Revenue Note for Guidance
Where capital expenditure has been incurred on the construction (including, by virtue of section 270, refurbishment) of an industrial building or structure and capital allowances have been made in respect of that expenditure, a balancing allowance or charge (that is, an adjustment to the quantum of the allowances made) may arise in a chargeable period where any of the following events occurs —
A balancing charge may also arise where certain health related and childcare facilities (defined as “relevant facilities” – see subsection (2A)) cease to be relevant facilities.
Where any of the above events occurs —
However, no balancing charge or allowance can arise where the event occurs outside the industrial building or structure’s relevant “holding period” for balancing event purposes. In some case, this may be the length of time it takes to write off the capital expenditure on the construction of the industrial building or structure by way of annual writing-down allowances. However, in more recent times the holding period of a building or structure for balancing event purposes may be greater than the writing-down period for the building or structure e.g. the holding period for private hospitals and other health related facilities is, generally, now 15 years whereas the writing down period is only 7 years.
Thus, the holding period of any particular industrial building or structure depends on the type of building or structure involved.
(1)(a) Where an industrial building (initial) allowance or a writing-down allowance has been made in respect of capital expenditure incurred on the construction (including, by virtue of section 270, refurbishment) of an industrial building or structure, a balancing allowance or a balancing charge will arise on the occurrence of any of the following events —
(1)(a)(i)The provision in subparagraph (iv) is essentially designed to prevent avoidance of a balancing charge through the device of creating a new interest out of the relevant interest in a building or structure which is marginally inferior to the relevant interest (for example, a 999 year lease is created out of the freehold interest). In the absence of that provision, the consideration received for the creation of such an interest would avoid the balancing charge procedure and, thus, escape a charge to income tax or corporation tax. It should be noted that the inclusion of the words “or partly treated” secures that most premiums for short leases are excluded from the provision. In effect, the provision principally applies in the case of long leases (50 years or more). The provision does not apply, however, in the case of buildings or structures covered by subsection (2).
A balancing allowance or charge is to be made on the person holding the relevant interest in the building or structure immediately before the event giving rise to the allowance or charge. The allowance or charge is made for the chargeable period related to the event, that is, in the case of corporation tax, for the accounting period in which the event occurred and, in the case of income tax, for the year of assessment in the basis period for which the event occurred.
(2A) A balancing charge may also arise where certain health related and childcare facilities (defined as “relevant facilities”) cease to be relevant facilities. This provision applies to such facilities that are first used (or first used after refurbishment) on or after 1 January 2006. For the purposes of calculating the balancing charge to be made, section 318(e) deems an amount of money to have been received.
(2A)(a) The types of buildings and structures involved are:
(2A)(b) Subject to paragraph (c), a balancing charge will arise where:
(2A)(c) A balancing charge will not be imposed under paragraph (b) where a building or structure ceases to be one type of relevant facility but becomes another type of relevant facility within 6 months.
(1)(b) Generally, no balancing allowance or charge is made where the event occurs after the end of the holding period of the building or structure for balancing event purposes. The length of this period depends on the type of industrial building or structure involved and the time when the expenditure on its construction was incurred. The holding period generally runs from the time when the building was first used. The holding period is a period of —
(1A) and (1B) The increase in the length of the holding period for hotel buildings and holiday camps to 25 years (see subsection (1)(b)(iii)) will not apply as respects capital expenditure incurred on the construction or refurbishment of a building or structure by 31 December 2006 or by 31 July 2008 where certain conditions are met.
(1A) The increase in the holding period will not apply in relation to capital expenditure incurred by 31 December 2006 if:
(1B) The increase in the holding period will not apply in relation to capital expenditure incurred by 31 July 2008 if:
By virtue of paragraphs (a) and (b) of section 270(7) local authority certification is required in respect of the condition that work to the value of at least 15 per cent of the construction or refurbishment costs is carried out by 31 December 2006. Such certification must include details of actual expenditure incurred to 31 December 2006 and of projected expenditure post 31 December 2006.
(2) The rule that a balancing event arises where consideration (other than rent or an amount treated or partly treated as rent under section 98) is received by the person entitled to the relevant interest in respect of an interest subject to that relevant interest does not apply where the relevant interest is in a building or structure in use for the purposes of hotel-keeping and a binding contract for the provision of the building or structure had been entered into in the period from 28 January 1988 to 31 May 1988.
(3) In the case where there are no sale, insurance, salvage or compensation moneys (defined in section 318) or consideration of the type referred to in subsection (1)(a)(iv), or where the residue of the expenditure (defined in section 277) on the building or structure immediately before the event exceeds those moneys or that consideration, a balancing allowance is made. The amount of the allowance is the amount of the residue or, where such moneys or consideration are received, the excess of the amount of the residue over those moneys or that consideration. It should be noted, however, that this subsection will not apply in the case of consideration of the type referred to in subsection (1)(a)(iv) which is received on or after 5 March 2001.
A factory was constructed in 1981 at a cost of €100,000. No industrial building (initial) allowance or free depreciation was claimed in respect of the expenditure. For the years of assessment 1981–82 to 2000–2001 annual writing-down allowances of 4% per annum were claimed (20 @ 4%), totalling €80,000. Thus, the residue is €20,000.
If the building is scrapped in the short tax year 2001 and no sale, insurance, etc moneys are received, a balancing allowance equal to the residue will be made, that is, €20,000. If, however, the building were sold in the short tax year 2001 for €15,000, the allowance to be made would be €5,000, being the excess of the residue over the sale price.
