Updated: Jul 5, 2020
Buildings account for around 34% of the UK’s greenhouse gas emissions, 27% of which relate to commercial properties. All buildings use energy but a significant majority are over 10 years old and require updating and this is one of the main reasons the government is keen to encourage property owners, and landlords in particular, to meet minimum energy efficient standards.
You might think then that the government would look to balance some of the sticks (eg. leasing restrictions, carbon reduction commitments etc) with some deserved tax breaks to encourage businesses to prioritise investment over other commitments. Unfortunately, the reality, as ever when it comes to tax is that careful planning is required to make the most of the limited options available.
If you have used the property and the character and function is going to be maintained post refurbishment works, then you should have a good case to claim the replacement of old components (eg. single glazed windows) with modern equivalents (eg. double glazing) under general tax principles.
However, a common challenge for most property owners is that major ‘enhancement’ works will often be capitalised for accounts purposes. Although tax law determines whether an item of expenditure is revenue or capital it is the accounting treatment which determines when any benefit can be taken (ie. when it is amortised).
Larger property investment businesses will typically value fixed assets by adopting the ‘investment method’ with revaluation differences reflected in the profit and loss account. In such circumstances, depreciation is not commonly charged. This means these business will get no tax relief for capitalised repairs to improve the energy efficiency of their buildings.
Adding Thermal Insulation
There is a specific provision within the capital allowances rules that allow business owners who incur expenditure in adding insulation against loss of heat to their buildings to claim plant and machinery allowances. This will be deductible at 8% per annum on a reducing balance basis or if available, set against the businesses Annual Investment Allowance (currently £200k) and deductible in full.
The business owner must have occupied or let the building for the purposes of their trade before expenditure is incurred. Examples of qualifying expenditure can include things like roof lining, double-glazing, draught exclusion and cavity wall filling.
There is an exclusion for dwelling houses, specifically when used in a residential property business; however, it is worth noting that the definition of a dwelling for the purposes of flatted developments or student accommodation typically relates to the curtilage only. This means expenditure in ‘common’ areas (ie. the area outside the flats) may still attract relief.
The key hurdles to this relief include demonstrating that the expenditure is actually capital for tax purposes and that improving the thermal insulation was a clear motivation in the expenditure being incurred.
HM Revenue & Customs will normally want to see documented evidence of the businesses intention to improve thermal efficiency (ie. more than meeting planning or modern building regulations), details of the materials used (before and after) and evidence that the thermal insulation properties have indeed improved.
Enhanced Capital Allowances
Enhanced Capital Allowances (ECAs) are a supposed straight forward way for a business to improve its cash flow through accelerated tax relief. The rules apply to certain energy and water efficient plant or machinery and the benefits include: –
100% First Year Allowances (instead of 8% or 18%)
First Year Tax Credit of 19% (reducing to two thirds of the prevailing CT rate in 2018/19)
Unfortunately, in the real world, the claiming of ECA can be extremely cumbersome. Not just in terms of the prescriptive nature of what qualifies but also in the level of detail needed to support claims.
Businesses that wish to benefit from ECAs must plan ahead, even if you are incurring expenditure in one of the approved technology categories. If the component installed is from a manufacturer who doesn’t have it listed on either the Energy Technology List (ETL) or Water Technology List the claim is likely to fail. There are special rules for lighting, pipe insulation, water recycling and CHP but these are by exception.
Autumn budget 2017 announced that the ETL will be updated to:
add three new technologies to the list: evaporative air coolers, saturated steam to electricity conversion and white LED lighting modules for backlit illuminated signs
modify nine existing technologies to reflect technological advances and changes in standards and clarify the qualifying criteria
remove Localised Rapid Steam Generators and Biomass fired Warm Air Heaters
These changes update the qualifying criteria to reflect technological advances and changes in standards. The government will legislate by statutory instrument to update the ETL in December 2017. The changes to the first year tax credit will have effect on and after 1 April 2018.
Developing Green Solutions
Construction companies that are involved in advanced component engineering, design or construction to incorporate alternate none traditional ‘green’ elements (eg. experimental cladding system) may find unexpected relief through research & development (R&D) expenditure credits (RDEC).
R&D tax credit expenditure can deliver:
An R&D Expenditure Credit (RDEC) of 11% (taxable) for large companies or up to £8.90 per £100 spent.
A tax deduction of 230% for small and medium sized companies or up to £33.40 per £100 spent.
To qualify as R&D, any activity must meet the definitions set out by the Department for Business, Innovation and Skills. These guidelines state that the activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity.
If your company and the project both meet the necessary conditions, you can claim tax relief on revenue expenditure in the areas outlined which can include staff costs, payments to contractors or vendors supplying personnel, software licences and utility costs. If you’ve spent money on something like, for example, staff costs where the employee was only partly engaged on R&D activities, you can claim for an appropriate proportion of the cost.
In the Autumn Budget 2017, the government announced it would increase the RDEC rate from 11%, to 12% – effective from 1 January 2018. This increase in generosity is good news for large companies – as well as the SMEs who also use the RDEC R&D tax credit scheme.
For further details, please do not hesitate to contact us.