SBAs are going to introduce new terminology and a slightly different entitlement basis from existing capital allowances claims. They are going to require planning and more timely analysis of actual construction documentation along with co-operation from stakeholders. Organisations that sell a ‘relevant interest’ in a qualifying building project that has not been demolished within the first 50 years of incurring the ‘qualifying expenditure’ are going to be on the hook for assistance with allowances statements.
If your clients enter into a construction contract for a new building or structure, on or after, 29 October 2018 you should expect to consider SBAs. Similarly, if your clients have acquired, or are planning to acquire, a new commercial property (including one from the Crown or other public body) that includes works subject to an eligible contract you should also consider SBAs.
Legal agreements will need to be updated to reflect the new SBAs and everyone will need to get used to allowances statements; a kind of capital allowances passport that sets out the availability of SBAs to anyone that owns the relevant interest.
The technical consultation with business has now concluded and a draft Statutory Instrument was published on 19 June 2019. This is despite the fact eligible projects are already awaiting analysis (e.g. for the eight-week period between 29 October 2018 to 31 December 2018 for businesses with a December year end).
The detailed guidance, which is going to be critical for a smooth implementation on how this new relief will be administered in practice has still to be published. This timetable creates a dilemma for everyone as this is a live tax allowance without the normal regulatory framework or detail.
This article is based on discussions with HMRC and the latest legislation which is due for enactment this summer.
What are SBAs?
SBAs are a new 2% writing down allowance (WDA) for qualifying expenditure on constructing non-residential buildings or structures where the construction contract is entered into on after 29 October 2018. If a contract has been entered into before this date for any preparation works (e.g., for demolition or site clearance) SBAs are likely to be excluded.
SBAs are not intended to reward differential investment in commercial buildings or structures but simply provide a degree of tax relief for the business that owns the relevant interest in relation to any qualifying expenditure incurred.
At current corporation tax rates this equates to a potential tax saving of up to £380 per annum for every £100,000 incurred. If a business is subject to income tax this has the potential to rise to £900 per annum (£920 in Scotland). If ownership of the original works is retained for the full 50 years, this results in an accumulated potential tax saving of £19,000 (19%), £45,000 (45%) or £46,000 (46%) respectively; however, this is subject to a very different interaction with capital gains tax (CGT).
Owners and tenants are eligible in respect of any qualifying expenditure they incur, provided they each use the asset for a ‘qualifying activity’ and have a relevant interest. There are special rules for capital contributions towards eligible building contracts and expenditure incurred under a lease.
There are no balancing allowances or charges; instead, the SBA rules interact with the CGT rules differently to other forms of capital allowances such that relief is only given once on claimed SBA expenditure (i.e. no double taxation or deduction).
Sometimes the granting of a lease may not be substantially different to a purchase and HMRC wants this reflected in any SBA claim. Where a lease is granted for 35 years or more and the retained value is less than one third of the consideration, entitlement to SBAs will pass to the lessee.
The availability of WDAs starts when the project is first brought into a ‘qualifying use’ and can last for up to 50 years (if not demolished). A building or structure that falls into disuse after a period of ‘qualifying use’ may still qualify for SBAs. SBAs not claimed by normal filing deadlines will be lost.
Qualifying expenditure
The basis and calculation of qualifying expenditure is determined by a combination of factors which include how the business constructed or acquired the original building project (e.g. self-build, via a developer or other third party) and correct application of the excluded expenditure rules. Details are set out in Table 1.
Underpinning the above is a necessity to show evidence of the actual construction costs involved which is going to need both cooperation and specialist skills to complete. HMRC has stated in discussions that it wants to avoid debates on estimates which are likely to create challenges for all businesses. There is also a market value test to catch costs that are not arms-length.
Table 1
Construction contracts are not designed for tax or accounting purposes. Tender quotations do not generally segregate components into qualifying or non-qualifying parts. Fixed lump sum quotations and/or information gaps are not uncommon.
It is envisaged that transactions that include land, or other excluded elements, will need to be separated on a just and reasonable apportionment basis. This is expected to follow current Valuation Office Agency formula guidance and we await details to confirm.
Qualifying use
A qualifying use is essentially anything that isn’t a residential use. Residential use includes:
a dwelling house;
residential accommodation for schools;
student accommodation;
residential accommodation for members of the armed forces;
a home or other institutional residential accommodation (except in certain situations with personal care);
a prison or similar establishment.
Residential use also includes buildings or structures that are ancillary to the above (e.g. common areas) and building or structures on the same land (e.g. outbuildings) which will create a different basis to plant and machinery allowances. The level of qualifying use cannot be insignificant which will be explained further when the detailed guidance is finally published.
Qualifying activity
A qualifying activity includes normal trading and property business activities that are chargeable to UK tax. It does not include a UK or EEA furnished holiday letting business.
Allowances statements
If a business wishes to make a claim for SBAs, it will need to have an allowances statement that sets out the following details:
the date of the earliest written contract for the construction of the building or structure;
the amount of qualifying expenditure incurred on its construction or purchase;
the date on which the building or structure is first brought into non-residential use.
A business that renovates or converts an existing SBA property may require multiple statements to reflect qualifying expenditure in each chargeable period of claim.
If a business takes over a relevant interest in a building or structure and is unable to obtain a valid allowances statement it will not be entitled to make an SBA claim.
Missing out
HM Treasury is funding the introduction of SBAs by reducing the WDA for special rate pool (SRP) plant and machinery from 8% to 6%. This change will affect all existing and new assets in the SRP and larger businesses that do not make use of their full SBA entitlement will lose out the most.
If you would have any questions on how SBAs whatsoever, please do not hesitate to contact us.