top of page

Work in Progress and Capital Allowances

Very large or complex building projects can span a number of accounting periods and the fact these costs may be held in Work in Progress until completion, or first use, does not always limit capital allowances claims in the intervening periods. In fact, some types of accelerated allowances require claims to be made in the actual period the qualifying expenditure is incurred which can raise some important practical challenges.



Work in Progress (WIP) is a balance sheet classification commonly used to capture costs on a long-term project, such as building works, that span an accounting period. It may also be described as the cost of unfinished goods in the manufacturing process and is often needed to meet company law presentation requirements.


From a borrowing perspective, few lenders will allow WIP to be used as collateral for loans, since partially completed inventory would be difficult for them to sell in the event of a borrower default, unless it is very close to completion. There is also a risk that the works may not be capable of completion on time or for the agreed cost.


WIP is therefore a temporary classification and on works completion the costs will normally be transferred to the appropriate accounting classification. In the case of building and related plant or equipment for operational use in the business this will normally be within the ‘fixed-assets’.


Breaking down fixed asset WIP


It is important to remember that WIP is just the same as any other fixed asset category in that it may include costs that are potentially allowable for capital allowances purposes, for example, interim building payments, direct orders and professional fees. As well as payments that may not, such as, financing costs, planning payments, advertising and certain legal fees – these should be segregated as part of the normal tax or capital allowances analysis.


The basic principle supporting capital expenditure for tax purposes is that it is the initial motivation behind the project expenditure that should determine its tax treatment and the creation of an asset for the enduring benefit of a trade will usually always be capital regardless of any temporary accounting classification. This means capital expenditure for tax purposes; and more specifically capital allowances purposes; may be incurred, and sometimes claimed (depending on the type of allowances) on a real time basis.


Ownership of asset


A business that wishes to claim capital allowances must own the asset involved and the capital allowances rules contain special provisions to enable tenants and other occupants of land to be treated as the owners of expenditure on fixtures and qualifying building costs. In fact the rules contain generous provisions that can allow businesses to be treated as owners for the purposes of interim or instalment payments on qualifying assets when the relevant ownership titles are passed on project completion.


These rules are prescriptive so if your business does not have a 'relevant interest' in the land, such as a freehold or lease, or an agreement to acquire such an interest at the time project expenditure is incurred you may not be entitled to claim. This can be particularly messy for companies or partnerships that decide to develop or use assets where ownership rests with another entity or individual and the required paperwork or titles have not been agreed or transferred before contract expenditure starts.


Another complication with intergroup projects and payments between connected parties are the restrictions to First Year Allowances and Annual Investment Allowances, so taking expert advice early is strongly advised if there are any doubts.


Valid purpose of expenditure


Claims for things like plant and machinery allowances (PMAs) or research and development allowances (RDAs) require you to have a valid business purpose for the qualifying expenditure involved.


For example, businesses that wish to claim PMAs must ensure that it is on ‘the provision of plant and machinery wholly or partly’ for the purposes of the qualifying activity involved. There are restrictions for mixed use and special rules for pre-trading expenditure but critically no requirement to physically bring the assets into use before the first claim is made. This means claims for abortive expenditure under a contract with a valid business purpose may also still qualify for PMAs.


Similarly, claims for RDAs can begin on ‘the provision of facilities for carrying out research and development’ (R&D) before actual use provided a trade already exists and the facilities will demonstrably be used for R&D.


These subtleties matter because if you are eligible and wish to claim accelerated PMAs using the 130, 100% or 50% First Year Allowances (FYAs), or 100% Annual Investment Allowances (AIA) up to £1 million, or claim RDAs (up to 100%) on eligible buildings/structures or plant you must do so in the chargeable period the core entitlement conditions are met, and the expenditure is incurred.


Qualifying use of assets


Structures and Building Allowances represent one of the few capital allowances that are linked to commercial use and there are again special rules for existing buildings to make tracking expenditure easier, particularly when parts of a building are completed and used in stages.


Timing of capital expenditure


Nowadays most businesses file accounts on an accrual basis which means the effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid).


In practice this means most capital allowances claims will follow the timing of expenditure in the accounts, but it is important to remember that the capital allowances rules contain additional provisions unlike other tax allowances which can create opportunistic and restrictive anomalies; more specifically: -


  1. Contracts with long credit terms (up to four months) - The date on which the obligation to pay for an asset becomes unconditional and the date on which the purchaser is legally required to pay for that asset may not be the same. For example, a sale agreement may require a business owner to make a payment for an item of equipment within 4 weeks of delivery. Provided the gap between the date on which the obligation to pay becomes unconditional and the date on which payment is required to be made is not more than 4 months the date of payment will be on the delivery.

  2. Milestone certificates (within one month of year end) - Milestone contracts are often found where there is a large-scale construction project for buildings or for major items of machinery or plant such as infrastructure pipelines. In a milestone contract the obligation to pay normally becomes unconditional when an architect or engineer who has inspected the work done issues a certificate. Provided the asset has become the property of the purchaser and the certificate is issued within one month following the end of the chargeable period, such as January for works in a December year end business, even although payment may not be made until February it may still be treated as being incurred in December (two months previous).


When you consider that the temporary £1 million AIA is due to expire for expenditure on 1 January 2022 and the cut-off for the new 130% and 50% FYA super deductions announced in Budget 2021 is 31 March 2023 the importance of considering (1) and (2) becomes all too clear. Be warned however, there is targeted anti-avoidance to prevent artificial pay arrangements beyond normal commercial terms.


Mixed invoices or linked payments


A further complication in the tax analysis of accounting ledger payments is that interim and project invoices can cover a range of qualifying assets with different tax treatments. When the tax at stake is significant HM Revenue & Customs may refer the project to the Valuation Office Agency (VOA) to check that the claims being made accurately reflect the qualifying assets installed at the critical invoice dates involved. The VOA may also be asked to comment on estimates where the original lump sum pricing has been insufficient in detail or format.


Another challenge can be determining the correct treatment of upfront design, surveying, legal and engineering payments which can be incurred many months, and even years in advance of actual construction works. These are often linked to the costs and analysis treatment of the final construction works so may not be accurately determinable when expenditure is first incurred - these always require careful planning and consideration particularly for larger projects completed beyond normal filing deadlines.


New businesses or trades


The general rule for new businesses is that most pre-trading expenditure is treated as being incurred on the first day of trading and this is true for most capital allowances subject to some important exceptions, notably for FYAs and AIAs.


To ensure that businesses get the correct FYA or AIA at the time expenditure is actually incurred, the normal pre-trading rules are disregarded, so new businesses must still check the relevant dates in line with the ownership and timing of expenditure conditions outlined above.


Finding the right balance


If you want to optimise your capital allowances claims, planning is essential and this needs to be done in the context of the wider business, project circumstance and legislative restrictions. After all, tax computations need only be filed 12 months after the accounting period and can be amended for a further 12 months thereafter, leaving plenty of time to collate final costs and determine the optimum claim value for most projects.


However, for larger projects in particular, getting a handle on the potential tax cash flow implications for things like tax instalment payments and loss utilisation can be extremely valuable. Understanding procurement and accounting policy decisions can also prove beneficial and of course, doing so early can save valuable time and money in the long run.


One of our largest single construction projects at Furasta was on a £600 million energy project and we have extensive experience of even larger transactions building up close working relationships with the accounts, tax, property and legal teams involved.


If you would like further details on how we can help your business make the most of its capital allowances and related reliefs, we will be delighted to hear from you.

bottom of page