Cash is king: why now's the time for a property tax review, guest opinion

As the post COVID-19 lockdown period places ever more demand on automotive retail businesses being lean and efficient, Alun Oliver, managing director of E³ Consulting, explains why now might be the time for a thorough property tax review.

“Cash is king” an oft cited mantra by business gurus such as Jack Welch (former CEO General Electric).

For many car dealerships and repair centres in a post COVID-19 world it will be essential to optimise all available cash flows to help ‘weather the storm’ as businesses look to stabilise and rebuild their finances, brands, market share and profitability.

Tax efficiency is an important element of any cashflow review and particularly those dealerships that have, in the past, invested significantly in their property assets, be it their corporate offices, new showrooms, valet bays, electric charging points and/or repair/service workshops across the UK.

For any property owning businesses improving cash flows can be relatively challenging in any economic climate. However, in these exceptional times a property tax review may facilitate a cost effective, and importantly, a relatively quick way to improve cash flow - from significant tax rebates.

Whether owning, leasing or investing, there are significant opportunities to claim capital allowances (CAs), repairs and maintenance (R&M) and (subject to the right circumstances) land remediation tax relief (LRTR) – to recover overpaid tax previously paid to HM Revenue & Customs (HMRC). 

In nearly 30 years of operating in the field of property tax, I still consistently see over 80% of cases reviewed, where either no claim, or only a superficial claim has been made – meaning that additional tax savings can almost definitely be achieved. 

So, it is essential that UK taxpayers consider re-visiting previous tax returns and bring in experienced and independent property taxation specialists to re-assess and review past expenditure to enhance their tax savings and where applicable obtain any available tax rebates. 

Clients often perceive that it is all too late to change things, that the quantum of tax is simply too little to worry about, or that the costs are prohibitive. 

Sometimes their tax advisers even reinforce this ‘do nothing’ approach – occasionally because they don’t wish to illustrate tax savings they had previously overlooked – resulting in unnecessary tax payments. 

However, on condition that the assets are still owned, it is worthwhile reviewing past expenditure to see if additional tax savings could be claimed.  

Historic Reviews

One recent project involved the review of a portfolio of dealerships across the South East, paying corporation tax. 

We reviewed ten refurb/fitting out projects – accounting for over £4m of expenditure between 2015 and 2019. The dealership had not claimed the capital allowances on these properties. Their total tax savings over time will equate to nearly £500,000. 

Amending their prior year tax returns has generated a significant tax rebate from HMRC, as well as further allowances going forward, reducing their future tax payments, until all of the allowances are consumed.

Acting for Westover Holdings we undertook a full capital allowances review on their then newly constructed Jaguar Land Rover (JLR) dealership in Christchurch (since sold to Hendy Group). 

Identifying approximately 35% of the project expenditure as eligible capital allowances claim – their total tax saved over time will be more than £200,000.

Election under s.198 CAA2001

Purchasers of second-hand property often believe (or are encouraged to do so by their vendor) that there is no further tax relief available on a purchase involving an election under s.198.

However, this is rarely the case and there are often ‘latent’ allowances available.

Elections are complicated and property tax is rarely properly understood by the conveyancing lawyer – so tax relief is frequently overlooked or a limited election value (£1/£2) presented as a ‘fait accompli’.  

In absence of specific contract wording, there is normally up to two years for the parties to agree the optional s.198 election, which determines the value of any capital allowances that can pass between the parties. 

However, experienced property tax specialists will regularly identify significant tax relief over and above any proposed or completed election. These may include purchases where the vendor was not entitled to claim allowances, legislative changes or where the costs were met by others.

Integral Feature Allowances (IFAs) only claims can amount to between 5% and 15% of the purchase consideration and are generally calculated as a valuation apportionment of the purchase price paid. Hence a review of past transactions – whether involving s.198, or not - may still yield additional tax allowances and thus result in further tax savings or a rebate.

Repairs & Maintenance (R&M)

Repairs are fully eligible for tax deduction and as shown in the recent case of Steadfast Manufacturing & Storage Limited v HMRC when 100% tax relief is available HMRC will scrutinise and challenge claims – seeking to treat the expenditure as capital and NOT revenue

Again, we regularly see taxpayers under claim or not claim at all, perceiving their expenditure to be ineligible. 

Conversely, there are those whose accountants historically claim all property expenditure as R&M without any real scrutiny of the reason, purpose or nature of expenditure - which helps to determine the ‘correct’ tax treatment. 

Land Remediation Tax Relief (LRTR)

Land remediation tax relief (LRTR) can also provide valuable tax relief (up to 150%) across projects for dealerships subject to UK Corporation Tax. 

LRTR is available on qualifying expenditure in tackling the barriers to development caused by contaminated and/or long term derelict land. 

Furthermore, if a LRTR claim results in the company making a loss in the accounting period it may surrender that loss and receive a payable tax credit from HMRC.  

The rate of the credit, 16% of the qualifying land remediation loss foregone, has not been adjusted since inception and is thus very favourable compared to current Corporation Tax rate of 19%.

Conclusion

If your business has previously invested in site acquisition, development, extension or refurbishment, then a fresh review of your property tax position could result in a significant tax rebate and/or future savings. 

The above examples may help illustrate some of the potential additional claim opportunities that might be available across the automotive sector.