Partners owning their surgery who decide to extend, refurbish or embark on the development of new larger premises, will need to carefully consider an area of tax relief which is often overlooked or not considered early enough on a new scheme, to benefit fully from 100% enhanced capital allowances (ECAs) available on energy efficient equipment.
There are circumstances where expenditure may have been incurred many years ago and no capital allowances claimed. In most situations, it is possible to revisit this historic work and claim those allowances today or, only where your accountant advises, revise, say, last year’s accounts, triggering a potential tax refund. The average new build surgery will attract around 30% of the total expenditure in capital allowances.
Another important factor bringing capital allowances into focus is the recent boost in
Annual Investment Allowances (AIA) for expenditure on plant and machinery (P&M) incurred between 1 st
January 2013 and 1 st
January 2015. At present, the increase is only temporary and is due to expire in two years. The effect of the increased AIA is to accelerate the tax relief available in the first year on “normal” P&M expenditure of
£250,000, by four or five times or more. Therefore, any proposed surgery works would be best timed to capitalise on the period of increased AIA.
A capital allowance is tax relief for capital expenditure on certain assets, more commonly known as P&M allowances.
Plant and Machinery (P&M)
There is no simple definition of P&M. The result is that what qualifies is far from obvious and may include carpets, toilet fittings, overhead door closers and certain types of suspended ceilings, to name but a few.
In a doctors’ surgery, P&M will include all the loose furniture and fittings installed in the premises and most of the mechanical and electrical installations forming part of the premises (fixtures), such as heating, ventilation, air-conditioning, lighting, power and plumbing installations.

However, in the case of fixtures, it is often more than the basic supply cost of the equipment that is claimable on refurbishments, extensive builders’ work items or even parts of the building structure itself depending on what the item is (which, on new build situations, would not normally qualify) can also be added to qualifying expenditure.
Up to 75% of refurbishment expenditure may qualify for relief in some form; whether this is as P&M, ECAs or on repairs to the existing building. On new builds, the percentage of P&M qualifying may be closer to 30% of the building cost, possibly higher on more complex designs.
Construction, Alteration and Refurbishment
The qualifying cost of P&M forming part of the construction of a new medical centre can include certain on-costs such as some professional fees and the contract preliminaries costs associated with the project. On-costs will need careful consideration to avoid challenges by HM Revenue and Customs (HMRC) and must be appropriate to the scheme’s design.
In the case of a refurbishment project, it is also important to identify any expenditure on repairs and maintenance because these costs will be tax deductible in full in the tax year that they are incurred.
Enhanced Capital Allowances (ECAs) - Why Should You or Your Consultants
Bother About ECAs?
ECAs are plant and machinery, but they are selected from prescribed lists of energy efficient P&M which are “approved” and as such, they attract 100% relief in the year of expenditure. Therefore, ECA qualifying expenditure is far more tax efficient than other types of non-ECA P&M, where the allowance is claimed at lower annual rates.
ECA plant may also result in more favourable building running costs for utilities by consuming less energy.
To benefit early in any new scheme’s design, you should carefully weigh up the pros and cons of your consulting engineer, specifying ECA plant and equipment, comparing their accelerated tax advantages alongside lower running costs, against a sometimes slightly higher capital purchase cost.

However, it should be noted that ECA qualifying P&M can be difficult to identify and specify and consultants will need guidance from a specialist and the qualifying criteria is constantly changing, meaning that equipment which may qualify for ECAs at project inception, six months later, when the item is procured for installation, it no longer features on the prescribed list, so will not be eligible. ECAs cannot be left to chance.
What are the Capital Allowances Worth in “Cash” Terms?
Let us consider the construction of a new 2000 square metre two storey surgery that is owned by a private company, built in 2012. The total cost of the project is £4.9 million (including £900,000 of professional fees, but excluding loose medical equipment).
£1.2 million of the total expenditure qualified for capital allowances including
£100,000 as ECAs. The anticipated tax savings that should accrue to the company over 10 years is:
• Assuming a constant corporation tax rate of 20%, the tax saving in the first ten years is £184,643, with a further potential tax saving of £75,357 available in later years as the benefit continues.
• The total allowances available for 2012 include an annual investment allowance (AIA) of £25,000 in the above example.
• If the expenditure had been incurred after 1 st
January 2013, then the AIA available would be £250,000, with the result that the allowances in that year increase to £471,000, which produces a tax saving of £94,200 in the first year alone.
• This opens up a temporary development window of opportunity as any expenditure incurred after 1 st
January 2013 for a two year period will qualify for the additional AIAs available, significantly increasing the allowances in the first year.
• It should also be noted that the above examples are for a company ownership.
If the property was owned by a partnership of individual doctors, then the tax savings would be more than twice the amount indicated.

Grants
The treatment of grants from PCTs or the NHS Commissioning Boards for capital allowances purposes will depend on the specific purpose and nature of the grant, e.g. in respect of any contribution deemed towards the provision of P&M, the usual treatment is to net off the amount received as doctors have not actually incurred the expenditure. However, in cases where the grants are not specific, or are towards development, there may be scope to allocate this to mainly non-P&M items, which may largely leave a claim for allowances unaffected.
In respect of grants from private organisations, their treatment would be subject to separate arrangement and agreement of their allocation may have to be sought and/or be covered by a contract clause in the agreement.
Summary
We recommend the following actions to ensure both your construction professionals and your accountant are fully informed:
1.
On surgery expenditure which may have been incurred some years ago, check that allowances have already been identified - in the year the expenditure was incurred, there should also be capital allowances shown. If none, check why not. There could be a valid reason or, if still in doubt, consult a specialist in capital allowances for a second opinion.
2.
On new build, extensions and refurbishment, raise the subject of ECAs. They represent a “greener” approach to development and attract much higher levels of tax relief and should also enjoy lower running costs over future years adding to a sustainable solution.
3.
On refurbishment, additional builders’ work should be claimable as P&M assuming a thorough analysis has been conducted. Also, repairs and maintenance to existing parts of the building structure may have occurred and will further enhance the value of the tax relief.
4.
The level of capital allowances for expenditure on doctors’ surgeries and other similar types of medical centres are likely to be particularly high because of the nature of the business being conducted within the property. Items such as radiation protection, special welfare facilities and a high level of security and communications equipment are specific to these types of property and will qualify for capital allowances.

Using an adviser or an accountant working in conjunction with a specialist will secure the maximum tax relief available. The “claim” must be in accordance with HMRC acknowledged procedures but, as queries from HMRC can arise some years after the building has long been brought into use, using a professional team with a good track record will ensure all safeguards are adhered to.
Richard Whittaker is a Capital Allowances specialist and part of Davis Langdon’s
Fiscal Incentives team, with over 25 years experience of providing technical help to
Accountants in the healthcare sector. For further information, he can be contacted by e-mail at: richard.whittaker@davislangdon.com
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