Industrial & Commercial Buildings Capital Allowances

Introduction

The Finance Act 2000 introduced restrictions on the availability of capital allowances for expenditure incurred on the construction or refurbishment of industrial and commercial buildings under certain tax incentive schemes. The restrictions apply in relation to:

• Property developers in certain circumstances
• Owner-occupiers of buildings in use in certain sectors and industries
• Buildings provided for certain large investment projects.

The restrictions were inserted in order to comply with EU requirements.

Where a restriction applies capital allowances are not available for industrial or commercial buildings. In the case of an industrial building, within the meaning of Section 268 TCA 1997, while the enhanced allowance (initial allowance and free depreciation) available under the particular scheme is not available, the ordinary industrial building writing down allowance is available.

Schemes Affected

The schemes affected and the relevant sections of the Taxes Consolidation Act 1997 are as follows:

Airport Enterprise Areas	- Section 343(11)
New Urban Renewal Scheme	- Section 372K(1)
Rural Renewal Scheme	- Section 372T(1)
Certain Childcare facilities	- Section 843A(5)
Town Renewal Scheme	- Section 372AJ(1)

Restrictions Applying

It should be noted that the restrictions do not apply uniformly to all of the schemes. The various restrictions and the schemes to which they apply are outlined below:

• Airport Enterprise Areas Scheme
  Restriction applies in relation to property developers.

• New Urban Renewal Scheme
  Restriction applies to
  
  1. property developers,
  2. owner-occupiers of buildings in use in certain sectors and industries, and
  3. buildings provided for certain large investment projects.

• Rural Renewal Scheme
  Restriction applies to
  1. property developers, and
  2. owner-occupiers of buildings in use in certain sectors and industries

• Certain Childcare Facilities
  Restriction applies to property developers.

• Town Renewal Scheme
  Restriction applies to
  1. property developers,
  2. owner-occupiers of buildings in use in certain sectors and industries, and
  3. buildings provided for certain large investment projects.

Summary Chart

Scheme	Property Developers	Industries/Sectors	Large Investment Projects
Airport Enterprise Areas	*
New Urban Renewal Scheme	*	*	*
Rural Renewal Scheme	*	*
Childcare Facilities	*
Town Renewal Scheme	*	*	*

Property Developers

As outlined, the restriction on the availability of capital allowances to property developers applies in relation to all the schemes listed above.

Details

Capital allowances for expenditure incurred on the construction or refurbishment of industrial or commercial buildings/structures are not available to a property developer where the property developer owns the relevant interest for capital allowances purposes in the building/structure, in circumstances where the actual construction or refurbishment was carried out by the property developer or by a person connected with the property developer. Thus, for example, capital allowances are not available to a property developer where the property developer:

• Constructs a number of commercial buildings and retains one, say, either as an office or as an investment, or
• Purchases (for similar purposes) a new commercial building which was constructed by a person with whom the property developer is connected.

What is a property developer?

A property developer is defined as a person carrying on a trade which consists wholly or mainly of the construction or refurbishment of buildings or structures with a view to their sale. The reference to a person includes a company. Accordingly, if more than 50% of the turnover from a person’s trading activities arises from the construction or refurbishment of buildings or structures with a view to their sale, the person is regarded as a property developer. Where the person is involved in a number of trading activities the test is applied to the aggregate of the turnover from all the person’s trading activities.

When is the test to be applied?

In the case of a company, the test is applied at the end of the company’s accounting period to which the claim relates. In the case of an individual, the test is applied at the end of the basis period for the year of assessment to which the claim relates.

What if a property developer jointly owns a property with an individual who is not a property developer and the construction of the property was carried out by the property developer or by a person connected with him/her?

The entitlement of the joint owners to capital allowances is looked at separately. In this case the property developer is not entitled to capital allowances due to the restriction outlined above. However, as the other joint owner of the property is not a property developer no restriction applies in relation to his/her capital allowances.

What if a controlling director of a property development company purchases a property from the company?

Capital allowances are available to the director unless the director is a property developer in his/her own right. If he/she is a property developer, then capital allowances are not available as the property was constructed or refurbished, as the case may be, by a connected person i.e. the company which he/she controls.

