Updated: Jul 5, 2020
Get ready for new non-residential construction projects to be accompanied by an “Allowances Statement”; at least that is what HM Revenue & Customs (HMRC) appears to be hoping for with the latest draft legislation for the new Structures and Building Allowance (SBAs) published on 13 March 2019.
Businesses with a construction contract that started on or after 29 October 2018 will need to take note of the changes despite the fact detailed legislation and guidance is still being finalised.
What is an “Allowances Statement”?
If you wish to make a claim for SBAs, you will need to have an “Allowances Statement” that sets out the following details:
the date of the earliest written contract for the construction of the building or structure,
the amount of “qualifying expenditure” incurred on its construction or purchase,
the date on which the building or structure is first brought into non-residential use, and
such other supplementary information as may be reasonably required by the Commissioners of HMRC.
The Allowances Statement will be a kind of capital allowances passport that sets out the availability of SBAs for anyone that purchases the property from you. HM Revenue & Customs (HMRC) does not want to see estimates but records of actual qualifying costs to avoid costly negotiation and debate and the Allowances Statement is intended to satisfy this requirement.
Separate construction projects (e.g. extensions, conversions) on the same site, regardless of size, will each require their own “Allowances Statement”.
If you purchase a property and are unable to obtain a valid Allowances Statement from a Seller, or other third party, you will not be entitled to make an SBA claim.
What is “qualifying expenditure”?
Qualifying expenditure is expected to be limited to the actual construction costs plus associated design/management fees. It may also include any land preparation and alterations for the actual building or structure. There are special rules to deal with acquisitions from developers.
It cannot include costs in connection with obtaining planning permission (including fees and related costs), land reclamation, land remediation or landscaping (other than to create the building or structure). Finance, marketing and other general property management costs will also be excluded.
Exclusion of fixed plant or machinery
In order to maintain the integrity of SBAs (which have different disposal/balancing adjustment rules and interaction with capital gains tax) it has been necessary to exclude fixed plant or machinery that has become installed or affixed to a building (e.g. heating, lifts lighting etc).
This means unlike other building allowances (e.g. research & development) taxpayers will not have the choice on which to claim and should be prepared to segregate fixed plant and machinery expenditure accordingly in any Allowances Statement.
Meaning of residential use
The SBA rules introduce a new definition of non residential use for taxpayers to administer which will mean that plant and machinery allowances may remain available for parts (or all) of buildings or structures where no SBAs are available.
Non residential use includes a dwelling-house; residential accommodation for schools; student accommodation, residential accommodation for members of the armed forces; a home or other institutional residential accommodation (except in certain situations with personal care); a prison or similar establishment.
A building with multiple distinct uses will require an apportionment.
Reprieve for land remediation relief
In what would have been an end to land remediation relief (LRR) for capital expenditure (up to 150%) for clearing up contaminants in existing buildings or sites, such qualifying expenditure cannot qualify for SBAs and will remain eligible for LRR instead.
What are the benefits?
The new SBA offers businesses the opportunity to claim an annual deduction of 2% of the original qualifying construction expenditure set out in each Allowances Statement.
At current corporation tax rates this equates to an overall lifetime tax saving of up to £19 or £0.38 per annum for every £100 incurred. If your business is subject to income tax this has the potential to rise to £45* or £0.90 per annum (*£46 in Scotland).
The availability of SBAs begins when the building is first brought into use and can last up to 50 years from this date. SBAs cease when the building or structure is demolished. A business that brings a commercial building or structure into a residential use will lose its entitlement. Any SBA not claimed in normal filing deadlines will be lost.
The SBA rules interact with the Capital Gains Tax rules differently to other forms of capital allowances such that qualifying SBA expenditure must be excluded from any chargeable gain on disposal.
The government invites comment by 24 April 2019 on the detailed draft secondary legislation. An overall response to consultation responses will be published in May 2019. The final, published version of this legislation will be in the format of a Statutory Instrument later this year.
Furasta Consulting met with HMRC to discuss the original consultation and is in ongoing discussions on the above. If you would like more details, or would like to discuss how these changes will affect your business, please do not hesitate to contact us.