Introduction

As part of the Autumn Budget, the Government announced on 29 October 2018 the introduction of a new capital allowance, known as the Structures and Buildings Allowance (SBA), for businesses investing in newly built or renovated non-residential structures and buildings.

The SBA offers tax relief for capital expenditure previously treated as ineligible for capital allowances. This new allowance differs significantly to the previous Industrial Buildings Allowance (IBA) which was abolished in 2011.

The Government’s aim is to incentivise investment in structural assets and make the UK an attractive investment location. Draft legislation has been published and a public consultation with resulting updates was released in June 2019. Guidance will also be published on HMRC’s website in due course.

The enabling powers for the SBA were legislated for in Finance Act 2019 and draft regulations were laid in June 2019.

The qualifying criteria, transfer on sale and administrative requirements differ from existing capital allowances legislation. This article highlights the main features of the new legislation.

Overview

The SBA provides tax relief at a flat rate of two percent over a 50 year period for the cost of building work on most non-residential buildings and structures.

All contracts for the physical construction works must be entered into on or after 29 October 2018 to enable the works to be eligible for the SBA.

A claim can only be made when the structure or building under construction first comes into use and the business must have an interest in the land on which the structure or building is constructed.

It is not possible for a business to claim the SBA for expenditure which already qualifies as ‘Plant and Machinery’ within the capital allowances regime. Likewise, the Annual Investment Allowance is not available on SBA qualifying expenditure.

Overview summary

Key points:

• Provides tax relief at a flat rate of 2 percent over a 50 year period
• On construction costs of non-residential buildings and structures
• Where the relevant contracts are entered on or after 29 October 2018
• Is only available when the structure or building first comes into use
• The business must have an interest in the land
• No claim is possible if expenditure qualifies for Plant & Machinery Allowances
• Annual Investment Allowances is not available on SBA expenditure

So what capital expenditure will qualify?

• New-build construction works
• Renovation or conversion of a structure or building so that it becomes a qualifying asset
• Preparation of sites or demolition necessary for construction of a structure or building
• Incidental repairs to the renovation or conversion works which are deemed to be expenditure on construction for these purposes
• Renovations and subsequent capital works after the date on which the structure or building enters into use may qualify – but as a separate allowance

The quantum of a SBA claim is restricted to the lower of the actual amount of expenditure and the market value of the property/works.

What capital expenditure does not qualify?

• Plant and machinery – Capital expenditure eligible for plant and machinery allowances does not qualify for SBA. Unlike the IBA, qualifying plant and machinery must be identified and claimed before the expenditure on which SBA will be claimed.
• Land acquisition costs
• Architectural and design fees
• Planning permission
• Residential properties such as dwellings including student accommodation.

Part qualifying expenditure

If a structure or building is divided into separate parts with some areas that will be qualifying for the SBA and some areas not qualifying, an appropriate proportion of expenditure will qualify for the SBA. However a building or structure will not qualify for the SBA if the qualifying proportion is ‘insignificant’. The original technical note issued by HMRC in October 2018 stated that the insignificance threshold would be 10 per cent. This percentage is not included in the regulations, but could be covered in the guidance to be issued by HMRC.

When can SBA be claimed?

If a contract is entered into before 29 October 2018, the business will not be able to claim the SBA. Therefore the SBA is available where the construction contract, and any contracts for preparatory works on the site, are entered into on or after 29 October 2018. This includes demolition and similar works.

As outlined above, claims can only be made when a structure or building first comes into use and the claimant must have an interest in the land on which the structure or building stands.

If the flat rate allowance of 2 percent is not claimed in the tax return for a year, it will be lost as the legislation contains no deferral provisions.

Other points of interest

The SBA may be claimed in relation to a ‘qualifying activity’ which includes a trade, UK or overseas property business, profession or vocation and managing the investments of a company with investment business.

A building or structure has a ‘qualifying use’ if it is in non-residential use for the purpose of the qualifying activity carried out by the person with a relevant interest.

A building or structure has a ‘residential use’ if it is used as a dwelling, residential accommodation for school pupils, residential accommodation for the armed forces, a home or other institution (there is an exception for residential accommodation which is provided with personal care for persons in need of care by reason of old age, disability, past or present dependence on alcohol, drugs or mental disorder), a prison, or student accommodation.

A ‘relevant interest’ in the land can include an owner-occupier, landlord or tenant who has incurred the capital expenditure qualifying for SBA. The legislation also includes clauses applying to lease interests which are not covered in this article.

Administrative requirements

The legislation requires an Allowance Statement to be provided by the first and all subsequent claimants of the SBA. This replaces the original requirement for businesses to produce detailed construction information from the original construction. However, the administrative burden of preparing and retaining an Allowance Statement for each building may be significant for some businesses.

The Allowance Statement is a written statement identifying the building or structure and must include:

• The earliest construction contract date;
• The amount of qualifying expenditure; and
• The date on which the building or structure was first brought into non-residential use.

Particular transactions

• Disposal of asset

On the sale of an asset qualifying for the SBA, the remaining allowances will be transferred to the new owner, who may then claim 2 percent of the original cost for each remaining year, or part thereof, of ownership. The new owner must obtain the Allowance Statement in order to be able to claim the SBA.

Unlike for the IBA, there is no claw-back of the SBA through the capital allowances computation on sale. However, the amount of the SBA claimed will be treated as increasing the proceeds on sale (rather than a restriction in base cost) for capital gains purposes.

• Demolition

As the demolition of a property usually gives rise to a disposal event for capital gains purposes, any unrelieved SBA expenditure may be claimed as an allowable deduction in the capital gains computation. This is an amendment to the original proposal.

• Acquisition of asset where previous owner was not chargeable to tax

If a property is acquired from a person not subject to UK tax (or where the income is not within the charge to UK tax) notional allowances at an annual rate of two percent will be calculated and deducted from the qualifying expenditure for this period of ownership to identify the remaining tax balance available to the purchaser.

• Period of disuse

An amendment to the original proposal allows the SBA to continue to be claimed by owners during a temporary period of disuse, provided the building or structure is not used for a residential purpose.

• Lease premium

A tenant may be entitled to claim the SBA on costs incurred by the landlord in cases where the tenant pays a lease premium of more than 75 percent of the total value of the property for the grant of a lease of 35 years or more.

The legislation includes other clauses applying to lease interests which are not covered in this article.

Conclusion

The objective of the new SBA legislation is to encourage investment and will allow a number of businesses to claim tax depreciation on construction costs which did not qualify for relief. However the rules are complex and require careful consideration.

Peter Davis is a Deloitte Tax Manager based in the Belfast office and specialises in Corporation Tax compliance and advisory services.