Firm foundations for a new relief? 

One of the few surprises in Budget 2018 was the introduction with immediate effect of a new class of capital allowances – Structures and Buildings Allowances (SBAs).  So what do (and don’t) we know about these mysterious new allowances?

In outline, SBAs will provide relief on a straight line basis for qualifying expenditure on new non-residential structures and buildings incurred on or after 29 October 2018.  This is good news for businesses, as such expenditure has often not qualified for relief since the abolition of Industrial Buildings Allowances (IBAs) in 2011. Indeed, early indications are that SBAs may even be available where IBAs were not available.

We are however in a rather odd situation – although expenditure currently being incurred by businesses could qualify for SBAs, we do not yet have any detailed legislation for them.  Finance (No.3) Bill (which is currently passing through Parliament) contains minimal information, providing for Treasury regulations to be passed which will set out the scope of SBAs in more detail.  These regulations have not yet been published and, instead, for more information we must turn to a thirteen page HMRC Technical Notice.

This articles outlines what the technical notice tells us about the scope and operation of SBAs, as well as highlighting some remaining areas of uncertainty.

Qualifying costs

SBAs are available for the direct costs of constructing new commercial structures and buildings (including any necessary demolition or land alteration), new conversions or renovations, and the acquisition of an unused asset from a developer.

There are a number of key exclusions to be aware of.  In particular, SBAs are not available for:

• Land and land-related costs (e.g. stamp duty, planning permission).
• Shared areas in mixed commercial / domestic buildings (SBAs differ from normal capital allowances in their treatment of communal areas).
• Work spaces in domestic settings (e.g. a home office).
• Structures or buildings where the claimant does not have an interest in the land on which they are constructed.

Where there is mixed qualifying / non-qualifying use of a building (e.g. a mixture of commercial and residential accommodation) expenditure will need to be apportioned.  However, there will be no SBAs at all where ten percent or less of the overall construction costs would qualify.

The buildings and structures can be in the UK or overseas, provided that they are used for the purposes of a business within the charge to UK tax.

Method of relief

Relief is given for both income tax and corporation tax purposes at a flat rate of two percent per annum of the original construction expenditure, meaning that full relief will be available over a 50-year period.

SBAs are therefore less generous than the old IBAs (which gave relief at four per cent per annum).  Another key difference between IBAS and SBAs is the treatment of disposals.  There are no balancing charges or adjustments where an SBA asset is disposed of – instead, the purchaser continues to claim two percent per annum of the original cost of the asset over the remaining portion of the 50-year period.

There is therefore no ‘step up’ in value for SBA purposes for the purchaser if an asset is sold for a profit. Some extra complexities will also be introduced into asset sales, for example:

• Sellers will need to deduct the amount of SBAs claimed from the base cost of the asset when calculating their chargeable gain or loss; and
• Purchasers will need to establish what level of SBAs have been claimed and over what period to establish the remaining relief available to them.

Another important point to note is that, unlike regular capital allowances, there is no opportunity to disclaim SBAs and carry them forward – if you don’t claim them you lose them.

SBA expenditure is not eligible for the annual investment allowance (AIA), although expenditure on integral features and fixtures can continue to qualify for normal capital allowances, including the AIA.

SBAs can only be claimed once the structure or building comes into business use (provided no more than seven years has elapsed since the expenditure was incurred).  Any expenditure undertaken after that time may qualify for SBAs in its own right, but as a separate allowance over fifty years – there is no pooling of expenditure on an asset.

The technical notice proposes some remarkably generous rules where a structure or building ceases to be used for an activity that qualifies for SBAs, including a two year ‘grace period’ in which SBAs can continue to be claimed (extended to five years if the structure / building burns down or is extensively damaged).  Businesses may also be able to continue to claim SBAs over the remaining 50-year period where a structure or building is demolished, and they decide not to replace it.

What don’t we know?

The technical notice does leave several questions open, in particular:

• The definition of structures and buildings – these terms aren’t defined, but it is indicated that they will include offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses.
• The definition of a dwelling – HMRC are consulting on this issue, but it is indicated that it will include university or school accommodation, military accommodation and prisons.
• The exact treatment of leasing transactions, overseas property and periods of disuse.

It is a case of ‘watch this space’ when it comes to resolving these and other questions on SBAs.  HMRC are inviting comments on the Technical Notice by 31 January 2019. Hopefully we will get some answers in draft secondary legislation shortly afterwards.

In the meantime, it could be worth highlighting to clients considering construction work that the Budget may have brought them an early Christmas present – albeit they will need to wait 50 years to get the full benefit of it.

This monthly column is written by Emma Rawson, ATT Technical Officer