Business Premises Renovation Allowance – The Final Countdown

The clock is ticking down for claims to be made for business property renovation allowance (BPRA). The expiry date is 1 April 2017 for corporation tax and 6 April 2017 for income tax, and the expenditure qualifying for BPRA must be incurred before the expiry date.

BPRA is a capital allowance for capital expenditure on the renovation or conversion of business premises in designated disadvantaged areas that have been unused for at least one year. Qualifying expenditure attracts a 100% initial allowance or, if this is not claimed in full, a 25% writing down allowance.

Before the building became vacant, it must have been used for a trade, profession or vocation or as an office. Its last use must not have been as a dwelling.

After renovation or conversion, the property must meet the definition of ‘qualifying business premises’. This means that it must be used by or be available and suitable for letting by a trade, profession or vocation or as an office and must not be used or available for use as a dwelling. Use by or letting to the following sectors (known as ‘relevant trades’) do not qualify for relief:

In addition, use by or letting to undertakings that are subject to an outstanding recovery order or that are in difficulty are also treated as relevant trades. Note that the list of relevant trades has changed several times over the lifespan of BPRA.

Following a technical review of the regime in 2013, prompted by disclosures made under the disclosure of tax avoidance schemes regime, the expenditure qualifying for BPRA became far more prescriptive for expenditure incurred on or after 1 April 2014 for corporation tax and 6 April 2014 for income tax.

To protect against inflated claims, qualifying expenditure is limited to the market value of costs. The following project costs qualify:

The technical review cited concerns over the inclusion of large project management fees and costs related to the marketing of completed sites. Other expenditure is now only allowed to the extent that it does not (in total) exceed 5% of expenditure incurred on the above (excluding the costs of planning applications and statutory fees and permissions).

Expenditure on integral features (as defined in CAA 2001, s 33A) qualify, together with a list of other specific fixtures and fittings.

Any repairs included in the claim must be incidental to the cost of renovation or conversion of the building.

If the property is used in a trade, profession or vocation, the BPRA is treated as an expense of that trade profession or vocation. Where the person incurring the expenditure is a landlord carrying on a property business, the BPRA is an expense of that business. If the person incurring the expenditure on the building is not carrying on a property business, they are treated as carrying on a property business for the purpose of claiming BPRA. Property traders cannot claim BPRA as they would not be incurring capital expenditure on a building.

As BPRA is a European state aid, there are other restrictions to ensure that it complies with the General Block Exemption Regulation. These include rules to prevent certain grants for the same expenditure and also applying a €20,000,000 cap to a single investment project.

HMRC also makes it clear that it considers that allowances are not available for the cost of acquiring land, extending a building or developing land next to a building.

There are a number of timing issues that could lead to expenditure either not qualifying for BPRA or triggering a balancing adjustment.

First, expenditure is excluded if the building was used at any time during the period of twelve months, ending with the day on which the expenditure is incurred. Therefore, if a person is looking to get a project underway before the April 2017 expiry date(s), they need to ensure that this vacancy condition can be met.

Second, following the 2013 technical review, works must be completed or services performed within 36 months of the expenditure being incurred, otherwise the related expenditure is treated as if it has never been incurred. BPRA projects are often characterised by prepayment of expenditure to provide certainty to banks and contractors that funds are available and to enable investors to claim immediate tax relief. However, from 1 April 2014 for corporation tax and 6 April 2014 for income tax, this 36-month rule has applied. If the works are eventually completed or services are performed outside of the 36-month window, the expenditure is treated as if it has been incurred at that time. As this time will always fall after the expiry dates of 1 April 2017 for corporation tax and 6 April 2017 for income tax, it essentially means that if the 36-month deadline is not met, the expenditure will not qualify for BPRA. 

Finally, if there is a balancing event within a certain timescale, there will be a balancing adjustment (a balancing charge if there is a surplus, or a balancing allowance if there is a deficit). The timescale was seven years from when the premises were first used or suitable for letting for expenditure incurred before 1 April 2014 for corporation tax and 6 April 2014 for income tax. This timescale was reduced to five years from first use or availability for letting for expenditure incurred on or after 1 April 2014 for corporation tax and 6 April 2014 for income tax. If a project is being undertaken with a view to an eventual sale, it should be noted that the total investment period may be longer than five (or seven) years.

This is because the clock starts ticking from when the conversion or renovation is complete, rather than from when the work started or BPRA claimed. The balancing events are:

Justin Time pays a contractor to undertake work to convert a disused qualifying building into qualifying business premises. Justin incurs the qualifying expenditure on 15 January 2017, but the contractor does not complete the works until 20 November 2019. Even though the works are not completed until after the expiry date of 6 April 2017, as the works are completed within 36 months, Justin is treated as incurring the qualifying expenditure before the expiry date.

BPRA exists to correct a market failure, recognising that many projects are simply not viable without it. Some will find that the numbers only work for investors that can claim income tax relief at 45%; with lower rates of corporation tax, the rate of relief in a corporate structure may not be enough.

Some BPRA collective investment schemes have been subject to challenge by HMRC, as highlighted in HMRC’s Spotlight 21. Investors have also been issued with accelerated payment notices.

As highlighted above, the rules have been significantly tightened since 2014 following the technical review. Timing of qualifying expenditure and the completion of works within 36 months could be key to securing the BPRA expected.