Updated: Jul 5, 2020
The autumn budget announced the introduction of a new structures and buildings allowance (SBA). It is designed to give tax relief for expenditure on commercial buildings and structures (non-residential) over a 50 year period (i.e. 2% on a straight-line basis). SBAs will be available for construction contracts on or after 29 October 2018.
Given draft legislation has still be published (and unlikely to arrive until the new year) we have set out below some of the key differences based on the technical information published to date – watch out for further updates!
One could be forgiven for thinking that the SBA will simply follow historically adapted rules (e.g. industrial building or building premises renovation allowances) to save time and make it easier for businesses and their advisors to adopt.
However, whilst the SBA does share many similarities with preceding legislation, it is shaping up to be a very different relief on important aspects that have the potential to catch many businesses and their advisors unaware.
Different interaction with capital gains tax
Currently the capital gain tax (CGT) rules specifically provide that there is not a requirement to exclude capital allowances expenditure from the GGT sums allowable where there is a gain.
For SBA purposes this exclusion will not apply. Instead a person’s allowable asset costs will be reduced by the total amount of SBAs claimed. In effect, reducing the value of SBAs to a timing advantage as opposed to an absolute tax saving in such circumstance.
New rules for expenditure incurred under a lease
Unlike CGT, when a lessor grants a property lease for capital allowances purposes it is not normally a disposal. Now, the granting of a lease of more than 35 years will require consideration of new rules to determine the value of the retained interest. If the lessor disposes of 75% or more of the value then SBAs will transfer to the lessee.
When a lessee incurs expenditure under an occupational lease that expires, it will often continue to receive the benefit of allowances on expiry. Lessors will now be able to benefit from the residue of unclaimed allowances on qualifying expenditure previously incurred by the lessee.
Another definition of qualifying expenditure
Whilst plant and machinery allowances allow claimants to include costs associated with the ‘provision of’ the qualifying items involved (e.g. professional fees, transport, installation etc.), the SBA rules will contain a new definition to achieve a similar if slightly narrower aim (i.e. that it is limited to the ‘net direct costs’ relating to physically constructing the asset).
More debate on the meaning of a dwelling
One has got to question why the UK tax system cannot have a single definition of a dwelling for all taxes. The capital allowances rules reference dwellings but do not actually define them which has resulted in much debate and HMRC clarifications and guidance over the years.
SBAs are only intended for non-residential structures and buildings, and to put the matter beyond doubt, HMRC intends consulting specifically on this point such that buildings intended or used for long-term residence are excluded (e.g. university or school accommodation, military accommodation and prisons).
Another de-minimis limit
If your building or structure contains areas in use for a non-qualifying purpose (e.g. a dwelling) the appropriate portion will need to be excluded from the SBA calculation. Unlike plant and machinery allowances, any shared areas (e.g. communal spaces) will not qualify. SBAs will only be due on the qualifying portion if its costs exceed 10%.
New balancing events and disposal adjustments
Accompanying the changes in interaction with CGT and treatment of leases there will be a fresh set of rules governing balancing events and disposal values. These will also cover periods of temporary disuse, demolition/destruction and insurance proceeds and again will be slightly different to previous and current rules.
A key concept of SBA is that allowances will be based on the original construction cost and be available for exactly 50 years from first use. If the property is sold the new owner will inherit the balance. If the property is demolished and not replaced the new owner will continue to claim SBAs on that asset (i.e. no balancing allowance or charge).
Periods of non-qualifying ownership (e.g. by Crown or non-tax payers) will be subject to a notional allowance.
Missed claims will be permanently lost
Use it or lose it. If a business wishes to benefit from SBAs it will need to claim them as they were intended. If for whatever reason it decides not to within normal filing deadlines any SBAs for the period will be lost.
New record keeping and computations
In a similar way to IBAs, tax payers will need to record expenditure on each building on a per project basis with periods of first use to ensure SBAs are claimed, tracked and recorded correctly.
It is not clear what processes are to be introduced for buyers of second hand properties eligible to inherit any balance of SBAs from both claimants and non claimants.
Potential ring fencing of SBA capex
When an asset qualifies for more than one type of allowance (e.g. integral features or fixtures in a qualifying building) tax payers can normally choose which relief to claim. However, this does not look possible for SBAs. The preliminary guidance states that such assets ‘will not be taken into account’ for the SBA and provides no commentary on re-allocation (e.g. to fixed plant on purchase) in a similar way to other building allowances.
Another apportionment formula
Capital allowances valuations that utilise a ‘just and reasonable apportionment’ are not new concepts as is the role of the Valuation Office Agency (VOA). Where a business acquires an unused asset from a developer a valuation will be required to separate the cost of the land from the structure or building. Unless the developer is willing to release these details, it is likely that a fresh valuation using a new VOA formula will be needed to reflect the actual cost of construction (i.e. net direct costs only).
Subject to ongoing consultation, 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.
New definition of qualifying activity
In order to qualify for SBAs, the building or structure must be in use for a ‘qualifying activity’ in the period of claim with special rules for temporary disuse and pre-commencement costs. The definition of a ‘qualifying activity’ is slightly different to the existing definition within Part 2 – Capital Allowances Act 2001 and there are notable omissions (e.g. a furnished holiday lettings business).
An end to land remediation relief for capex
Contaminated or derelict land remediation relief is restricted when capital allowances is available instead and this will apply to SBA. This will significantly limit the scope of this relief as previously unaffected works (e.g. roofing, foundations, walls etc) will likely qualify for SBA when capital expenditure is incurred.
HMRC and HMT will be seeking views on the operation of leases, temporary disuse, overseas and the definition of dwellings. They will also be holding meetings with interested parties and Furasta Consulting will be taking part.
If you have any questions, please free to contact us. Representations to HMRC and HMT can be made directly to: firstname.lastname@example.org by 31 January 2019.