372D Capital allowances in relation to construction or refurbishment of certain commercial premises

Summary

This section provides for the granting of capital allowances for capital expenditure incurred on either or both the construction and refurbishment of certain commercial premises or parts of such premises which are situated in qualifying areas. The construction or refurbishment work, whichever applies in relation to an area, must be carried out in the qualifying period. By virtue of section 372B certain types of commercial buildings viz. multi-storey car parks, offices, the facades of offices, commercial buildings with only a small office content and the facades of such buildings may or may not qualify.

The section also provides for the granting of capital allowances for capital expenditure incurred on the construction or refurbishment of certain commercial premises or parts of such premises which front on to qualifying streets. The construction or refurbishment work must be carried out in the qualifying period. By virtue of section 372BA certain types of buildings may not qualify i.e. those not is use for the retailing or supply of local goods and services, those in use as offices or in use for mail order or financial services.

Generally, capital allowances are available for 100 per cent of the relevant expenditure. An initial allowance of 50 per cent is available to both lessors and owner-occupiers with annual allowances of 4 per cent for the balance. Alternatively, an accelerated allowance known as free depreciation of up to 50 per cent is available to owner-occupiers. Refurbishment expenditure only qualifies for allowances if it is not less than 10 per cent of the value of the premises before refurbishment.

The accelerated capital allowances provided by this section are not available in certain circumstances – see section 372K for full details.

By virtue of sections 270(4) to (7) and 316, the amount of capital expenditure incurred in the year 2007 and in the period 1 January 2008 to 31 July 2008 must be reduced to 75 per cent and 50 per cent respectively of the amount attributable to the period involved. These restrictions apply in relation to both the Urban Renewal and LOTS schemes. In the case of the Urban Renewal scheme, an overall cap also applies in relation to the amount of expenditure incurred in the period 1 January 2007 to 31 July 2008.

Details

Qualifying premises

(1) The section applies to commercial premises such as shops, restaurants etc. situated in a qualifying area, or fronting on to a qualifying street, which are used for the purposes of a trade or profession or are let on a commercial basis. A part of a building or structure in use as such a premises and which is situated in a qualifying area or which fronts on to a qualifying street will also qualify. Industrial buildings, hotels and any part of a premises used as a dwelling are excluded.

In relation to qualifying areas, certain types of buildings i.e. multi-storey car parks, offices, the facades of offices, commercial buildings with only a small office content and the facades of such buildings, may or may not be selected to qualify in orders made under section 372B.

In relation to qualifying streets, certain types of buildings i.e. those not is use for the retailing or supply of local goods and services, those in use as offices, or those in use for mail order or financial services, must be excluded from qualification in orders made under section 372B.

Application of law relating to industrial buildings or structures

(2)(a) Subject to the modifications set out in subsections (3) to (5), the provisions of the Tax Acts relating to capital allowances for industrial buildings or structures apply to qualifying premises, despite anything to the contrary in those provisions (for example, the exclusion of allowances for retail shops in section 268). Those provisions, which specifically relate to the use of premises for a trade, are so applied as if a qualifying premises were at all times it is a qualifying premises an industrial building or structure within section 268(1)(a) (for example, a mill, factory or other similar premises) and as if any activity carried on in the qualifying premises (or in a building, the facade of which is a qualifying premises) which is not a trade were a trade. The reference to the qualifying premises being so treated “at all times at which it is a qualifying premises” ensures that a change in the nature of the use of the premises from, say, use as a shop to use as a restaurant constitutes continuance of use as a qualifying premises.

Restrictions on expenditure incurred in 2007 and 2008

(2)(a) The relieving provision of this section (subsection (2)(a)) is also subject to sections 270(4) to (7) and section 316(2B). Under those sections, any capital expenditure incurred in the year 2007 and the period 1 January 2008 to 31 July 2008 is subject to the respective reductions to 75 per cent and 50 per cent of the relevant amount attributable for the period involved. These restrictions apply to both the Urban and LOTS schemes (see notes on section 270).

Additionally, in the case of the Urban Renewal scheme, by virtue of the provisions of section 270(7), the amount of expenditure incurred in the period 1 January 2007 to 31 July 2008 which may be taken into account in calculating capital allowances is capped at the amount of expenditure, projected to be incurred post 31 December 2006, which was certified by the local authority. This cap will apply prior to the application of the respective reductions to 75 per cent and 50 per cent of the capital expenditure for the period involved (see notes on section 270(7)).

