Tax: Structures and buildings allowance
By Donald Drysdale for ICAS
12 April 2019
Now that draft secondary legislation for structures and buildings allowance has been published for consultation, Donald Drysdale notes that few changes have been made.
Introduction
Last November I wrote an article entitled ‘Tax relief: structures and buildings’. In it I explained the Government’s proposals for a new structures and buildings allowance (SBA), and I sought to encourage readers to respond to questions contained in a Budget Day technical note.
The Government has now published draft secondary legislation to give effect to SBA, which will apply to eligible costs incurred on or after 29 October 2018, subject to commencement provisions.
Accompanying the draft legislation is a note reiterating the scope and design of SBA, and outlining some technical changes which have been made as a result of the consultation process to date.
Core structure of SBA
Key features of the relief remain as originally proposed, and are summarised in the new document:
- relief at a flat rate of 2% over a 50-year period;
- relief available for new commercial structures and buildings, including new conversions or renovations;
- available for UK and overseas structures and buildings, where the business is within the charge to UK tax;
- limited to the costs of physically constructing the structure or building, including costs of demolition or land alterations necessary for construction, and direct costs of bringing the asset into existence;
- available for eligible expenditure where all contracts for the physical construction works were entered into on or after 29 October 2018;
- can only be claimed when the structure or building first comes into use;
- no relief on costs of land, rights over land or costs of obtaining planning permission;
- the claimant must have an interest in the land on which the structure or building is constructed;
- dwelling houses do not qualify, nor any part of a building used as a dwelling;
- no balancing adjustment on sale of the asset – instead the purchaser may claim the residual allowances over the remainder of the 50-year period;
- integral features and fittings currently allowable as plant and machinery continue to qualify as plant and machinery, including the annual investment allowance (AIA) up to its annual limit;
- SBA expenditure does not qualify for the AIA; and
- where a structure or building becomes a qualifying asset on renovation or conversion, the expenditure qualifies for a separate 2% relief over the next 50 years.
ICAS submission
With the benefit of input from its members, ICAS submitted a response to the Budget Day technical note.
ICAS supported the introduction of the proposed SBA, while noting its dislike for the truncated consultation process and the use of secondary (rather than primary) legislation. It suggested that the new provisions should be written into the Capital Allowances Act 2001 with other capital allowances legislation.
The submission from ICAS raised a number of other specific concerns.
Administrative burdens
The overall aim of the proposed approach to SBA appeared to have been to avoid complexity – so, for example, there would be no balancing allowances or charges. However, some aspects of SBA would impose administrative burdens which might deter take-up.
Businesses would need to maintain detailed analyses of expenditure incurred on structures and buildings, and detailed depreciation schedules for each one – with separate schedules for any later additional capital expenditure, e.g. on renovations.
Where a structure or building was constructed by the Crown or another person not within the charge to UK tax, there might be little incentive for them to keep detailed records which would enable a later purchaser to claim SBA.
These concerns seem to have gone largely unaddressed, though to simplify record-keeping HMRC have now confirmed that SBA will continue to be available during periods of disuse.
Nonetheless, owners will have to create and maintain far-reaching records and documentation on each asset acquisition, construction, improvement and disposal. This will be particularly onerous for taxpayers with multiple qualifying assets.
Demolition
ICAS was concerned about the treatment of qualifying assets becoming obsolete in significantly less than 50 years – as might happen, for example, with structures for generating alternative energy. It suggested that, where such an asset was demolished and replaced, SBA should continue to run on the balance of the original cost as well as on the replacement cost.
HMRC now say that demolition would usually be considered a disposal event for chargeable gains – allowing any unrelieved expenditure to be claimed as a deduction in computing any capital gain or loss. They argue that this would avoid businesses having to continue with ‘shadow’ SBA claims after demolition or where an interest in land may have expired.
Unfortunately, a deduction for chargeable gains may not be as useful as a balancing allowance would have been. Thankfully technical amendments will allow a deemed disposal on demolition of a qualifying building or structure to take place without triggering a deemed disposal of the land to which it is attached.
Integral features and fittings
Some of the concerns which were raised by ICAS have fallen on deaf ears.
For example, where a business incurs costs on a qualifying asset and on integral features and fittings but wants to avoid having to break down the costs, it might have suited it simply to claim SBA on the total – as was possible under the old industrial buildings allowance (IBA) regime.
Instead, as HMRC had originally proposed, a statutory prohibition will prevent expenditure on the provision of plant or machinery from qualifying for SBA. Businesses will have no alternative but to produce detailed analyses of costs incurred, or forgo allowances.
Leases
Although not raised specifically by ICAS, the consultation process elicited questions about the treatment of leased structures and buildings.
Where the lease term is not more than 35 years, SBA will stay with the lessor. Where the lease exceeds 35 years and the amount paid as a capital sum for the lease falls within certain specified parameters, the relevant interest is transferred to the lessee.
Separate rules will apply to wasting and non-wasting leases, both to ensure that all eligible expenditure is relieved and to avoid double relief. The rules will also look to ensure that lessors do not benefit unduly from unclaimed relief on expiry of a lease.
Final consultation opportunity
HMRC are now inviting views on the draft legislation by 24 April. After that, they will publish an overall response to consultation responses in May. Subject to the current ravages and uncertainties of parliamentary business, the resulting statutory instrument is expected to be debated by Parliament before being made by affirmative resolution.
If you have views on the proposed legislation which you wish ICAS to take into account in responding to HMRC, please email the ICAS tax team.
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