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HMRC internal manual

Capital Allowances Manual

HM Revenue & Customs
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Plant and Machinery Allowances (PMA): introduction: professional fees and preliminaries

Professional fees, such as survey fees, architects’ fees, quantity surveyors’ fees, structural engineers’ fees, service engineers’ fees or legal costs, only qualify for PMA as expenditure on the provision of plant or machinery if they relate directly to the acquisition, transport and installation of the plant or machinery and as such are part of the expenditure incurred on the provision of the plant or machinery.

The same rule of law applies to preliminaries. Preliminaries are indirect costs incurred over the duration of a project on items such as site management, insurance, general purpose labour, temporary accommodation and security.

Where preliminaries and professional fees are paid in connection with a building project that includes the provision of plant or machinery, only the part, if any, which relates to services that can properly be regarded as on the provision of plant or machinery can be qualifying expenditure for PMA.

Establishing the part which relates to such services needs to be determined on a case by case basis. There is no one correct answer for all cases. For some cases it may be necessary to carry out a detailed analysis of the individual costs to determine whether, or the extent to which each should properly be apportioned to particular plant or machinery expenditure. In other cases, it may only be possible to apportion the costs between items which do, or do not, qualify for PMA. (This is sometimes called “the pro rata approach”).

In the recent Upper Tier Tax Tribunal decision: JD Wetherspoon v. HMRC Commissioners [2012] UKUT 42(TCC), this was said at paragraph 92:

Preliminaries are, by their nature, items of overhead expenditure which cannot be, or which have not been, attributed to any single item in the building project. Some, like insurance, are inherently incapable of being so attributed. Others, like scaffolding, may be capable of specific attribution, but the time and cost involved in the process of specific attribution is often disproportionate to the amount at stake. Thus, apportionment of preliminaries between items which do, or do not, qualify for capital allowances is the only solution in relation to un-attributable preliminaries, and may be the sensible solution where attribution is uneconomic.

For most small construction projects ((This content has been withheld because of exemptions in the Freedom of Information Act 2000) ) the use of the pro rata approach will generally be acceptable (unless it is clear that an apportionment approach would be demonstrably inappropriate without opening any enquiry). So, for such smaller claims, enquiries should not be opened simply because a business has made a pro rate apportionment of professional fees and preliminaries. Indeed, even if other aspects of any wider capital allowance claim are subject to an enquiry, a challenge to a pro rata approach to professional fees and preliminaries should not be made solely because the business has used a pro rata methodology.

It may be that the amount of the professional fees or, perhaps more particularly, preliminaries, looks unusually high ((This content has been withheld because of exemptions in the Freedom of Information Act 2000) ). However, the advice of the Valuation Office (see CA12300) must be sought in any such case where the initial fact finding seems to suggest that particular costs are unusually high because the costs may have been incorrectly classified as either relevant professional fees or preliminaries.

In larger construction projects ((This content has been withheld because of exemptions in the Freedom of Information Act 2000) ) there will often be other capital allowances aspects that need to be enquired into and it may be that one aspect of a wider review of the capital allowance claim will be the treatment of professional fees and preliminaries. If a business has decided to pro rata such costs then the advice of the Valuation Office must be sought before challenging the treatment adopted by the business.

If, unusually, in relation to any larger construction project, it is considered that the only cause of concern is that the costs have been apportioned on a pro rata basis, the advice of the Valuation Office must be sought before opening any enquiry.

Some businesses may approach HMRC seeking an agreement that they will use a pro rata approach in all their projects. In order to be considered, all such proposals must, of course, be fully supported with a detailed explanation of the underlying facts and circumstances. If a reasoned case has been made for the use of a pro rata methodology, then the advice of the Valuation Office must be sought, in the first instance. If the Valuation Office accepts the pro rata basis for all of a business’s projects for a particular year, no agreement should, however, be given that binds HMRC to the same approach for future years. For the future it must be made clear that HMRC will take a risk based approach to deciding whether the apportionment methodology remains appropriate.