The Chancellor announced in the budget a package of measures to stimulate business investment, all subject to Royal Assent, including a 2-year increase in the Annual Investment Allowance (AIA) to £1million per year, and a new Capital Allowance for Structures and Buildings (SBA) on most non-residential commercial buildings, of 2% per annum of the construction and or refurbishment cost, which is available over 50 years.
However, the Government has also reduced the Special Rate Pool (SRP) from 8% to 6% and set a date of April 2020 to abolish 100% Enhanced Capital Allowances (ECA). There is also new legislation clarifying allowances for costs of altering land.
We have summarised the key points, but our view is that these changes have increased the complexity to claim. Investors will be required to retain records of their historic cost to pass onto future owners and more detailed analysis for their AIA calculation. With potentially more tax to pay due to the effect of the interest restrictions and overseas companies now coming into UK Corporation tax rules with additional capital gains tax liabilities, the Capital Allowances will be even more important, but increasingly complicated to calculate.
New Structures and Buildings Capital Allowances 2% (SBA)
This tax relief will be welcome for those large infrastructure and construction projects. On the face of it a simple system of claiming 2% per annum whilst you hold the property, then on sale the next purchaser carries on claiming the 2% until the 50 years has elapsed.
The main key points are:
- Available for contracts entered after 29th October 2018
- 2% flat rate, straight line available over 50 years
- Applies to new commercial structures and buildings including renovations and conversions
- Available on UK and overseas structures and buildings where the income is remitted to the UK
- Claims made when structure or buildings first comes into use
- Claimant must have an interest in land
- Dwelling houses will not qualify, subject to further comment
- Sale of asset will not result in adjustment, and next owner can claim on remainder of allowances up to 50 years
- Integral features and plant and machinery will continue at their rates and will also qualify for AIA
- SBA will not qualify for AIA
The technical note does mention several other conditions, which will create a degree of complexity
- Forward funded schemes will require an allocation if not provided
- Transfer to a new purchaser will require evidence of original cost
- Notional allowances will apply when non-tax payers own the property
- The allowances cannot be claimed as well as other allowances, including land remediation relief
- The allowances reduce the base cost for capital gains tax purposes
We welcome the additional reliefs available but it will have the effect of adding another layer of complexity to a Capital Allowances claim, far from simplifying the process.
HM Revenue and Customs have issued a technical note for SBA, with request for representations on views of the relief.
Increased Annual Investment Allowance £1million (AIA)
The Government previously wanted to give investors certainty and made the current level of AIA of £200,000 a permanent incentive, rather than creating confusion in calculating the benefit through continual historic changes, (£100,000 in 2010, £25,000 in 2012, £250,000 in 2013, £500,000 in 2014), The increase in the AIA to £1,000,000 will apply for a 2 year period from 1 January 2019 to 31st December 2020, before reverting back to £200,000.
Earlier this year, the response from the Office of Tax Simplification when considering an accounting depreciation approach in lieu of Capital Allowances, stated that extending the AIA for those 30,000 tax payers who incur more than the current level would help simplify the process. However, with the introduction of the SBA, businesses will still be keen to still categorise those assets which can be IF or P&M to benefit from the accelerated relief.
The AIA will also apply to assets acquired, which are deemed new expenditure. With the Purchaser potentially gaining more than the Seller in terms of timing, how Capital Allowances are negotiated on future deals may change.
Reducing the Special Rate Pool from 8% to 6%
A further reduction in the rate from 8% to 6%, to align more closely with the life of an asset, will require expenditure on these items to be split before and after the effective date of April 2019. However, a reduction in the rate is offset by the new increased rate for the AIA.
Abolition of Enhanced Capital Allowances 100%
First year 100% allowances are currently available for certain “green” energy efficient items installed within buildings but these allowances will cease from April 2020 with the revenue saved used to fund the Industrial Energy Transformation Fund. Enhanced Capital Allowances has benefited many investors, although identifying them is complicated and time consuming.
Clarification of Allowances for Altering Land
New legislation has amended the current section 21 and 22 of the Capital Allowances Act 2001, which allows the claiming of allowances in relation to the the alteration of the land, as a result of a recent case, SSE Generation Limited v HMRC, concerning the excavation of caverns for the purposes of installing plant and machinery.