(4) In the case where the sale, insurance, salvage or compensation moneys or consideration of the type referred to in subsection (1)(a)(iv) exceed the residue, if any, of the expenditure on the building or structure immediately before the event, a balancing charge is made. The amount of the charge is the excess of those moneys or that consideration over the residue or, where the residue is nil, the amount of those moneys or that consideration.
If in the last example the factory had been sold in the short tax “year” 2001 for €35,000, a balancing charge of €15,000 would be made, being the excess of the sale price over the residue of €20,000.
(5)(a) The “relevant period” is the period beginning when the building or structure was first used and ending on —
However, if before the event giving rise to the balancing allowance or charge the building or structure had been sold while an industrial building or structure, the “relevant period” begins on the day following that sale or, if there had been more than one such sale, on the day following the last of those sales.
(5)(b) In order to ensure that an excessive balancing allowance or charge does not arise in relation to a building or structure which for part of the “relevant period” was not an industrial building or structure, any balancing allowance or charge arising is to be reduced in the same proportion that the years of industrial use bear to the total years of use (the “relevant period”) of the building or structure at the time of the event giving rise to the balancing allowance or charge. For this purpose, non-industrial use is use in a chargeable period for which a writing-down allowance has not been made.
(5)(c) The availability of industrial buildings (initial) allowances under section 271 and accelerated writing-down allowances (free depreciation) under section 273 could mean that in many cases writing-down allowances will not be made for chargeable periods for the reason that the allowances which would otherwise have been made for those periods have been aggregated by acceleration into an earlier period. In the absence of a provision to the contrary, this could result in periods of genuine industrial use being treated for the purposes of subsection (5)(b) as periods of non-industrial use. Thus, where a writing-down allowance would have been given for a chargeable period but for section 272(6) (which ensures that no further writing-down allowances will be given once the whole of the original cost of a building or structure has been written off) or section 321(5) (which limits the aggregate amount of writing-down allowances and initial allowance to the expenditure incurred), it is provided that the writing-down allowance will be deemed to have been given and, accordingly, any balancing allowance or charge will not be reduced by reference to such a chargeable period.
On 1 January 2002 a company whose accounting year ends on 31 December buys a building which was first used in January 1997. At the time of sale the building is an industrial building. The tax life of the building is 25 years and the residue of expenditure after taking into account a balancing charge on the seller is €100,000. Accordingly, the buyer has the expectation of writing off the €100,000 by way of annual writing-down allowances of €5,000 over the years 2002–2021 (the remaining 20 years of the tax life).
The company does not continue to own the building until the year 2021; instead the company sells it during the year 2017 for €40,000. Also, the company did not use the building for industrial purposes throughout its period of ownership but diverted it to non-industrial use from 1 January 2007 to 31 December 2011 so that no writing-down allowances were made for the 5 years 2007 to 2011. The calculation of the balancing charge on the sale in the year 2007 is as follows:
Residue at time of purchase in January 2002 |
€100,000 |
|
Writing-down allowances for years 2002 to 2006 (5 years @ €5,000) |
€25,000 |
|
Notional writing-down allowances (see section 277(4)) for years 2007 to 2011 (5 years @ €5,000) |
€25,000 |
|
Writing-down allowances for years 2012 to 2016 (5 years @ €5,000) |
€25,000 |
€75,000 |
Residue |
€25,000 |
|
Sale proceeds |
€40,000 |
|
Provisional balancing charge |
€15,000 |
|
Relevant period 1/1/2002 – 31/12/2016 (15 years) |
||
Industrial use within relevant period (10 years) |
||
Balancing charge is reduced to €15,000 × 10/15 |
= |
€10,000 |
The new owner takes over the residue of expenditure computed as follows —
Original residue on 2nd sale (as computed above) |
€25,000 |
Add balancing charge |
€10,000 |
Residue |
€35,000 |
Assuming the new owner continues to use the building for industrial purposes, such owner will be entitled under section 272(4) to writing-down allowances in respect of the residue of the expenditure which will be written off on a straight-line basis over the un-expired part of the tax life of the building.
(6) A holiday cottage is an industrial building or structure (i.e. in relation to capital expenditure incurred prior to the termination of relief for such cottages) only if it is registered in the register of holiday cottages. If a holiday cottage ceases to be so registered in circumstances where (apart from this provision) a balancing allowance or charge could not be made under this section (for example, the cottage is converted into a family home by the owner), then, the holiday cottage is deemed to have been sold while it was an industrial building or structure at a price equivalent to the expenditure incurred on its construction. The effect of this provision is to enable a balancing charge to be made which will recover the total capital allowances granted in respect of the capital expenditure incurred on the construction of the holiday cottage. The exclusion of section 272(4) from the application of this provision is designed to ensure that, where a holiday cottage is sold while it is not in use as such, the buyer will not have any entitlement to capital allowances even if the cottage is subsequently re-registered.
(7) However, if the holiday cottage is not sold during the period of its non-registration and is subsequently re-registered by the person on whom the balancing charge was made under subsection (6), that person will be entitled to writing-down allowances equivalent to what a buyer of the holiday cottage would be entitled. The normal provisions relating to balancing allowances and charges would apply if, during the second period of registration, the holiday cottage were sold by the person on whom the balancing charge was made under subsection (6).
(8) Where a balancing event arises in relation to an industrial building or structure, the amount of a balancing charge to be made on a person cannot in any circumstances exceed the amount of any capital allowances made to the person in respect of the capital expenditure incurred on the industrial building or structure.
Relevant Date: Finance Act 2019
