Not since the introduction of Integral Features back in 2008 has the government made the bold step of providing for a new major form of Capital Allowance. This tax relief is aimed at giving additional cash back for those individuals or entities who build and invest in structures and buildings, but it is not without its complications. In this article we look at what the tax relief applies to and some of the key technical considerations.
Currently, when investing in either the construction of new structures and buildings or on acquiring certain property assets, tax relief is often only available on certain expenditure, namely on qualifying plant and machinery (P&M) fixtures. The legislation that governs P&M allowances, typically, although not in all cases, excludes the ability to claim on certain deemed structural or building assets. The introduction of SBAs looks to readdress this point by providing tax relief for these assets, which in essence will mean for some buildings and structures, that they will be 100% qualifying for some form of tax relief.
The key characteristics of SBAs are:
- Claimable at 2% per annum on a straight line basis over a 50 year period
- Available for new commercial structures and buildings, including costs for new renovations and refurbishments
- Applies to contracts for physical works entered on or after 29 October 2018
- Available on UK structures and buildings in the UK and overseas where the income remitted to the UK
- Claims can only be made when the structure of building first comes into use
- The claimant must have a relevant interest in the land
- Dwelling houses will not qualify, which includes student accommodation and the private rented sector (PRS), although this is subject to a further consultation
- Apportionment of expenditure for mixed use residential properties
- Only land alterations necessary for construction qualify for SBAs, so external works packages will need to be assessed
- The sale of an asset will not result in a balancing adjustment, instead the purchaser takes over the remainder of the allowance
- Standard P&M allowances are still available and have to be excluded from the SBA qualifying expenditure
- SBAs will not qualify for the Annual Investment Allowance (AIA)
The ability to attract tax relief for expenditure on structures and buildings is not new, Business Premise Renovation Allowances, Industrial Building, Hotel Building, Agriculture Building and Enterprise Zone Allowances were all previous forms of Capital Allowances which achieved this. It is worth noting that Research and Building Allowances are still available and provide 100% tax relief on the part of the building which undertakes a qualifying R&D trade. Whilst on the face of it the adopted system for SBAs appears straight forward, there are however some key entitlement and compliance points for clients to be aware of and address.
For projects currently on site, those for which the main construction contract is in place it is clear the SBAs will not apply. There is, however, the opportunity to consider SBAs where preliminary works have only been undertaken, either under a letter of intent or the works are unknown at the time of those initial works. The key point is that for SBAs to apply, the contract for the qualifying expenditure must have been entered into i.e. one that has been signed and dated by both parties, on or after 29 October 2018.
The 50 year life for SBAs starts once the structure or building is first brought into use and applies to that defined project. For existing structures and buildings which are to have a phased programme of refurbishment works, for say a multi let office, legislation still needs to be drafted to clarify if SBAs can be claimed straight away where the property is already in use and partially let. In any event there will be the need to assess each individual project to net off first the qualifying P&M allowances. When it comes to the future sale of that building some sellers may not have maintained their SBA records or be willing to pass over, so we can see a need in some cases for the purchaser to come up with their own valuation of the remaining SBA value.
For purchasers of structures or buildings, the CPSE enquiries will need to be revised to establish the claim history of SBAs so that the balance can be passed over, noting that this falls outside of the current s198 election requirements under s187A and B. An added complication will arise if the past owner has been a non-tax payer. This period of ownership will give rise to notional SBAs but may require the purchaser to obtain proof of the original expenditure in order to pursue a claim, likewise where the past owner hasn’t made a claim for SBAs.
For forward funded developments there is a need to allocate the “purchase” expenditure. This will include allocating part to the land purchase which is specifically excluded from the SBA calculation and to then calculate the normal P&M allowances which attract a faster rate of relief.
This change will also affect both REITs and PAIFs, meaning that they will have to review their data capture processes, in order to satisfy the REIT compliance requirement of claiming Capital Allowances under a shadow tax regime.
Where a structure or building can no longer be used for a qualifying activity or is demolished, then a shadow SBA can be claimed for a period of two years. This two year period can be extended to five years where the structure or building is extensively damaged. The total eligible costs on any rebuild will be net of any costs recovered by compensation or insurance.
Finally, to the extent SBAs are claimed, unlike normal P&M allowances, they reduce the base cost when it comes to calculating any gain on disposal and so for those structures or buildings which are to be held for a shorter period, the benefit of claiming SBAs is a timing and cash flow benefit.
In conclusion, the introduction of SBAs is a positive addition, albeit it will add another layer of complexity for clients, requiring them to allocate expenditure to multiple forms of Capital Allowances to ensure that they obtain the fastest rates of tax relief available.
Veritas Advisory will be making a representation to HMRC on the consultation into the definition of a residential dwelling for the purposes of this tax relief. We would welcome any views if clients or consultants would like to contribute, particularly around student accommodation and the private rented sector.