Written by: Kyle Barford, Product Manager (Tax)
Tax changes announced in the 2018 Budget included a number of additions and alterations to the capital allowances rules: notably this included the introduction of a new allowance for expenditure on new non-residential buildings called the Structures and Buildings Allowance (“SBA”).
A technical note was released at the time of the announcement which included some information on key definitions and rules around the SBA. The final draft secondary legislation for the Structures and Buildings Allowance has now been laid before Parliament.
This is going to have a significant impact on the tax deductions available for companies in respect of capital expenditure on building works, in particular on the previously unrelieved non-plant elements such as the costs of conversion and refurbishment of commercial premises.
Relief is available on qualifying expenditure at a flat rate of 2% per annum over a 50 year period. Qualifying expenditure includes capital costs of new commercial structures and buildings, new conversions and refurbishments. The list of qualifying activities is widely defined, and includes expenditure on commercial buildings brought into use in ring-fence trades in the oil and gas sector, overseas businesses to the extent these are within the charge to UK tax, and managing the investments of a company with investment business (to the extent that profits or gains from the investment business are chargeable to tax).
Expenditure on residential property and other buildings that function as “dwellings” does not qualify for the SBA, and neither does expenditure on land.
The technical note and draft legislation include a non-exhaustive list of structures intentionally within the scope of the SBA including offices, retail structures, wholesale premises, factories and warehouses. Guidance is expected to be released this month to assist with complex SBA claims, and should include further detail on structures within the scope of the allowance.
Qualifying expenditure with respect to the SBA includes the physical costs of construction of the structure, along with direct costs. Expenditure must be incurred on an arm’s length basis. Expenditure on plant, fixtures and fittings, integral features etc. is excluded from the scope of the SBA as this will already be relieved more quickly under the general and special rates for capital allowances, even after the reduction in the special rate from 8% to 6% from 1 April 2019.
The SBA is available to be claimed from the date on which the structure is brought into use in the qualifying activity. Relief is available for eligible expenditure incurred where all the contracts for the physical construction of a structure were entered into on or after 29 October 2018.
SBAs will cease to be available during any period in which a structure previously used for a qualifying activity becomes used as a dwelling. SBAs may recommence if the structure is subsequently brought back into qualifying use. SBAs can continue to be claimed on a disused structure for two years after use ceases. Further relief is thereafter unavailable until the structure is once again used for a qualifying activity.
The right to claim the SBA is effectively transferred on sale: where an asset that qualifies for relief is disposed to a new owner, the new owner will be able to claim the annual relief for the remaining part of the 50-year period, so long as the asset continues to be used in a qualifying activity. Balancing adjustments are not made on disposal, but there is some interaction with the chargeable gains rules in that a company’s allowable cost of the structure disposed will be reduced by the total amount of SBA relief that has been claimed.
Example:
A Limited acquires a piece of land at a cost of £1m and begins construction of a new office in 2019. Construction takes just over one year and costs £3m. The office is brought into use by A Limited for the purposes of its trade on 1 April 2020, at the beginning of their accounting period ending on 31 March 2021.
A Limited can claim an annual writing down allowance of:
£3m x 2% = £60,000 per annum, for 50 years
In 2025, A Limited chooses to relocate and sells the office building and land to B Limited for the purposes of its trade. B Limited pays £5m, of which £1.2m relates to the land. B Limited brings the office into use on 1 April 2025.
B Limited can claim an annual writing down allowance of:
£3m x 2% = £60,000 per annum, for the remaining 45 years
A Limited has received a total of £300,000 SBA for 5 years of ownership. For chargeable gains purposes, the land and building is one asset. A Limited must reduce the allowable cost of the asset by the £300,000 claimed.
The chargeable gain for A Limited is:
£5m – (£4m - £300,000) = £1.3m
The legislation is subject to parliamentary approval and we are still pending the release of guidance concerning complex claims. More detailed information on the allowance can be found in the draft legislation, consultation and responses, and technical note. This includes information on administration, record-keeping, restrictions, transfers and leasing complexities.
In the absence of detailed guidance, a new capital allowances pool category has been added to the Corporation Tax template in accordance with the technical note and consultation information. This allows users of CaseWare Corporation Tax to action a claim for relief under the SBA and to generate a computation note. Further updates will be made to this section as more information is made available by HMRC.
*These are the opinions of CaseWare Product Managers to provide information and insight to our products and should not be considered as a replacement to statutory guidance.