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Capital allowances for
structures and buildings
Technical Note 29 October 2018
Contents
Introduction
Chapter 1 Aim of the relief
Chapter 2 Outline of relief
Chapter 3 Key features of the SBA
Chapter 4 Expenditure that will qualify for SBA or not
Chapter 5 Timing and amount of relief available
Chapter 6 Treatment for particular transactions
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Treatment for leasing transactions
Anti-avoidance provisions
Commencement conditions
Next steps
This technical note outlines a new capital allowance for structures and buildings from 29 October 2018. It provides businesses with information before draft legislation is published in Finance Bill 2018-19.
Introduction
- The Chancellor announced at Budget 2018 that the government will introduce a new Structures and Buildings Allowance (SBA) for new non-residential structures and buildings. Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of two percent on a straight-line basis.
- This will improve the UK’s international competitiveness. The UK currently has the lowest Corporation Tax rate in the G20 – which is set to decrease further to 17% in 2020
- as well as generous tax relief for research and development to support innovation. The SBA will further reduce the costs of doing business in the UK.
- This SBA directly addresses a gap in the current capital allowances system, where no relief has been available for most structures and buildings, although capital allowances are available for plant and machinery that forms integral features of buildings, such as air conditioning. It is a longstanding request from business representative groups that capital investment to construct structures and buildings should be relieved, as is already the case for other types of investment. The Office of Tax Simplification recommended widening the current scope of capital allowances in their report earlier this year.^1 The government recognises the issue, and is responding. The SBA will ensure that expenditure on new commercial structures and buildings will be generally relievable over time through the tax system.
- The introduction of the SBA represents a long-term commitment to improving the competitiveness of the UK as a destination for investment. Businesses factor future capital allowances into their investment decisions, and the SBA will improve the business case for new investments in structures and buildings.
- Aspects of the design of the SBA that the government invites views on are underlined in this note and summarised in chapter 10. If you have any questions about this technical note, please contact our mailbox: contact.capitalallowances@hmrc.gsi.gov.uk
Chapter 1 Aim of the relief
- The aim of the SBA is to relieve the costs of physically constructing new structures and buildings. This will encourage investment in the construction of new structures and buildings that are intended for commercial use, the necessary works to bring them into existence and the improvement of existing structures and buildings, including the cost of converting existing premises for use in a qualifying activity. These assets are already depreciated in many businesses’ accounts, but until now without tax relief being given on all the expenditure.
- The SBA is intended to stimulate investment in structures and buildings that are intended for commercial activity. Neither land nor dwellings will be eligible for relief. Where there is mixed use - for example, between commercial and residential units in a
(^1) ‘Accounting depreciation or capital allowances? Simplifying tax reliefs for tangible fixed assets’, June 2018.
g) land costs or rights over land will not be eligible for relief, nor will the costs of obtaining planning permission h) the claimant must have an interest in the land on which the structure or building is constructed i) dwelling houses will not qualify, nor any part of a building used as a dwelling where the remainder of the building is commercial j) sale of the asset will not result in a balancing adjustment - instead, the purchaser takes over the remainder of the allowances written down over the remaining part of the 50-year period k) expenditure on integral features and fittings of a structure or building that are currently allowable as expenditure on plant and machinery, will continue to qualify for writing down allowances for plant and machinery including the Annual Investment Allowance (AIA) up to its annual limit l) SBA expenditure will not qualify for the AIA m) where a structure or building is renovated or converted so that it becomes a qualifying asset, the expenditure will qualify for a separate two percent relief over the next 50 years.
Chapter 4 Expenditure that will qualify for SBA or not
Qualifying expenditure
- SBA will be available for capital expenditure on structures and buildings brought into use for the following qualifying activities:
a) a trade, including a ring-fence trade in the oil and gas sector b) a profession or vocation c) a UK or overseas property business that is an “ordinary” business for the purposes of the Capital Allowances Act 2001 d) a concern listed in section 12(4) of the Income Tax (Trading and Other Income) Act 2005 or section 39(4) of the Corporation Tax Act 2009 (mines, transport undertakings etc.) e) managing the investments of a company with investment business, to the extent that any profits or gains from the activity are chargeable to tax.
- Structures and buildings include offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses. Capital expenditure on renovations or conversions of existing commercial structures or buildings will also qualify. The costs of construction will include only the net direct costs related to physically constructing the asset, after any discounts, refunds or other adjustments. Capital expenditure does not include costs that can be allowed as a deduction in calculating the profits of the business.
Dwellings
- Expenditure on residential property and other buildings that function as dwellings will not qualify for the SBA.
- Dwellings are buildings primarily intended or used for long-term residence. This would include university or school accommodation, military accommodation and prisons. The
definition of dwelling for the purpose of this relief will be consulted upon before being set out in legislation. Premises used as hotels and care homes will qualify for the SBA.
- There will be no relief for expenditure on workplaces that are an integral part of a dwelling, such as home-offices.
- The government welcomes views on the appropriate definition of a dwelling for SBA purposes.
