Updated: Jun 15, 2020
With the increased focus on energy efficiency in buildings arising from higher running costs and more restrictive legislation we look at tax relief in more detail…
Older buildings can often require re-roofing or re-cladding and the tax treatment of how the expenditure is treated is often only considered long after the expenditure has been incurred and accounts filed.
To reflect the significance of the cost involved and enhancement value of the underlying property many businesses will ‘capitalise’ the cost as either a freehold or leasehold improvement and depreciate in line with their accounting policies. From a tax perspective, this depreciation is added back as a disallowable expense which can leave many businesses scratching their heads as to how to obtain tax relief.
If the primary motivation behind the roof or wall cladding replacement was to improve the thermal efficiency of the building then a partial claim may be possible under the Capital Allowances Act 2001 s28 which was originally introduced in the 1950’s to help reduce energy consumption in factories and preserve dwindling coal reserves. Any expenditure must be legitimate ‘capital’ expenditure for tax (ie. more than a nearest modern equivalent replacement, change in use, layout etc) and the building occupied by the business before works began. HM Revenue & Customs are known to ask for both evidence of motivation and improved thermal efficiency. Qualifying expenditure is written off at 8% per annum and on sale benefits from a nil disposal value.
A much more common scenario is to simply treat the expenditure as a genuine (albeit ‘capitalised’) repair. In such cases, provided the normal tests for repair treatment are met (see Revenue and Customs Brief 5 (2013): guidance on repairs and renewals of assets) then businesses should still be entitled to treat the expenditure as a repair for tax purposes. Relief will be allowed as the costs are depreciated.
Another less common relief is for contaminated land remediation which can be triggered if the work involves the need to remove hazardous or dangerous materials (e.g. asbestos roof lining). This is a relief that is only available to companies and it is only the extra additional cost that is eligible for relief resulting from the contamination. Qualifying expenditure (capital or revenue) is eligible for an enhanced deduction of up to 150% or, if loss making, tax credit of up to 16% (ie. £24 for every £100 incurred). Unlike capital allowances, if the property is subsequently sold for a gain the original expenditure is not allowed to be deducted when calculating any chargeable gain. There are also restrictions on expenditure eligible for capital allowances which means expenditure, for example, on a laboratory roof or wall used for qualifying R&D will not qualify for relief.