Revenue Note for Guidance

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Revenue Note for Guidance

270 Meaning of “expenditure on construction of building or structure”

Summary

This section provides that capital expenditure on refurbishment of industrial buildings or structures qualifies for capital allowances. It also provides that certain expenditure is not to be treated as expenditure on the construction of a building or structure.

additionally, the section restricts the amount of capital expenditure incurred on the construction and refurbishment of certain industrial and commercial buildings and structures which can qualify for capital allowances under a number of tax incentive schemes – whether the allowances are annual, initial or free depreciation. The restrictions and the buildings and schemes affected are detailed below.

Details

Definition

(1) The term “refurbishment” means any work of construction, reconstruction, repair or renewal, including the provision of water, heating or sewerage facilities, carried out in the course of the repair or restoration of the building or structure.

Refurbishment expenditure

(2) References in this Chapter to expenditure incurred on the construction of a building or structure include expenditure on refurbishment of the building or structure. This enables capital expenditure incurred on the refurbishment of industrial buildings or structures to qualify for capital allowances.

Exclusion of certain expenditure

(2) Expenditure on the construction of a building or structure does not include any expenditure incurred on the acquisition of, or of rights in or over, any land. In other words, site cost is excluded. Also excluded is expenditure on the provision of machinery or plant (or an asset treated as machinery or plant) or expenditure which qualifies for a mine development allowance (section 670) or a scientific research allowance (section 765(1)).

Apportionment of expenditure

(3) Where expenditure is incurred on an industrial building or structure which forms part of a building, is one of a number of buildings in a single development or forms part of a building which is one of a number of buildings in a single development, the expenditure is to be apportioned in order to determine the expenditure incurred on the industrial building or structure.

Tax Incentive schemes – restrictions on qualifying expenditure

(4) to (8) Subsections (4), (5), (6) and (7) which were inserted in this section by section 26 Finance Act 2006 concern transitional arrangements relating to the ending of certain property incentive schemes or capital allowance regimes. Subsection (5) limits the amount of capital expenditure which can qualify for capital allowances purposes to 75 per cent and 50 per cent, respectively, of expenditure incurred in the year 2007 and in the period 1 January 2008 to 31 July 2008. The types of buildings and schemes affected are set out in subsection (4).

Additionally, for some of these buildings/schemes, subsection (7) puts an overall cap in place on the amount of expenditure eligible to qualify for relief in respect of the period 1 January 2007 to 31 July 2008. This cap applies prior to the application of the 75 per cent and 50 per cent limits. Subsection (6) clarifies how section 279 (transfer of allowances on a new building to a purchaser) is to apply where the various limits and restrictions apply.

Finally, subsection (8) (inserted by section 28 Finance Act 2007) provides, in relation to qualifying residential units, that capital expenditure incurred under contracts entered into on or after 1 May 2007 will qualify only in relation to 50 per cent of the amount involved in the case of individuals and in relation to 75 per cent of the amount involved in the case of companies.

Expenditure is treated as incurred in a period only to the extent that it is attributable to work actually carried out in that period – see section 316(2B).

Buildings and schemes affected

Subsection (4) applies to the following buildings and structures:

  • (4)(a) hotels, holiday camps and registered holiday cottages – under section 268(1)(d) and 268(3);
  • (4)(b) sports injuries clinics – under section 268(1)(k);
  • (4)(c) multi-storey car-parks – under section 344;
  • (4)(d) industrial buildings and commercial premises located in Urban Renewal areas and commercial premises on qualifying streets under the Living over the Shop scheme – under sections 372C and 372D;
  • (4)(e) industrial buildings and commercial premises located in Rural Renewal areas – under sections 372M and 372N;
  • (4)(f) Park and Ride facilities and commercial premises on the sites of Park and Ride facilities – under sections 372U and 372W;
  • (4)(g) industrial buildings and commercial premises located in Town Renewal areas – under sections 372AC and 372AD;
  • (4)(h) Third-Level College buildings – under section 843, and
  • (4)(i) qualifying residential units associated with registered nursing homes – under section 268(3A).

The provision applies where capital expenditure on the construction or refurbishment of these buildings and structures (or “qualifying expenditure” in the case of a section 843 building) is incurred between 1 January 06 and 31 July 2008. (This latter date is to be read as 30 April 2010 in the case of qualifying residential units where subsection (8)applies). The year 2006 is included in this provision (and in section 316(2B)) to ensure that expenditure is not brought forward into that year to try and avoid the respective reductions, to 75 per cent and 50 per cent, that apply in relation to expenditure attributable to the year 2007 and the first 7 months of 2008 – see below.