Land
- Expenditure on land or acquiring rights over land will not qualify for relief. This includes any legal costs and stamp duty, or any costs attributable to the obtaining of planning permissions, including the costs of public inquiries.
- Where the business itself develops the structure or building, rather than acquires it, the cost of any land preparation necessary for construction will qualify for relief.
- Where a structure or building is acquired from a developer, then an apportionment of the purchase cost from the developer will be required to separate the amount of the cost that is attributable to the land. The eligible costs will be the overall acquisition cost less the value of the land acquired.
Integral features and fixtures in structures and buildings
- Integral features and fixtures that are functional assets within a structure or building, such as its lighting or heating system, will continue to qualify for relief as plant or machinery, as they do now, including the AIA within the annual limit, and will not be taken into account for the SBA.
Other reliefs
- Allowances can be claimed once the structure or building comes into qualifying use. As with any capital allowance, qualifying expenditure can only be claimed once where separate provisions of the Capital Allowances Act 2001 might apply to the same expenditure. Therefore, where parts of a structure or building qualify for allowances as plant and machinery such expenditure will not also be allowed under the SBA. Capital allowances are not due on any costs deductible in calculating profits chargeable to tax, such as land remediation relief.
Overseas Buildings
- Relief for expenditure on an overseas structure or building will be available on the same basis as for a UK structure or building. The structure or building will qualify for SBA where it is in use by the person claiming the relief for a qualifying activity and to the extent the profits of the activity are chargeable to tax in the UK.
Apportionment of qualifying expenditure
- Where a structure or building is divided into separate parts, some of which qualify, an appropriate proportion of expenditure will qualify for relief. SBA will not be due where ten percent or less of the costs would meet the conditions for relief.
Disuse or change of use of a qualifying structure or building
- Where an asset ceases to be used for an activity that qualifies for relief, then relief can be claimed for a further period of up to two years. After this point, no further relief can be claimed until such time as the structure or building is once again used for a qualifying activity.
- Where a structure or building is damaged and can no longer be used for qualifying activity, allowances will remain available for a period of two years, allowing reconstruction work to take place. If the reconstruction takes longer allowances will not be available after that two-year period until the reconstructed structure or building comes back into qualifying use. This two-year period may be extended up to five years where the structure or building substantially no longer exists following extensive damage. Any new expenditure on reconstruction will qualify for relief in its own right, and will qualify for relief at the rate of two percent annually over the following 50 years. The total eligible cost will be net of any costs covered by compensation or insurance etc.
- Where a structure or building is demolished, and the owner decides not to replace that building, it can continue to claim the SBA on that asset, for the remaining term of the previous structure or building.
Illustrative example
Company A builds a new commercial building on which the construction costs were £50m. 10 years later, there is a fire, which causes heavy damage. The building is partially insured, and insurance payments will cover £10m. The cost of rebuilding (including costs of partial demolition) are estimated at £12m.
At the time of the fire, Company A is claiming SBA at a rate of £1m per year. For the period after the fire, Company A continues to claim SBA while it decides on a replacement. If it rebuilds, it will continue to claim SBA for the remaining 40 years of the original building, while the net costs of rebuilding (£2m, taking into account insurance receipts) may be claimed as a new investment over 50 years. If it does not rebuild, it may continue to receive a “shadow SBA” on the original construction costs.
Qualifying expenditure on structures or buildings by the Crown or person
not chargeable to tax
- Where construction costs are incurred by the Crown or other person not in the charge to UK tax, or where income from the qualifying activity is not within the charge to UK tax notional allowances at an annual rate of two percent will be calculated and deducted from the qualifying expenditure. Any person subsequently acquiring the structure or building will be entitled to the remainder of qualifying expenditure reduced by the notional allowances.
Chapter 6 Treatment for particular transactions
Acquiring a ready built asset
- Where a business acquires an unused asset that has already been constructed by a developer the qualifying expenditure will be the price paid by the business less any amount relating to land. A valuation will be required to separate the amount of the land cost from the cost of the structure or building.
Disposals and acquisitions of assets
- Where an asset that has qualified for relief is sold, the new owner will be able to claim the annual relief for the remaining part of the 50-year period if it is used for a qualifying activity and continues to be used for a qualifying activity. Relief for the period in which the disposal takes place will be apportioned.
- There will be no balancing adjustments on disposal. However, for chargeable gains purposes a person’s allowable cost of the asset will be reduced by the total amount of relief that they have claimed.
- Where the SBAs are transferred to a new owner, the amount of the original expenditure on construction may need to be verified if SBA is not already being claimed. The buyer will then be entitled to claim the remainder of relief on the basis of costs they have not themselves incurred. To ensure that relief is given on an agreed amount, there will be a need to retain evidence of actual costs incurred where a building or structure has qualified for relief and provide this to a purchaser.
Illustrative example
Company A buys a new office building from a developer at a total cost of £15m of which £5m relates to the land leaving a construction cost of £10m. It brings it into use for the purposes of its trade at the beginning of its accounting period ending on 31 December 2021. The annual writing down allowance will be
£10m x 2% = £200,000 SBA each year, for 50 years.
