Capital Allowances and Property-based Incentive Schemes

Introduction

Tax Briefing 64 contained an article on the Finance Act 2006 changes to the property-based incentive schemes and addressed a number of issues raised in a previous article. It also contained an example illustrating the application of the various restrictions put in place affecting hotels and certain other commercial and industrial projects, etc. benefiting from the extended 31 July 2008 deadline. The example featured an industrial building in an urban renewal area with an element of expenditure on the building being incurred outside the qualifying period for the urban renewal scheme in August 2008. It has been drawn to our attention that, being an industrial building, such expenditure, though not qualifying under the urban renewal scheme, would qualify for relief under the general industrial buildings capital allowance regime. The purpose of this article is to point out that the example in Tax Briefing 64 more correctly reflects the position for a commercial building than an industrial building. A revised example is now attached illustrating the position for an industrial building and taking account of the fact that relief is available for such buildings outside the ambit of the various property-based incentive schemes.

Example Illustrating the Application of Finance Act 2006 Restrictions

A builder purchases a site in a qualifying Urban Renewal area for €100,000 and constructs an industrial building on it for a cost of €420,000. The building is completed in August 2008 and, without having been used, the builder sells it to X on 1 October 2008 for €600,000 and X immediately takes it into use for the purposes of his manufacturing trade.

Construction expenditure attributable to the various periods is as follows:

Year 2006: €100,000

Year 2007: €220,000

1 Jan. 2008 to 31 July 2008: €80,000

August 2008: €20,000

As expenditure has been incurred on an industrial building within and outside the qualifying period for the urban renewal scheme, relief will be available under that scheme as well as under the general 25 year write off regime for industrial buildings in respect of that element of expenditure attributable to August 2008.

Relief under the Urban Renewal Scheme

The projected amount of post December 2006 expenditure, as certified by the local authority, was €280,000. Therefore the combined expenditure for the period 1 January 2007 to 31 July 2008 (€300,000) must be restricted to €280,000 and the restriction (€20,000) must be made in relation to the period January to July 2008 in priority to the year 2007. Accordingly, expenditure treated as incurred in the period January to July 2008 (before the 50 per cent restriction is applied) is €60,000 (€80,000 less €20,000).

The amount of qualifying expenditure in each period after application of the 75 per cent and 50 per cent restrictions is as follows:

Year 2006: €100,000

Year 2007: €220,000 x 75% = €165,000

Jan to July 2008: €60,000 x 50% = €30,000

August 2008: Nil (outside of the qualifying period). Total expenditure for the purposes of the numerator "C"* in the formula is therefore €295,000.

The net price paid by X for relief purposes under Section 279 TCA (as amended) is -

B x	C
	D+E

Where

B = purchase price

C = expenditure in qualifying period as reduced by restrictions

D = actual expenditure incurred

E = site cost

i.e. €600,000 x	€295,000	= €340,385
	€420,000 + €100,000

X is deemed to have incurred construction expenditure on 1 October 2008 equal to the net price paid by him, that is, €340,385, and his entitlement to capital allowances will be based on that amount at the rates available under the urban renewal scheme.

*NOTE: When calculating the formula for "the net price paid" in Section 279 the numerator "C" in the formula should be the amount of construction expenditure (incurred in the qualifying period for the scheme) as reduced in accordance with subsections (5) and (7) of Section 270. The denominator "C" in the original formula - now "D" in the revised formula - should include the full amount of expenditure incurred on the construction of the building or structure i.e. before any restrictions and whether or not incurred in the qualifying period for the particular scheme.

Relief under General Industrial Buildings Regime

As €20,000 of the expenditure on the building is attributable to August 2008 (a period falling outside the qualifying period for the urban renewal scheme), that amount must be considered for relief under the general capital allowance regime for industrial buildings. Again, using the Section 279 formula, the amount of relief available to the purchaser in respect of this element of the expenditure is determined as follows:

€600,000 x	€20,000	= €23,077
	€420,000 + €100,000

X is deemed to have incurred construction expenditure of €23,077 on 1 October 2008 under the general industrial buildings regime and capital allowances on this element of the relief are available at the rate of 4% per annum over 25 years.