372AAC Capital allowances in relation to conversion or refurbishment of certain commercial premises

Summary

This section is concerned with the commercial element of the incentive scheme.

Details

Definitions

(1) “qualifying expenditure” is defined as capital expenditure incurred on the conversion or refurbishment of a qualifying premises. However, the amount of relief available under this element of the Initiative is subject to an overall cap. European Union State Aid rules require that the total amount of aid going to any particular enterprise or undertaking in these circumstances cannot exceed €200,000. While, in general, State Aids are regarded as incompatible with the European Treaties, a certain de minimis level of aid is allowed on the grounds that the distorting effect on competition is not significant. The legislation ensures that the overall level of actual tax relief (state aid) for any project does not exceed the permitted amount.

This limit is intended to set a maximum amount of tax relief (State Aid) of €200,000 for any individual project. In the case of a company carrying on a trade from the qualifying premises the limit of qualifying expenditure is €1.6m (@ 12.5% tax rate this equals €200,000). In the case of a company in receipt of rental income from letting the qualifying premises the limit of qualifying expenditure is €800,000 (@25% tax rate this equals €200,000). If the investors are individuals, the expenditure limit is based on the assumption of an effective rate of tax of 50% and is set at €400,000. Where the individual is taxed at the standard rate of 20%, the amount of actual relief obtained will be lower but the limit on qualifying expenditure is not increased above €400,000. In addition, a cross reference is made to expenditure deemed to have been incurred under section 279 to ensure that where such a commercial building is refurbished and sold, the purchaser is still restricted to the respective limits.

“qualifying premises” is defined as a building or structure the site of which is wholly within a special regeneration area and which –

• apart from this section is not an industrial building within the meaning of section 268 or deemed to be such a building or structure (this provision therefore rules out any building or structure which already qualifies for capital allowances by virtue of section 268), and is
  • in use for the purposes of the retailing of goods or the provision of services within the State, or
  • let under a lease at arms-length for either of those purposes.

Limit on Relief

(1A) The meaning of “qualifying expenditure” is further refined in this paragraph. It addresses the scenario in which more than one person has incurred capital expenditure on an individual project. It could be that a number of individuals, a number of companies or a number of individuals and companies have invested. Without this provision it is possible that the aforementioned limits in the definition of qualifying expenditure would extend to each person who invests rather than being an overall cap on the level of tax relief for that project. The formula for individuals and companies trading from the qualifying premises is –

(A × 50%) + (B × 12.5%) cannot exceed €200,000, where

A is the aggregate of all qualifying expenditure by individuals and

B is the aggregate of all qualifying expenditure by companies trading from the qualifying premises

The formula for individuals and companies in receipt of rental income from letting the qualifying premises is –

(A × 50%) + (B × 25%) cannot exceed €200,000, where

A is the aggregate of all qualifying expenditure by individuals and

B is the aggregate of all qualifying expenditure by companies letting the qualifying premises.

The formula seeks to ensure that the sum of all relief given to individuals (A × 50%) plus the sum of all relief given to companies (B × 12.5%) or (B × 25%), as the case may be, cannot exceed €200,000. If the overall amounts of expenditure are small, then it is likely that the equation is satisfied anyway. However, where the sums of money are large, then each participant’s share of the overall qualifying expenditure will have to be reduced to make sure the equation is satisfied. The legislation is not prescriptive as to how this reduction should take place, other than to say that a person cannot obtain tax relief on expenditure which was not incurred. The precise apportionment of the qualifying expenditure can be agreed between the participants.

This provision does not set a limit on the amount of expenditure which can be incurred on any individual project, rather it limits the amount of that expenditure which can be treated as qualifying expenditure and which is eligible for the relief.

Application of industrial buildings’ provisions

(2)(a) The provisions of Chapter 1 of Part 9 (relief for capital expenditure on industrial buildings or structures) are applied to capital expenditure incurred on the conversion or refurbishment of premises, which qualify under this section. The application of Chapter 1 (subject to paragraph (b) and to subsections (4) to (8) of this section) is:

• as if the premises were a mill or factory under section 268(1)(a), and
• as if any non-trading activity carried on in the premises were a trade. This provision is a mechanism to ensure that the technical rules for entitlement to industrial buildings allowances apply and does not affect the nature of any income arising from the premises e.g. if a premises is let the income arising will be chargeable under Case V but capital allowances will be available even if the activity of the lessee is not a trade.

Allowances available

(2)(b) Allowances are available only in respect of capital expenditure incurred on the refurbishment or conversion of a qualifying premises during the qualifying period.

Rate of allowances and tax life

(4) This provision sets out how the application, by subsection (2), of the provisions of Chapter 1 of Part 9 in relation to capital expenditure incurred on the conversion or refurbishment of a qualifying premises is to apply in the case of section 272.

• (4)(a) Section 272(3)(a)(ii) applies as if a reference in that subsection to 4% were a reference to 15% – this provides that qualifying expenditure incurred in the qualifying period in relation to a qualifying premises is to be written off at the rate of 15% per annum.
• (4)(b) Section 272(4)(a)(ii) applies as if a revised subsection (4)(a)(ii) were inserted – this provides that the tax life (the period during which the relief attaching to the premises can be transferred to a new owner) of a qualifying premises in relation to qualifying expenditure incurred on its conversion or refurbishment is 7 years from its first use subsequent to the incurring of that expenditure.

Balancing events

(5) Where a sale or other event which might give rise to a balancing allowance or charge under section 274 occurs in relation to a qualifying premises, a balancing allowance or charge is not to be made if that event occurs more than 7 years after the qualifying premises was first used subsequent to the incurring of the qualifying expenditure.

Minimum spend

(6) Conversion or refurbishment expenditure incurred in the qualifying period must exceed €5,000 for relief under this section to apply.

Information to accompany Claim

(6A) The following information must be provided to the Revenue Commissioners before any claim for accelerated capital allowances under this section can be made:

• the name, address and tax reference number of the person making the claim,
• the address of the premises in respect of which the expenditure was incurred,
• details of the aggregate of all expenditure incurred on the conversion or refurbishment of the qualifying premises, and
• a brief description of the nature of the retail or other commercial which is to be conducted from the premises

(6B) The information required under subsection (6A) will be provided to the Revenue Commissioners by electronic means and through whatever electronic systems the Revenue Commissioners may make available.

Subsections (6A) and (6B) will enable the results of the scheme to be evaluated on an on-going basis.

Expenditure attributable to work actually carried out

(7) Conversion or refurbishment expenditure is to be treated as incurred in the qualifying period only to the extent that it is attributable to work actually carried out in the qualifying period.

Non-availability of relief

(8) Property developers or connected persons are precluded from getting relief in relation to a qualifying premises, where either the property developer or the connected person incurred the capital expenditure on the conversion or refurbishment of the premises or it was incurred by some other person connected with the property developer.

(8)(A) Expenditure that qualifies for relief under this section will be reduced by an amount equal to 3 times any grant received or receivable, directly or indirectly from the State or any of its agencies.

Provision against double relief

(9) Relief shall not be given in respect of capital expenditure incurred on the conversion or refurbishment of a qualifying premises, under any other provision of the Tax Acts where relief is given by virtue of this section.

Undertakings in difficulty

Undertakings in difficulty are now excluded from the commercial element of the scheme in accordance with the 2014 EU Commission Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty.

An undertaking is an entity that is involved in economic activity, irrespective of its legal form or how it is financed or whether it has a for profit orientation or not. An undertaking availing of relief under the commercial element of the Living City Initiative should ensure compliance with COMMISSION REGULATION (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid.

Relevant Date: Finance Act 2019