By Dean Needham, Senior Capital Allowances Analyst at Catax.
Following Mark Anthistle’s overview of the good, the bad and the ugly in respect of the Autumn budget last month; for this month’s Capital Allowances tax talk we are focusing on the Ugly – the new Structures and Buildings Allowance (SBA).
How does the new SBA work?
The same qualifying criteria for normal plant and machinery allowances (PMAs) apply to the new SBAs. However, the new SBA is restricted to new builds, extensions and conversions or renovation projects.
SBAs apply to eligible construction costs where the contractor has been instructed to carry out the works on or after the 29th October 2018 on non-residential properties.
SBAs allow 2% of the qualifying expenditure to be claimed each year against taxable profit/loss for a duration of 50 years. The aim of the new allowance is to provide tax relief on the costs of physically constructing new structures and buildings which was previously unavailable.
Those who remember the old industrial buildings allowances (IBAs – phased out in 2011) will notice that SBAs are very similar.
Why should you claim PMAs when you can get the full cost under SBAs anyway?
It would be incorrect to claim SBAs on full construction costs. The expenditure must be split between costs which qualify for PMAs and those that don’t.
As per paragraph 24 of HMRC’s technical note on SBAs “As with any capital allowance, qualifying expenditure can only be claimed once where separate provisions of the Capital Allowances Act 2001 might apply to the same expenditure.” Therefore, if the easy option is incorrectly taken to claim SBAs on the full expenditure it may preclude any potential claim for PMAs.
It is imperative that the correct tax treatment is applied to construction costs following the introduction of the new SBA, to ensure that the maximum tax relief that the taxpayer is entitled to is used.
When claiming SBAs, the expenditure is not eligible for annual investment allowance (AIA) and the relief is restricted to 2% of the construction cost each year.
When you compare this to the 18% relief available for general pool plant and machinery and 6% relief available on integral features, it is better to make the most of higher rates of relief available on normal PMAs.
It is also worth noting that with the AIA limit increasing to a whopping £1,000,000 from 1st January 2019, in most cases the costs qualifying for PMAs can be relieved using AIA at 100% in a single year! Again, comparing this to the benefit of SBAs spread over 50 years, it would be foolish to incorrectly claim SBAs on full project costs and miss out on the generous AIA available.
To maximise the benefit available from new construction projects the correct procedure should be to first allocate costs which are eligible for PMAs, claiming these at the highest rate of relief available of either AIA (100%), general pool items (18%) or integral features (6%). The balance (less land) should then be claimed under the new SBA at 2%.
The devil is in the detail…
On the sale of a commercial property, an owner can avert repaying the benefit of the PMA’s claimed over their ownership period by entering into an s198 election. This restricts the disposal value of the qualifying plant and machinery to the tax written down value or lower, avoiding any clawback of benefit. Claiming PMAs has no impact on the owner’s capital gains base cost and no impact on any future capital gain liability.
In contrast, when claiming SBAs, the base cost for capital gains is reduced by the amount claimed each year. Although there is no balancing allowances or charges; the benefit gained from the SBAs will eventually be clawed back through an increased capital gains tax liability in the future. Therefore, the process of claiming SBAs is purely a cash flow exercise, with no permanent tax benefit.
An Illustrative example
As an illustrative example, a limited company spends £500,000 constructing a new trading office on land they already own, in a period which qualifies for SBAs.
Catax has identified £170,000 of PMAs from the construction expenditure.
The correct tax treatment of the expenditure would be to claim the £170,000 PMAs first with the balance of £330,000 claimed as SBAs.
With the correct tax treatment, the velocity of the benefit realised to the client is greatly increased with no clawback of benefit on the PMAs.
How can Catax assist?
Although the SBA has been introduced following a report produced by The Office of Tax Simplification, the new SBA has added further complications to commercial property tax relief. This adds further value to the service Catax provide by ensuring the maximum tax relief our client is entitled to is claimed via PMAs (with no clawback) allowing for SBAs to be claimed only on the balance, avoiding any overclaim of SBAs.
Please see the below link to HMRC’s technical note on the new SBAs for further technical reading here.