ASSOCIATE WITH Taxes Consolidation Act 1997 s268

Plant integral to industrial/commercial buildings

Interaction with restriction on amount of qualifying construction expenditure

A current Revenue practice allows taxpayers to elect to treat expenditure on plant and machinery which is an integral part of an industrial/commercial building as part of the construction cost of the building - instead of as expenditure on plant and machinery. This practice can be found at www.revenue.ie in the FOI section under ‘Capital Expenditure’ [section references 9.1.5 and 10.3.11]. It applies to expenditure incurred after 6 April 1997. The matter was also referred to in Tax Briefing (Issue 42, page 28) in an article which, additionally, dealt with the treatment of capital allowances for plant that is let with industrial, commercial and residential buildings. As pointed out in that article, these options do not apply to plant integral to commercial buildings that do not qualify for industrial buildings allowances.

The practice applies only to certain items of plant and machinery, where, in relation to plant, the items are actually plant given the particular circumstances of the trade being carried on in the building. The specified items are -

• lifts
• heating systems
• air-conditioning systems
• electricity/gas distribution systems
• water and waste services
• alarm and security systems
• fire fighting/prevention systems
• wiring associated with or ancillary to any of the above.

These are integral items of the type that would not be removed by the owner if the building were sold. They are necessary for the basic functioning of the building, regardless of the trade being carried on there. They have effectively become part of the fabric of the building and can be distinguished from other items which, while attached to the building, might be removed were the building to be converted to a different use. For example, items of fixed plant in a reception area of a hotel would probably be removed if the building were converted for use as a nursing home.

Depending on the particular circumstances involved, there are advantages to electing to claim industrial buildings allowances in relation to expenditure incurred on the items listed above instead of wear and tear allowances. The ring-fencing provisions of Section 403(5) TCA, 1997 for wear and tear allowances for lessors of plant and machinery do not apply, so that there is greater flexibility in how the allowances can be used. Instead of being restricted to the income from the leasing of the plant or machinery, the capital allowances are available for set off against all Case V income; and, for most types of buildings, any excess can be set against other income up to a maximum of €31,750. Depending on the rate of industrial buildings allowances, it may also be possible to claim the capital allowances at a faster rate than the usual 8-year write-off period for plant and machinery.

However, there can be a downside to electing for such treatment. This is because the expenditure on the provision of such plant and machinery is treated as expenditure on the construction of the building and as a consequence becomes subject to other provisions that apply to expenditure on the construction of buildings. The provisions in question include the transitional arrangements that were introduced in the Finance Act, 2006 for the phasing out of capital allowances for certain industrial and commercial buildings (see Tax Briefing Issues 63 and 64).

As part of these transitional arrangements, the amount of construction expenditure that can qualify for capital allowances is reduced - depending on when the expenditure is incurred. Thus, while there is no restriction on the amount of qualifying construction expenditure incurred in 2006 for relief purposes, qualifying expenditure incurred during 2007 and in the period 1 January 2008 to 31 July 2008 is restricted for relief purposes to 75% and 50%, respectively, of the expenditure incurred. Where an election is made to treat expenditure on the provision of integral items of plant and machinery as expenditure on the construction of the building, such expenditure is also subject to the 75% and 50% restrictions.

Claimants can elect to treat expenditure on the provision of integral plant and machinery that is incurred by 31 December 2006 as expenditure on the construction of the building and to treat such expenditure incurred after that date as expenditure on the provision of plant and machinery.

References in this article to expenditure on construction apply equally to expenditure on refurbishment.