It is now time to consider the UK tax relief available on building projects, writes Eugene Moore.
To stimulate international investment in the UK, the then-Chancellor, Phillip Hammond, presented his 2018 Autumn Budget to the House of Commons. In it, he announced the introduction of capital allowances for capital expenditure incurred on the construction, renovation or conversion of most UK and overseas buildings and structures. The Structures and Building Allowance (SBA) applies to contracts entered into on or after 29 October 2018.
Construction projects that may qualify for the SBA are now starting to be completed, with the structures and buildings coming into use. It is now, therefore, time for the current owners and their advisors to consider the significant tax relief available on such capital projects and how best to mitigate the risks of making an invalid claim.
The relief
Relief is available for UK and overseas structures and buildings where the claiming business is within the charge to UK tax. The SBA was introduced at a rate of 2% straight-line basis on qualifying expenditure over 50 years.
The rate was increased to 3% in the Budget and the change will take effect from 1 April 2020 for UK corporation tax and 6 April 2020 for UK income tax.
The relief commences with the later of:
- The day the building or structure is first brought into non-residential use; or
- The day the qualifying expenditure is incurred.
Once qualifying expenditure is incurred, the first use of the structure or building must be non-residential. Subsequent events, such as change of use to residential or the demolition of the structure or building, will impact the availability of the SBA. A period of non-use immediately after a period of non-residential use is deemed as non-residential use, and the SBA continues to be available.
Qualifying activities
The structure or building must be for a qualifying activity carried out by the person who holds the relevant interest. Qualifying activities include:
- trade;
- an ordinary UK property business;
- an ordinary overseas property business;
- a profession or vocation;
- the carrying on of a concern listed in ITTOIA05/S12(4) or CTA09/S39(4) (mines, quarries and other concerns); or
- managing the investments of a company with investment business.
Qualifying expenditure
Capital expenditure incurred on the construction or purchase of a structure or building (including professional fees and site preparation costs) is qualifying expenditure. Excluded expenditure covers:
- the cost of the land or rights over the land;
- the cost of obtaining planning permission;
- financing costs; or
- the cost of land remediation, drainage and reclamation.
Abortive costs, such as architect’s fees associated with a structure or building that is not completed, do not qualify for the SBA.
Commencement date
As the SBA was introduced to stimulate investment from 29 October 2018, allowances are not available on structures or buildings where the contract for the physical construction work was entered into before 29 October 2018.
For projects under a construction contract, the commencement date for the SBA will be the date of that contract. HMRC is of the opinion that contracts can take different forms; it gives the example of email exchanges, which confirm that works will take place.
Where no contract is in place, the date of the commencement of physical works represents the commencement date for the SBA. This is also the case where physical works commence, and a contract is subsequently put in place.
Site preparation
According to HMRC, the cost incurred in preparing land as a site is treated as expenditure on the construction of the structure or building that is then built upon that site. This includes cutting, tunnelling or levelling land.
On the plus side, these costs are not excluded as expenditure for the SBA. On the downside, the timing of these costs could drag the entire construction project into an invalid claim position for the SBA if they are incurred before 29 October 2018. HMRC states that the following does not impact the commencement date:
- separate preparation and construction contracts;
- replacement of preparation contracts;
- preparation works ceased then recommenced; and
- preparation work redone.
Demolition or enabling works incurred before 29 October 2018 do not in themselves make the entire claim invalid for the SBA unless explicitly linked to the actual structure or building.
Practical issues
Before an SBA claim can be made on a UK income tax or UK corporation tax return, the current owner of the relevant interest in a structure or building must create and maintain an allowance statement. Where the current owner incurred the qualifying expenditure in relation to the structure or building, the current owner creates the allowance statement. Where the current owner acquired the relevant interest in the structure or building from another person, they must obtain the allowance statement from the previous owner.
An allowance statement means a written statement, which must include the following information:
- information to identify the building to which it relates;
- the date of the earliest written contract for the construction of the building;
- the amount of qualifying expenditure incurred on its construction or purchase; and
- the date the building is first brought into non-residential use.
CPSE.1 (Ver. 3.8) General Pre-Contacts Enquiries for all Commercial Property Transactions now contains questions concerning the SBA and requests explicitly the allowance statement.
In summary
The SBA may result in significant tax relief for UK businesses that construct or purchase non-residential structures and buildings where previously, there was none on such expenditure. Careful consideration should be given to the commencement date of the project, and detailed evidence must be created and maintained by way of an allowance statement to avoid invalid claims.
Eugene Moore ACA is Corporate Tax Manager at BDO Northern Ireland.
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