figure supported?
☐ Are the relevant reports and records being retained?
Don’t Let a CPSE Reply Become a Missed Opportunity
Commercial property transactions involve many moving parts.
It is understandable that capital allowances can sometimes get lost amongst the legal, financial and practical issues surrounding a deal.
But the consequences can be significant.
HMRC’s guidance makes clear that the fixtures rules impose specific conditions on buyers seeking plant and machinery allowances following a property transfer.
That is why the capital allowances section of the CPSE should be treated as an important part of the property’s tax due diligence, not simply another section of the form to complete.
How CPA Tax Can Help
At CPA Tax, we work alongside commercial property lawyers, accountants, brokers and buyers to help ensure that capital allowances are properly considered during property transactions.
We can assist with:
- Reviewing CPSE capital allowances responses
- Investigating the property’s capital allowances history
- Identifying qualifying fixtures
- Reviewing pooling and Section 198 positions
- Preparing capital allowances reports
- Assisting with Section 198 elections
- Supporting accountants with the subsequent tax claim
- Responding to HMRC queries where required
Our aim is simple: to work alongside your existing professional team and make the capital allowances process as straightforward and well-supported as possible.
If you’re acting on a commercial property transaction, involving a capital allowances specialist before exchange or completion can help ensure that an important tax consideration isn’t missed.
Contact CPA Tax to discuss your next commercial property transaction.
| Salman Sadiq, Director
Email: salman@cpatax.co.uk |
Babar Khan, Director
Email: bk@cpatax.co.uk |