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Budget 2018ócapital allowances

Budget 2018 - capital allowances

Lexis®PSL Legal Analysis 05/11/2018
Tax analysis: The tax measures announced at Budget 2018 on 29 October 2018 included a new structures and buildings allowance and the abolition of certain environmental enhanced capital allowances. Steven Bone, director of The Capital Allowances Partnership Ltd, comments on the changes and their impact for businesses.

What is the new structures and buildings allowance (SBA)?

The SBA is a welcome 2% flat rate capital allowance for expenditure on constructing non-residential structures and buildings.
At the moment we only have a technical note, not draft legislation, and the government is inviting views on aspects.  But the key points include that it will be available for income and corporation tax, for both UK and overseas expenditure, where UK tax is payable.
Most capital allowances qualifying activities will benefit, with the apparent exception of furnished holiday lettings.
It will include new works and converting existing premises to business use, but the construction contract must be entered into from 29 October 2018. The SBA will not be available for expenditure on land or on dwellings.
Claims start when the building is brought into use (if no more than seven years has elapsed between the expenditure and use). Subsequent buyers will inherit the residue of cost not yet written-off for tax. So, there will be no balancing allowances or charges.
Plant and machinery fixtures, including integral features, will continue to qualify for plant and machinery allowances (PMAs) and benefit from the 100% annual investment allowance.
It is however disappointing that, unlike PMAs, claiming the SBA will reduce the owner’s capital gains base cost and so will increase a gain on sale.
In many respects the SBA rules look like the government is dusting-off and reinstating the industrial buildings allowances (IBA) rules which were abolished from 2011. However, the SBA will go further than the former narrow definition of ‘industrial’ buildings. The rate of relief will also be a throwback to the earliest incarnation of IBAs in the 1940s when relief was given straight-line over 50 years.

Why is the government introducing the SBA, and are many businesses likely to benefit?

The UK has had the dubious distinction of having the least generous tax depreciation regime amongst competitor nations. So, a longstanding request from business was to give capital allowances for buildings and structures which currently rarely qualified for relief (except where business premises renovation allowances or research and development allowances were available). The government considers that extending the scope of relief should improve the UK’s international competitiveness and address a gap in the rules.
The surprising aspect is that business has been calling for this for decades. Businesses used to complain that it was unfair that ‘industrial’ buildings and structures qualified, whereas other commercial buildings generally did not. In 2007, the government concluded that there was some merit in that view. But instead of extending the relief to everyone, in a somewhat meanspirited move, it took away the relief from those already benefitting. The Treasury and HM Revenue claimed that in effect ‘the tax system already recognises the depreciation of buildings and structures in other ways’, the Exchequer costs of extending relief would be ‘extremely high’ and that resources would be more efficiently allocated to other priorities.

What is the likely impact of the increase in the annual investment allowance (AIA)?

The increase in the AIA from £200,000 to £1m has been widely welcomed. It accelerates the tax relief on an additional £800,000 of expenditure in each year. This will mean that many more expenditure projects can be written-off in full in the year the expenditure is incurred. It will particularly benefit one-off business expenditure, such as the purchase of business premises and equipment, or new-build and refurbishment projects.
It is possible, but perhaps unlikely, that taxpayers will delay some larger expenditure until 1 January 2019 to benefit.

What transitional issues could arise with changes to the AIA?

The AIA cap has yo-yoed up and down according to political considerations at the time. So, practitioners are familiar with transitional issues. The main one is that for chargeable periods straddling 1 January 2019, when the AIA increases to £1m, a complicated calculation will be needed to work out the actual AIA that is available.
The government’s aim will be to allocate the AIA proportionately, and prevent taxpayers fortuitously benefitting from the increase when their expenditure was incurred before the threshold went up. First, it will be necessary to time apportion the respective £200,000 and £1m AIA thresholds based on how much of the period falls before 1 January 2019, and how much after. Second, the AIA will then be restricted based on the actual qualifying expenditure incurred in each respective part of the overall period.

Why is the government abolishing some environmental enhanced capital allowances, and are many businesses likely to be affected by this?

Enhanced capital allowances (ECAs) at 100% were a welcome relief when introduced in 2001 and extended in 2003.  However, since 2008 the 100% AIA has also been available. This could be claimed for assets which might otherwise qualify for ECAs. The AIA means that for many expenditure projects most, if not all, of the spend can be written-off at 100% anyway without needing to claim ECAs. And with the AIA now increasing to £1m, ECAs will only be worth claiming if the total qualifying expenditure in a year is more than the AIA cap.
It is also fair to say that while introducing ECAs for ‘green’ assets was a worthy idea, the devil was in the detail. The assets typically cost more to buy than their non-qualifying counterparts, which put many taxpayers off. Claiming ECAs could also prove burdensome because of the need to specify qualifying assets upfront and then make sure that appropriate evidence found its way to the person preparing the tax computation and return many months later. This was not helped by the fact that ‘unlisted’ products, such as complicated and expensive lighting systems, needed bespoke engineering input or supplier certification to establish whether they were eligible.
So, in practice, ECAs were often ignored, or considered too difficult to bother with. The final nail in the coffin was that last year the Office of Tax Simplification damningly reported that there were ‘significantly high barriers to access it’, including that the assets were rarely the most efficient options on the market and the administrative burden was ‘excessive’.

Was the reduction in the special rate of plant and machinery allowances unexpected? Is this likely to have much impact?

This was not expected but was not a surprise. Long-life assets (now special rate expenditure) used to be available at 6% but that was increased to 10% from 2008 and then reduced to 8% from 2012 to fund a reduction in the headline rate of corporation tax. This time the special rate has been reduced by two percentage points to largely offset the upfront cost involved in introducing the SBA.
Interviewed by Anne Bruce.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
This article appeared on Lexis®PSL on Monday, 5 November 2018

Tags for this article: Budget 2018, capital allowances, structures and building allowance, SBA, annual investment allowance, AIA

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