In its 2018 Budget, the government announced plans to introduce a new capital allowance for certain costs incurred in purchasing, constructing or renovating commercial structures and buildings, to be known as the "Structures and Buildings Allowance" (SBA).
Capital allowances can be a useful tax relief for businesses which incur a lot of capital expenditure (for example on equipment, machinery or business vehicles), as the relief enables a business to deduct some or all of the value of the capital item from its profits before it pays tax. The aim of introducing the SBA is to support business investment in constructing new structures and buildings, and improving existing ones, as well as increasing the international competitiveness of the UK’s capital allowances system.
The legislation introducing the SBA came into force on 5 July 2019. However, it applies retrospectively to all qualifying expenditure incurred under contracts entered into on or after 29 October 2018 (the date of the 2018 Budget). HMRC published some guidance on the SBA on 15 August 2019, with more technical guidance expected to follow.
Overview of the SBA
The SBA provides an annual 2% writing down allowance at a flat rate over a 50 year period on the costs of constructing, renovating or converting new commercial structures and buildings under contracts entered into on or after 29 October 2018.
Unlike other capital allowances, the SBA is an annual flat rate based on qualifying expenditure (rather than being claimed on a reducing balance) and there will be no system of balancing charges or balancing allowances on a subsequent disposal of the building or structure. Any remaining years of the 50 year period will pass to a new purchaser if and when the building or structure is sold. The amount of SBA claimed by the vendor in respect of that building or structure will be added to the proceeds of sale when calculating its gain on the disposal of the asset.
There are also various conditions which must be met. In broad terms, SBAs can only be claimed on "qualifying expenditure" (see further below) when a building or structure is in non-residential use for the purposes of a "qualifying activity" carried out by the person who has a relevant interest in the building or structure. A relevant interest includes taking a lease of the building or structure, although the position is more complex with leases. Qualifying activities include trades and UK or overseas property businesses but only to the extent that the profits or gains from the activity are, or (if there were any profits) would be, chargeable to UK tax.
What is qualifying expenditure?
Qualifying expenditure is, broadly, the amount of direct costs related to physically constructing new structures and buildings, or the cost of converting or renovating them. It also includes the costs of purchasing the relevant interest in the structure or building. Expenditure incurred on the acquisition of land, land reclamation and remediation, landscaping and altering of land (unless altered for preparing land for a building or structure), and on plant or machinery is specifically excluded.
Evidence of expenditure: the "allowance statement"
A claim for SBA must be made on the business's tax return. However, in order to claim, the claimant must have an "allowance statement" for the building or structure which identifies the building or structure to which it relates and provides other details relating to the qualifying expenditure (including the amount of expenditure incurred). It seems clear from the legislation that estimates cannot be used to quantify the SBA. Actual amounts of the expenditure must be shown, and if actual expenditure cannot be shown, the SBA expenditure will be treated as nil.
Where a claimant wishes to claim SBAs on a used structure which it has purchased, it will only be able to do so if obtains an allowance statement (or a copy of it) from any previous owner. If the claimant extends or renovates the structure, or any extension or renovation is completed after the claimant starts using the structure, the claimant can record the construction costs as a separate item on the allowance statement provided or, in the absence of one, create a new allowance statement in respect of those costs.
Osborne Clarke comment
While the SBA is a welcome relief and should increase business investment into commercial buildings, there are still some concerns over the practicalities of how the relief will be claimed. The concerns relate mostly to the allowance statement. The recent guidance published by HMRC has provided some clarification, for example, in the case of a purchaser that incurs qualifying expenditure to a property it has acquired where no allowance statement was provided. However a number of questions remain, including: whether (or when) the allowance statement should be submitted to HMRC; and what happens if you rely on an allowance statement which later turns out to be wrong, or if the allowance statement is not forthcoming? We will need to wait for further technical guidance which, hopefully, will address these questions.