Kevin Read looks at changes announced in Budget 2018 to the tax rules for plant and buildings, as the government seeks to encourage investment during these uncertain economic times.
There were several unexpected changes to the tax rules for capital expenditure announced by Philip Hammond on 29 October 2018.
Plant and machinery allowances
Let’s start by getting the bad news out of the way. Firstly, from April 2019, the writing down allowance (WDA) on the special rate pool is reducing from 8% p.a. reducing balance to 6% p.a. For accounting periods that straddle the change, a time-apportioned hybrid rate will need to be calculated.
This change means that the tax relief on items such as long-life assets and integral plant in a building will become even slower, where not covered by the 100% annual investment allowance (AIA).
Secondly, the enhanced capital allowance (ECA) regime (currently giving 100% first year allowances for expenditure on qualifying plant that uses energy efficiently or is environmentally beneficial) is being abolished from April 2020.
Businesses should consider advancing planned expenditure before those dates if total expenditure on plant would otherwise exceed the AIA for the period. As is common, the list of qualifying technologies is being updated for 2019/20 (note that ECAs for electric vehicle charge points will continue until 31 March 2023).
Now for the good news!
There is a large, temporary increase in the AIA from £200,000 to £1 million, for expenditure between 1 January 2019 and 31 December 2020. However, it will be of no benefit to partnerships with a corporate partner, which are ineligible for AIA.
Whenever the AIA changes, there are always relatively complicated transitional rules, so do not assume that £1 million of plant can be purchased on 1 January 2019 and qualify for AIA. The exact amount available will depend on the business’s accounting period.
Structures and buildings allowance
This will apply to all new commercial structures and buildings, including offices. No relief is available, however, for the land itself or dwellings. The definition of ‘dwellings’ excludes care homes and hotels which therefore qualify, as do structures such as bridges and tunnels.
Expenditure on integral plant (e.g. air conditioning) will continue to qualify as special rate pool expenditure, as discussed above.
The SBA will be 2% on a straight-line basis, to write off the cost over 50 years from when the building or structure is first brought into use. ‘Cost’ is the construction cost, including renovation and conversions of non-commercial buildings, and includes the demolition cost of any previous structure. If purchased from a developer, the claim will be on the price paid minus the value of land.
The relief will apply where all the contracts for the physical construction works are entered into on or after 29 October 2018. Where construction is undertaken by an internal workforce, that physical work must have commenced on or after 29 October 2018.
Any subsequent construction costs (e.g. an extension) will create a separate 2% allowance, with its own 50-year life.
There will be no balancing adjustment on a sale; the purchaser will simply take over the remainder of the allowances and the writing down period.
Example: May Ltd and Corbyn Ltd agree on a deal!
May Ltd buys a new office building from a developer at a total cost of £14 million, of which £4 million relates to the land. It brings it into use on 1 January 2020. The company has a 31 December year end.
On 31 December 2029, the building is sold to Corbyn Ltd for £10.5 million, of which £8 million relates to the land.
May Ltd’s annual WDA will be £200,000 (i.e. £10 million x 2%). By 31 December 2029, it will have claimed 10 years’ allowances, totalling £2 million.
The allowable cost when calculating its capital loss on the land and building is: £14 million, less the £2 million allowances claimed, i.e. £12 million; so, the capital loss is £10.5 million - £12 million = £1.5 million.
The price Corbyn Ltd pays does not affect the amount of allowances it gets. It will claim SBA of £200,000 p.a. for the remaining 40 years of the building’s tax life, or until it sells it.
HMRC has issued a technical note on the proposed rules: see tinyurl.com/HMRC-SBA-Tech
Practical Tip:
It is important, going forward, that detailed records are kept for SBA purposes not only of costs but also when buildings are first brought into use. This information will need to be made available to the purchaser when the building is sold.
