Sarah Bradford explores the new structures and buildings allowance introduced in Finance Act 2019.
At the time of Budget 2018, Chancellor Philip Hammond unveiled a new capital allowance for qualifying expenditure on non-residential structures and buildings – the structures and buildings allowance (SBA).
A technical note was published on 29 October 2018 setting out details of the proposed allowance, with comments being sought on some aspects of the relief.
Legislation was introduced in Finance Act 2019, s 30 enabling the Treasury to make regulations to amend CAA 2001 to give statutory effect to the allowance.
The introduction of the new allowance addresses a gap in the capital allowances structure. The government also hope that it will increase the UK’s international competitiveness and stimulate investment in structures and buildings intended for commercial use.
Overview
The SBA will provide relief for eligible construction costs incurred on or after 29 October 2018 on new non-residential structures. The relief will be given on a straight-line basis at a rate of 2% per annum, thereby writing off the cost of the structure over 50 years.
The aim of the relief is to relieve the costs of physically constructing new structures and buildings. The relief applies to investment in structures and buildings which are intended for commercial use; the allowance is not available in respect of land or dwellings. Where there is a mixed use of the structure (for example, between commercial and residential), the relief is proportionately reduced. SBA cannot be claimed in respect of workspaces within a domestic setting, such as home offices.
The relief will be capped at the original cost of construction or renovation. These costs will be relieved over a fixed 50-year period, irrespective of whether ownership changes hands.
Nature of the relief
As indicated, businesses incurring qualifying expenditure on structures or buildings which are used for qualifying activities will be able to claim SBA and write off the expenditure over a 50-year period (at a rate of 2% per annum on a straight-line basis). The allowance will be calculated by reference to the original construction cost and, as it is on a straight-line basis, the allowance will be the same each year.
For example, if qualifying construction expenditure is £5 million, the allowance will be £100,000 (i.e. 2% of £5 million) per year for 50 years.
Another feature of the allowance is that if the building or structure is sold, the purchaser can continue to claim the allowance based on 2% of the original cost for the remainder of the 50-year period – there are no balancing adjustments on disposal. Further, the amount that is eligible for relief is not increased if the property has appreciated at the date of sale – relief is given only for the original construction costs and not for any appreciation in value.
The relief is only available for qualifying constructions costs incurred on or after 29 October 2018 under a contract entered on or after that date. No relief is given for construction costs incurred on or after 29 October 2018 under a contract entered into before that date.
Key features of the relief
The technical note sets out the key features of the new structures and building allowance, which are as follows:
- relief is available for new commercial structures and buildings, including the costs for new conversions or renovations;
- relief is given at the rate of 2% over a 50-year period;
- relief is available for UK and overseas structures and buildings, where the business is within the charge to UK tax;
- relief is limited to the costs of physically constructing the structure or building including the costs of demolition or land alterations necessary for construction and to bring the asset into existence;
- relief is available for eligible expenditure incurred where all the contracts for the physical construction work were entered into on or after 29 October 2018;
- a claim for SBA can only be made when a structure or building first comes into use;
- land costs or rights over land are not eligible for relief, nor are the costs of obtaining planning permission;
- the claimant must have an interest in the land on which the structure or building is constructed;
- dwelling houses will not qualify for relief, nor will any part of the building used as a dwelling where the remainder of the building is used for commercial use;
- sales of the building or structure will not result in a balancing adjustment – instead the purchaser takes over the remainder of the allowances for the remaining part of the 50-year period;
- expenditure on integral features and fittings of a structure or building that qualify for plant and machinery capital allowances will continue to qualify for plant and machinery allowances, including the annual investment allowance (AIA) up to its annual limit;
- SBA expenditure will not qualify for the AIA;
- where a structure or building is renovated or converted so that it becomes a qualifying asset, the expenditure will qualify for a separate SBA at the rate of 2% a year over 50 years.
Qualifying expenditure and qualifying activities
The new allowance is given for qualifying expenditure. This is expenditure on structures and buildings which are brought into use for the following qualifying activities:
- a trade, including a ring-fence trade in the oil and gas sector;
- a profession or vocations;
- a UK property business which is an ‘ordinary’ business for the purposes of CAA 2001;
- managing the investments of a company with investment business to the extent that profits or gains are chargeable to tax.
The allowance is given for the cost of the original construction, but this is restricted to the net direct cost of constructing the asset, after allowing for any discounts or refunds. Capital expenditure on renovating or converting an existing commercial building is also eligible for the allowance.
What structures count?
Structures and buildings allowances are available for a range of non-residential structures, including offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses.
However, expenditure on ‘dwellings’ is excluded from the ambit of the allowance as these are residential rather than commercial structures.
Overseas structures
Availability of SBAs is not restricted to UK structures; the allowance will also be available for qualifying expenditure on overseas structures on the same basis as for a UK structure where it is used for a qualifying activity and to the extent that the profits of that activity are chargeable to UK tax.
Timing of the relief
Structures and buildings allowances are available from the date when the structure or building is first brought into use for a qualifying activity.
Where the structure or building is being constructed for a commercial activity which has not yet started, the expenditure will only qualify for SBAs if no more than seven years elapse before the commencement of the qualifying activity.
Changes of use
The availability of SBAs will cease if the use of a building which original qualified for the allowance is changed to residential use.
If the building reverts to commercial use, SBAs can be claimed again, but are lost for the period attributable to the non-qualifying use.
Practical Tip:
When constructing a new commercial structure or renovating an existing one, check the qualifying conditions are met to enable the new SBA to be claimed.
