Updated: Jul 5, 2020
Furasta Consulting was invited to attend a meeting with HM Revenue & Customs, HM Treasury and the Chartered Institute of Taxation to discuss the new Structures and Buildings Allowances (SBAs) and the points raised in their Technical Note published last year.
HMRC confirmed the governments desire to reward capital expenditure on building contracts entered into, on or after, 29 October 2018 and gave a brief presentation on background and purpose.
There were discussions around a number of areas and some of the specific points are highlighted below.
The current dwelling house exclusion for plant & machinery allowances only applies to property rental businesses. Other businesses that utilise accommodation for their trade that have the potential to be excluded by their design include:- serviced apartments, school or university halls of residence, flats for employees, B&B facilities and guest houses, PFI/PPP prisons, special needs or residential care houses etc.
SBAs will make no such distinction and if a new definition is adopted it will be important to ensure that existing businesses claiming PMAs do not lose out.
HMRC confirmed that is does not want to give SBAs towards furnished holiday lettings, halls of residence or any other residential dwelling and will re-examine the mean of a dwelling in light of comments received.
Treatment of Leases
Not all property landlords are subject to CGT and therefore will have to introduce new processes to calculate retained interest values for the 75%+ value test to determine when a transfer takes place. This will represent an additional burden and it is not clear what will happen if either party disputes. Linking the transfer value to a known cost (e.g. original claim) could provide a simpler less subjective calculation.
The Technical Note (7.45) refers to the transfer of SBAs to the person holding the retained interest on lease expiry or termination. The average commercial lease is currently around 7 years which means that unless the tenant demolishes the assets (e.g. arising from a tenant fit-out) before lease expiry or termination the residue of any SBAs (over 86%) will revert to the landlord.
A more equitable outcome could be for the tenant (the person incurring the capex) to retain the value (subject to normal disposal receipt rules).
This is again going to provide an additional burden (particularly for non-paying landlords such as Real Estate Investment Trust “REITS) to have processes in place to track and claim accordingly. REITS are required to claim allowances under the “shadow capital allowances rules” and we have asked for clarification on this and other points to make sure relevant clients are not adversely affected.
HMRC acknowledged the anomalies in lease treatment and will consider in line with other comments. HMRC confirmed it remained in favour of some type of value test and wanted the allowances to be retained by the person with economic ownership.
The main challenge is one of practicality in terms of tracking use, original costs etc which again will be heightened if the UK owner is outside the charge to tax.
Given that claims for SBA are expected to last 50 years, record keeping will be extremely important for all parties if accurate claims are to be maintained. HMRC does not favour an “estimate” approach. It will require any claimants to have accurate records of actual costs, dates of first use etc.
HMRC noted the general comments.
The government has proposed a period of disuse during which the structure or buildings retains its eligibility for relief – up to two years ordinarily, or up to five years where it substantially no longer exists following extensive damage. Are there any significant practical problems would prevent the proposed policy from working?
A business that demolishes a property will continue to get SBAs whereas a business that has a property which falls into disuse does not – this seems counterproductive and it was accepted that this should be revisited.
HMRC noted the anomalies in disuse and the appropriateness of a temporary disuse test in general. It expects to review this point and gather further feedback.
The property rental business of a REIT is normally outside the scope of capital gains tax. However, there can be situations where a CGT liability arises (e.g. <3yr disposals) and with the requirement to reflect SBAs in any disposal calculation regardless of gain/loss could put them at a disadvantage compared to other property businesses and HMRC will consult further with relevant stakeholders.
The onus will be on the Purchaser to ascertain their entitlement to SBAs with original cost, date/period of first use. HMRC do not want anyone to use estimates. A Purchaser will not be able to re-allocate any fixed plant or machinery included in an SBA claim.
Commercial Property Standard Enquiries (CPSE) and Due Diligence Questionnaires (DDQs) are often not completed properly by Sellers of commercial property. Distressed asset sales rarely have details of historical claims or entitlement (no valid P&M election). There is no reason to suggest that the introduction of SBAs will alter the status quo such that a Buyer (who may or may not be within the charge to tax) will receive the necessary details to support any claim during a buildings residual 50yr life. This means there is a high risk SBAs will be lost with a break in evidence if another means (mandatory SBA statements or allowance of approved estimates) are not considered. HMRC will examine further.
If you would like more details please do not hesitate to contact us.