On 31 December 2030 the building is sold to Company B for use in its trade. The price paid was £12m of which £7m relates to the land.
Company B will be entitled to claim SBA on the original construction costs of £10m, less the portion already received by company A.
Company A will have received SBA for 10 years totalling £2m. The allowable cost when calculating its capital loss on the land and building (which are a single asset for capital gains purposes) is reduced by that amount. The capital loss of £3m (£15m less £12m) is therefore reduced to £1m.
In 2032 Company B decides that the building needs improvement and it becomes unoccupied for two years during a £4m renovation project. The company can
b) where only part of the property is subject to a lease the test will apply only to that part and allowances will transfer if the capital sum is 75% or more of the value of that part
c) where this is less than 75% all the allowances will stay with the lessor
d) where the term of the lease is not more than 35 years, all the allowances will stay with the lessor
e) the value of the interest in the property retained by the lessor will include the value of the right to receive the rent due under the lease.
Illustrative example
Company X owns a building on which it claims the SBA, the building including land cost £25 million. It then grants a lease over the entire building to Company Y which will use it in its trade. The term of the lease is 40 years and Company X will receives a premium of £50 million but only a token rent is payable. Company X’s retained interest in the property is agreed to be £10 million.
The income tax rules mean that for a 40-year lease 22% of the premium is chargeable to income tax leaving £39 million as capital gains proceeds.
The proportion of the capital gains base cost that can be deducted is calculated as disposal proceeds using the formula: disposal proceeds / (disposal proceeds + value of asset retained). This is 39 / (39 + 10), approximately 80%.
Because the lease is for over 35 years and more than 75% of the capital gains base cost is applied in calculating the gain, this means that Company X is no longer entitled to claim SBA. Company Y will be able to claim instead.
Chapter 8 Anti-avoidance provisions
- The relief is designed to act as an incentive for businesses in respect of qualifying capital expenditure. To ensure that relief can be obtained only for genuine business costs on actual construction works, anti-avoidance rules will deny or restrict the relief in appropriate circumstances. Rules will be included in the legislation to prevent manipulation of the relief for a tax advantage, including for commencement purposes and across the relief more widely.
- The relief is available on construction works that commence on or after 29 October 2018, including direct costs required to bring the asset into existence. In the past, the government has seen arrangements that seek to exploit the availability of capital allowances and other incentives. In particular, there will be rules to prevent leases being used to give more than one party separate interests in the same structure or building.
- There will also be a rule to disallow relief through attempts to manipulate contracts, such as by revising or revoking agreed contracts for construction works entered into before
29 October 2018, or other arrangements with a main purpose of obtaining relief for construction works that commenced before that date. Relief will be unavailable wherever contracts were in place, or preparatory or construction work commenced, before 29 October 2018. Demolition, site clearance or similar ‘enabling’ works will not in themselves constitute a means for eligibility of a project.
Chapter 9 Commencement conditions
- The relief will apply to newly constructed commercial structures and buildings where all the contracts (not letters of intent) for the physical construction works of the structure or building (including any contract for preparatory works) are made in writing, and are entered into (signed and dated by the bound parties) on or after 29 October 2018. Similar rules will also apply to all the contracts for construction works, including any contracts for physical preparatory works in whole or in part, involving renovation or conversion of existing structures and buildings for a qualifying use.
- Where construction is undertaken by an internal workforce, for example by contract or on payroll, the relief will apply where that physical work commenced on or after 29 October 2018.
- Where a new structure or building is bought from a developer, the relief will be available where the written contracts held by the developer for the physical construction works of the structure or building are entered into on or after 29 October 2018.
- In most cases, “construction works” are likely to include any preparatory work for the land on which the structure or building is constructed. Where such a written contract for preparatory work has been entered into before 29 October 2018, the structure or building will not qualify for SBA. This will be the case notwithstanding that the remainder of the constructions works to complete the structure or building are effected under separate contracts entered into only on or after 29 October 2018. Any contract in place for preparatory or construction work before 29 October 2018, or effectively replaced after this date by termination or withdrawal, will invalidate the SBA being available for such claims. This includes where physical preparatory or construction work ceases and recommences, or where such physical works are undone and then subsequently redone.
- However, in some circumstances the preparatory work will be unconnected to the eventual structure or building. For example, where a site has been cleared of an existing building but no new structure or building is planned on the site at that time, the preparatory works are unconnected to any future contract entered into to construct a new structure or building. If the first contract for construction of the eventual structure or building is entered into on or after 29 October 2018, the structure or building may qualify for SBA. Demolition, site clearance or similar ‘enabling’ works will not in themselves constitute a means for eligibility of a project unless linked explicitly to the actual structure or building intended for relief, including where this occurs through phased construction.
- Where framework or call-off contract arrangements are agreed, the test will be whether the written contract requires particular works to be undertaken within the period of the framework, that relate to the construction of a specific building. In practice, this means
- There are some features of the regime where consultation will be more productive through meetings. HMRC and HMT will set up these with interested parties. Any representations should be sent to: contact.capitalallowances@hmrc.gsi.gov.uk by 31 January 2019.
