Property-based Incentive Schemes - 15% test

Transitional Arrangements for Property-based Incentive Schemes - test for work carried out by 31 December 2006

Extension of Qualifying Period

Finance Act 2006 extended the termination date by which qualifying construction¹ expenditure can be incurred under most of the property-based incentive schemes. It also extended the termination date by which construction expenditure incurred on registered hotels and registered holiday camps can continue to qualify for capital allowance write off over 7 years as opposed to the new 25 year write off for such projects. The termination date has been extended from 31 July 2006 to 31 December 2006 where existing conditions are met and further extended to 31 July 2008 where additional conditions are met. The full amount of the construction expenditure incurred during 2006 can qualify for capital allowances. However, relief is restricted to 75% of the expenditure incurred in 2007 and 50% of the expenditure incurred in the period 1 January 2008 to 31 July 2008.

Existing Conditions

For the buildings and schemes listed below the extended deadline of 31 July 2008 is subject to a number of conditions that pre-date Finance Act 2006. For most of the schemes, a full and valid planning application must have been made by 31 December 2004. In the case of an urban renewal project, a 15% local authority certificate must have been issued by 30 September 2003. In the case of a multi-storey car park, a 15% local authority certificate must have been issued by 31 December 2003. In the case of a third level education building, an application must have been made to the Minister for Finance by 31 December 2004.

New 15% Condition

Finance Act 2006 introduced a new condition to be met by projects seeking to avail of the extension to 31 July 2008. This requires work to the value of at least 15% of the actual construction costs of a particular building/development to have been carried out on or before 31 December 2006. This article is concerned mainly with those schemes that do not require a local authority to certify that this condition has been met. The schemes in question are -

• Urban Renewal (residential buildings)
• Rural Renewal (residential buildings)
• Town Renewal (residential buildings)
• Student Accommodation
• Multi-Storey Car Parks
• Third Level Education Buildings
• Living over the Shop
• Park and Ride
• Sports Injury Clinics

While local authority certification is not required, the Tax Acts require the person claiming relief to be able to show that the 15% condition has been met. Tax Briefing 63 (page 6) stated that Revenue expected that builders and developers would arrange for a quantity surveyor or architect to prepare a statement showing clearly the actual work that was carried out on or before 31 December 2006, the construction costs attributable to this work, the actual construction costs to completion of the building and the percentage of the total figure represented by the work that was carried out on or before 31 December 2006. The statement should also contain the name and address of the individual or company that is carrying out the construction, the name and address of the development and the relevant scheme. This statement may be required in the event of an audit by Revenue where the person claiming the relief may have to show that the 15% condition was satisfied. Therefore, a builder or developer who sells a completed building should provide this statement to the purchaser who will be claiming the relief together with the usual statement of costs and certificates of compliance/reasonable cost/consistency as appropriate.

Work carried out - costs to be taken into account for the 15% condition

It should be noted that the 15% condition introduced by Finance Act 2006 differs from previous 15% conditions that applied to the urban renewal and multi-storey car park schemes. Firstly, the new 15% test relates to the degree to which work is carried out as opposed to expenditure incurred. Secondly, unlike the earlier tests, the new 15% condition takes no account of the cost of acquiring the site or of any costs associated with that acquisition. It is based solely on the value of construction work actually carried out. The value of work and costs associated with site preparation such as site clearance, laying foundations, power supply, drainage, sanitation and water supply can, however, be taken into account.

As indicated above, the new 15% test is to be established by reference to the value of actual work carried out and not just on the basis of expenditure incurred. No account can be taken of any advance payments made for work that has not yet been carried out. Visible and tangible construction work has to have been carried out and this work has to be manifested as an integral part of the building/development on or before 31 December 2006. Construction costs such as raw materials and labour used, equipment hire and architects fees can be taken into account in establishing the value of the work carried out where these are directly attributable to work actually carried out on the building. For example, an architect’s fees can only be taken into account where they are directly attributable to work that has already been carried out. Ongoing work such as project management yet to be delivered as of 31 December 2006 is not to be taken into account. Work that is carried out ‘off-site’ or work that is involved in the assembly of a part of a building but that has not yet been integrated into the building is not to be taken into account. For example, while the expenditure on the work involved in assembling a bathroom pod or in assembling a roof-frame could ultimately be treated as qualifying construction costs, it is not to be taken into account for the purposes of establishing the value of the work that has been carried out until such time as the bathroom pod or roof-frame has actually been put in place and integrated into the building. The value of the work which is established as actually carried out on this basis on or before 31 December 2006 must then be compared to the sum of that value and the value of the work carried out after 31 December 2006 (i.e. the overall cost of the project) to establish if the 15% test has been met.

Local Authority Certification

The focus of this article has been on those schemes not requiring local authority certification in relation to the 15% condition. However, it should be noted that for certain schemes where the extended 31 July 2008 deadline required E.U. Commission approval, the qualifying conditions are more onerous. The schemes in question are -

• Registered Holiday Cottages
• Holiday Camps
• Hotels
• Urban Renewal (commercial and industrial buildings)
• Rural Renewal (commercial and industrial buildings)
• Town Renewal (commercial and industrial buildings)

For these schemes, Finance Act 2006 requires a binding contract in writing under which the expenditure on the construction of the building/development is to be incurred to have been in place on or before 31 July 2006. It also requires local authority certification that work to the value of at least 15% of the actual construction costs was carried out on or before 31 December 2006. An application for a certificate must be made on or before 31 January 2007. Where satisfied, local authorities must issue certificates on or before 30 March 2007. Guidelines in relation to local authority certification have been issued by the Department of the Environment, Heritage and Local Government. It should be noted that the criteria set out above for determining the value of work carried out apply also in the case of these schemes and that local authorities will have regard to these criteria in determining whether a 15% certificate is to be issued.

Exceptions to 15% Condition

In the cases of nursing home residential units and the general countrywide refurbishment scheme, the extension to 31 July 2008 applies without having to satisfy the 15% condition.

Building/Development

The Finance Act 2006 refers to individual buildings. However, where there are several buildings involved in a development as, for example, in the case of a housing estate or a student accommodation development, the 15% condition will be regarded as met for each building where work to the value of 15% of the actual construction costs of all buildings in the development has been carried out on or before 31 December 2006.

Meeting the 15% condition will not of course be an issue in the case of individual buildings in a development completed in 2006 as work to the value of 100% of their construction costs will have been carried out before 31 December 2006. The value of the work on these buildings will count towards achieving the 15% condition where the option is taken to treat a development as one entity for the purpose of that condition. However, it is possible that where projected costs for a development are exceeded on some buildings constructed after 31 December 2006 that the 15% condition is not met when the total development costs are taken into account.

It should be noted that the option to look at an overall development rather than at each individual building in that development only applies in relation to the 15% condition. It is not an option in relation to the 75% and 50% caps or restrictions on qualifying expenditure incurred during 2007 and 2008, respectively and apportionment of relief among all buildings in a development is not possible. For example, a person who purchases a house that was constructed during 2006 will, subject to excluding site cost etc, qualify for 100% relief while a person who purchases a house that was constructed between January and July 2008 will only qualify for relief on 50% of the expenditure. Where construction spans more than one year the relevant cap will apply to the portion of expenditure incurred in each year. Tax Briefing 63 (Captial Allowances and Property-Based Incentive Schemes) has details of the 75% and 50% restrictions on the amount of expenditure qualifying for relief.