Capital expenditure is regarded as incurred in a period only if it is attributable to work carried out in that period (see notes on section 316(2B)).

Allowances available – qualifying areas

(2)(b) Allowances are available only in respect of capital expenditure incurred on the construction or refurbishment of a qualifying premises during the qualifying period (see subsection (7)). The effect of subsection (2)(a) is to make annual writing-down allowances of 4 per cent available under section 272 in respect of qualifying expenditure. The writing-down allowances are available to both owner-occupiers and lessors.

(4)(a) An industrial building (initial) allowance of 50 per cent of qualifying expenditure is made available under section 271. The initial allowance is available to both owner-occupiers and lessors of qualifying premises.

(4)(b) Alternatively, free depreciation (an acceleration of the annual writing-down allowances) of up to 50 per cent of qualifying expenditure is made available under section 273. Free depreciation is available only to owner-occupiers of qualifying premises.

The balance of the qualifying expenditure may be written off at 4 per cent per annum where initial allowance or free depreciation is claimed.

Refurbishment expenditure

(3) The allowances provided for in the section are only available in the case of refurbishment expenditure where the capital expenditure incurred on refurbishment is not less than 10 per cent of the market value of the premises before refurbishment.

Allowances available – qualifying streets

(3A)(a) The same regime of capital allowances (4 per cent annual writing-down allowances, 50 per cent industrial building (initial) allowance and 50 per cent accelerated writing-down allowances (free depreciation)) as is available in the qualifying areas is also available in the case of the qualifying streets. The allowances are available in respect of capital expenditure incurred on the construction or refurbishment of a qualifying premises during the qualifying period. In addition, in order for the allowances to apply, the following conditions must be satisfied:

• the qualifying premises must be comprised in the ground floor of an existing building (i.e. a building which existed on 13 September 2000 and which fronts on to a qualifying street) or a replacement building (i.e. a new building where the original building has to be demolished following a demolition order or, in certain cases, due to structural reasons),
• apart from the capital expenditure incurred in the qualifying period on the construction or refurbishment of the qualifying premises, expenditure must also be incurred on the existing building or the replacement building which is—
  • eligible expenditure within the meaning of Chapter 11 of this Part (i.e. expenditure incurred on necessary construction, conversion expenditure or refurbishment expenditure on rented residential accommodation), or
  • qualifying expenditure within the meaning of Chapter 11 of this Part (i.e. expenditure incurred on necessary construction, conversion or refurbishment of owner-occupied residential accommodation)
  and in respect of which a deduction has been given or is available under section 372AP or 372AR.

(3A)(b) Moreover, the amount of the capital expenditure incurred on the construction or refurbishment of the qualifying premises which qualifies for capital allowances is confined to an amount which does not exceed the aggregate amount of the expenditure incurred on the residential elements of the existing building or the replacement building which qualifies for relief under sections 372AP and 372AR.

Balancing charge

(5) Where a sale or other event which normally might give rise to a balancing charge under section 274 occurs in relation to a qualifying premises, a balancing charge is not to be made if that event occurs more than 13 years after the qualifying premises was first used or, in the case where refurbishment expenditure on the qualifying premises qualified for capital allowances, more than 13 years after that expenditure was incurred.

Qualifying expenditure

(7) The capital expenditure which is to be relieved must be expenditure incurred on work carried out during the qualifying period. Where work commences, but is not completed, in the qualifying period, only the part of the expenditure referable to the work carried out in that period qualifies for relief.

This provision negates, for the purposes only of determining the amount of expenditure to be relieved under this section, other provisions of the Tax Acts which, by treating expenditure as incurred later than the carrying out of the work, might otherwise deprive a person of relief under this section. The provisions so negated are—

• section 279 which deals with a case where an industrial building or structure is bought before it is used or within one year of it commencing to be used and provides for certain expenditure to be treated as having been incurred when the purchase price becomes payable,
• section 316(2) which for the purposes of capital allowances for industrial buildings or structures treats expenditure as incurred when the sum in question becomes payable, and
• section 316(3) which for the purposes of industrial building (initial) allowances treats expenditure incurred before a trade commences as incurred when the trade commences.

Relevant Date: Finance Act 2019