Purchase of New Buildings/Structures

Section 279 TCA 1997 provides that where expenditure is incurred on the construction of a building/structure and the relevant interest, for capital allowances purposes, in a building or structure is sold, the person who buys that interest is deemed to have incurred the expenditure on the construction of the building/structure equal to the lesser of the actual expenditure or the net price paid, provided that:

• The building/structure was sold before it was used or within one year of first use, and
• No capital allowances had been claimed in respect of the building/structure.

Where a property developer buys such a building/structure the restriction on the availability of capital allowances does not apply as the property developer will not have incurred the actual expenditure on construction. However, if the actual construction expenditure was incurred by a person connected with the property developer the restriction applies.

In other words, capital allowances are available to a property developer where the property developer purchases a newly constructed building, say, either as an office or as an investment, where the actual construction was carried out by an unconnected person.

Owner-Occupiers of Industrial and Commercial Buildings in use in certain sectors and industries

As outlined above, this restriction applies in relation to the New Urban Renewal Scheme, the Rural Renewal Scheme and the Town Renewal Scheme.

Details

Capital allowances under the above schemes are not available in respect of construction or refurbishment expenditure incurred by owners (includes both individuals and companies) of industrial or commercial buildings or structures which are in use for the purposes of the owner’s trade (or any activity treated as a trade) where that trade or activity is carried on wholly or mainly in any of the following sectors/industries:

• The agricultural sector, including the production, processing and marketing of agricultural products
• The transport, steel, shipbuilding, synthetic fibres or financial services sectors
• The coal, fishing or motor vehicle industry.

Accordingly, if more than 50% of the turnover from the owner-occupier’s trade or activity, in respect of which the building is occupied, arises from activities in one of the above sectors/industries, the restriction applies. Where the building is in use for the purposes of more than one trade or activity of the owner the test is applied in relation to the aggregate of the turnover from all the trades/activities for which the building/structure is used.

Sellers of agricultural products will not be regarded as coming within the agricultural sector unless they are also involved in the production, processing or marketing of agricultural products.

Sellers of steel, synthetic fibres, coal or fishing industry products will not be regarded as coming within the sectors/industries unless they are also involved in the production of the products.

In relation to the financial services sector, an auctioneer selling financial products, for example, will not be entitled to capital allowances if more than 50% of his/her turnover arises from such sales.

The motor vehicle industry is regarded as being confined to the development, manufacture or assembly of motor vehicles. Owner-occupiers of sales outlets, car showrooms, garages or motor factors will not be regarded as coming within the term unless they are also involved in the development, manufacture or assembly of motor vehicles.

When is the test to be applied?

In the case of a company, the test is applied at the end of the company’s accounting period to which the claim relates. In the case of an individual, the test is applied at the end of the basis period for the year of assessment to which the claim relates.

Purchase of Buildings/Structures

The restriction also applies where the owner-occupier of a building/structure purchases a new or second-hand building/structure.

Lessors

The restriction does not apply to lessors of buildings/structures which are in use by lessees for the purposes of a trade carried on in any of the above sectors or industries.

Buildings provided for the purposes of certain large investment projects

As outlined above, this restriction applies in relation to the New Urban Renewal Scheme and the Town Renewal Scheme. While the restriction does not apply in relation to the Rural Renewal Scheme a separate restriction was included in the legislation governing this scheme, when it was introduced in Finance Act 1998, which effectively restricts the availability of capital allowances to small and medium sized enterprises where the number of people employed is 250 or less.

Details

Capital allowances under the New Urban Renewal Scheme and the Town Renewal Scheme are not available in respect of industrial or commercial buildings/structures which are provided for the purposes of a project in respect of which regional aid is limited under certain rules prepared by the Commission of the European Communities. These rules are contained in "Multisectoral framework on regional aid for large investment projects." [Official Journal Issue No. C 107, 7.4.98, p.7]

Under the framework the Commission decides on a case-by-case basis a maximum allowable aid intensity for projects which are subject to the notification requirements. Generally, notification arises where a Member State proposes to award regional investment aid where either of the following criteria are met:

• The total project cost is at least £50 million, the cumulative aid intensity expressed as a percentage of the eligible investment costs is at least 50% of the regional aid ceiling for large companies in the area and aid per job created or safeguarded amounts to at least £40,000, or
• The total aid is at least £50 million.