Structures and Buildings Allowance
By Six Forward
You might be forgiven for thinking that (in a democratic country) we should have open access to the laws under which we are governed. This is especially true given that ignorance of the law is never a valid excuse for getting things wrong.
There are at least two ways, however, in which such access is denied in relation to tax matters.
Most fundamentally, there is no freely available source of current tax law. You can find, online, each piece of legislation as it was originally enacted, but that only gets us so far. Tax law is changing all the time, and if you want to know how that particular section of that particular Act now reads, you have to pay a commercial provider for the privilege.
Also, though, there can be a delay in publicising the law even as it will first apply, and rarely has there been a clearer instance of this than in relation to the new structures and buildings allowance (SBA). This article serves as a reminder of what the SBA is all about, and also explains where we currently stand in relation to the rules themselves.
SBAs – the basics
The new allowance for structures and buildings was announced in the Budget of 29 October 2018, and the allowance is – broadly speaking – available from that date. The stated purpose, from the Explanatory Notes, is “to address a gap in the current capital allowances system, where no relief has been available for most structures and buildings”.
The introduction of the SBA is broadly to be welcomed, reversing as it does the general trend of abolishing numerous types of property-related capital allowances, including industrial buildings allowances, agricultural buildings allowances, flat conversion allowances and business premises renovation allowances, all of which have been removed in the past decade or so.
The new allowance is given at the flat rate of 2% per year, with various rules as to “qualifying use”, “qualifying expenditure”, having an interest in the land, and various other conditions that are already familiar for those dealing with plant and machinery allowances for property fixtures.
Where are the rules?
So far so good – the legislation introduced by Finance Act 2019 gives the broad parameters within which the relief will be available. We also have an HMRC technical note.
The problem, however, is that the tax devil is always in the detail. Unless we can look that detail in the eye, as it were, we cannot truly know how the relief will operate or indeed how valuable it will prove to be. According to the CIOT, who have been in discussion with HMRC, draft regulations will be published for consultation in the spring (March, April, May …?) and these will then be open to consultation. Given that the wheels of the HMRC machine tend to grind rather slowly, it seems quite possible that the allowance will have been around for a full 12 months before we actually have statutory certainty as to how it will work.
This problem of missing legislation bites from the outset. According to the primary legislation (FA 2019), the new rules will apply to expenditure incurred from 29 October 2019, but certain expenditure may be treated as incurred before that date, so as to deny allowances. The restriction specifically applies to certain expenditure that is associated or connected with pre-commencement expenditure, but may also be applied “in other prescribed cases”. So a company drawing accounts up to 31 December 2018 may genuinely not know whether or not it can claim SBAs on certain expenditure. That is wholly unsatisfactory.
Broadly speaking, we think we know what will constitute qualifying expenditure for the purposes of this allowance. In reality, however, the primary legislation merely tells us that regulations must specify what is covered by the term. So once more, we don’t really know. The technical note gives us some good clues, so as long as the guidance given there isindeed translated into the final regulations, a claim can at least be prepared on the basis that it is likely to succeed. If necessary, the self-assessment time limits should allow for alterations to be made at a later stage.
Other areas where care will be needed will include the term “dwelling-house”, which is to be given its own definition for this allowance, the details still to be determined.
The interaction between SBAs and the existing regime for claiming for the cost of fixtures also needs clarification. For example, it is not yet clear whether SBAs could be claimed for the whole of the construction costs, including the fixtures in the property, or whether it is a statutory requirement to exclude the fixtures and to claim only on the balance. Section 7 of CAA 2001 certainly makes it clear that no double claim is possible, but there are different views on whether everything could be claimed under the new SBA regime (with no claim under the fixtures rules) or not. In most cases, though, it will be clear that the cost of fixtures should be claimed under the plant and machinery code, which will normally give a much better outcome.
Is it all worth the fuss?
What does seem clear is that the SBA is a poor relation of the plant and machinery allowances.
First, the rate is restricted to an ungenerous 2% per year, whereas a claim for fixtures may well be at 100% (through the mechanism of annual investment allowances).
Furthermore, there is an important distinction when it comes to the interaction of capital allowances and capital gains tax (or corporation tax on capital gains). Where a property is sold at a profit, s. 41 of TCGA 1992 ensures that the computation of the capital gain is not affected by any capital allowances that may have been claimed. It appears, however, that a different approach will be taken for SBAs. As the technical note puts it, “for chargeable gains purposes a person’s allowable cost of the asset will be reduced by the total amount of relief that they have claimed”.
So if a property is constructed for £400,000 and sold for £600,000, and a claim has been made under the plant and machinery code for fixtures of £120,000, the capital gain is still £200,000 (net of selling costs, etc.). This is the case even if the seller signs a fixtures election for (say) £2 so that he is able to retain the full benefit of the allowances claimed.
By contrast, if a property is constructed for £400,000 and sold for £600,000, and a claim has been made under the SBA code for the £400,000, it appears that the capital gain will be £600,000 (once more, net of selling costs, etc.). So there is a (slow) cash flow advantage in claiming the allowance, but the advantage is fully unwound on sale because of a higher capital gain. Indeed, if capital gains are for whatever reason taxed at a higher rate than income, then it appears that the person could be worse off by claiming SBAs. Once more, however, we don’t really know, and will only have certainty on this once the full secondary legislation has been published and indeed enacted.
So what does this mean in practice? We cannot simply ignore a new form of tax relief, which has already in principle been operative since last October, and as a firm we have started to consider this new capital allowance in some live client cases. As with all the scenarios we already deal with under the fixtures rules, however, each case needs to be considered on its merits, taking a long term perspective and balancing the various options. We will be very happy to discuss both the pros and the cons of the new allowance in relation to any real transaction you have undertaken or may be considering.
We will also, of course, be keeping a close eye on the developing legislation to ensure that our advice reflects best practice in the light of everything we know at any given time.
In the meantime, though, there can be relevant certainty when it comes to the rules for fixtures claims for commercial property – as long as the person advising understands the real underlying complexities. We are pleased to continue helping our clients (and ultimately their clients) to get those claims right.