Expenditure limited to 75 per cent and 50 per cent respectively

(5) In the case of buildings or structures to which subsection (4) applies and notwithstanding any other provisions of the Taxes Acts (but subject to subsections (6) (7) and (8)), the amount of capital expenditure or qualifying expenditure which is to be taken into account for the purposes of making any allowances and charges under Part 9 is to be reduced to 75 per cent of the capital expenditure attributable to the year 2007 and to 50 per cent of the capital expenditure attributable to the period 1 January 2008 to 31 July 2008. Expenditure that is proper to the year 2006 can qualify without restriction. In the case of qualifying residential units, the restriction to 75 per cent for 2007 applies only from 25 March 2007 and in this case expenditure incurred in 2006 and up to 24 March 2007 can qualify without restriction. (See subsection (8) also, which applies a revised version of paragraphs (a) and (b) of this provision, in relation to expenditure incurred on qualifying residential units between 1 May 2007 and 30 April 2010).

The restrictions apply whether or not allowances arise directly under Part 9 or by virtue of a provision of Part 10 or of section 843 e.g. some industrial buildings and structures located in Urban etc. areas may be entitled to accelerated allowances by virtue of the provisions of Part 10 but would be entitled to annual allowances under Part 9. In such cases the expenditure incurred is restricted to 75 per cent and 50 per cent respectively for the purposes of granting all allowances in relation to the building or structure.

Local Authority certification of 15 per cent condition and overall cap on expenditure for period 1 January 2007 to 31 July 2008

(7) Local authority certification is required of certain matters in relation to some of the schemes listed in subsection (4) and, for those schemes, an overall cap is placed on the amount of capital expenditure, relating to the period 1 January 2007 to 31 July 2008, which may be taken into account for capital allowances purposes. This cap applies prior to the application of the 75 per cent and 50 per cent limits.

(7)(a) The buildings and schemes affected are:

  • hotels, holiday camps and registered holiday cottages (subsection (4)(a)),
  • industrial buildings and commercial premises located in Urban Renewal areas (subsection (4)(d)) (but excluding commercial premises on qualifying streets under the Living over the Shop scheme),
  • industrial buildings and commercial premises located in Rural Renewal areas (subsection (4)(e)), and
  • industrial buildings and commercial premises located in Town Renewal areas (subsection (4)(g).

(7)(a)(i) to (iv) In relation to these buildings or premises a person must show that work to the value of 15 per cent of the construction or refurbishment costs was carried out by 31 December 2006. This condition, as inserted by Finance Act 2006, is contained in the legislation for each of these schemes and the relevant sections are listed in this provision. Where the 15 per cent condition is not met the earlier termination date of 31 December 2006 will apply or, in the case of hotels and holiday camps, the lower 4 per cent annual allowance rate will apply after that day.

Local Authority certification of 15 per cent condition

(7)(b)(i) The relevant 15 per cent condition will not be treated as having been met in relation to the above schemes unless a local authority certificate is issued by 30 March 2007 stating:

  • (7)(b)(i)(A) that the local authority is satisfied that work to the value of not less than 15 per cent of the construction or refurbishment costs was carried out by 31 December 2006,
  • (7)(b)(i)(B) the actual amount of construction or refurbishment expenditure incurred by 31 December 2006, and
  • (7)(b)(i)(C) the balance of construction or refurbishment expenditure that is projected to be incurred post 31 December 2006.

(7)(b)(ii) Applications for certificates must be made by 31 January 2007 and certificates are to be issued having regard to guidelines issued by the Dept. of the Environment, Heritage and Local Government.

Overall cap on expenditure for period 1 January 2007 to 31 July 2008

(7)(c) The amount of capital expenditure which is taken into account for the period 1 January 2007 to 31 July 2008 for the purposes of making capital allowances may not exceed the amount of the post December 2006 projected expenditure – as was certified by the local authority under paragraph (b)(i)(C) above.

(7)(d) Any restriction under this subsection is to take place before the application of the restrictions to 75 per cent and 50 per cent (see subsection (5)) and the revised application of section 279 (see subsection (6)). Also where expenditure for the period 1 January 2007 to 31 July 2008 is to be reduced, such reduction is to take place first in relation to the period 1 January 2008 to 31 July 2008.

(7)(e) Where a building is sold, a copy of the local authority certificate should be passed on so that the purchaser is in a position to make appropriate claims for allowances.

Application of section 279 in relation to purchases of unused buildings

Section 279 provides that the purchaser of a building or structure is treated as having incurred the expenditure on the construction of the building or structure where it is purchased unused, or within a year of first use, from the person who actually incurred the expenditure – provided that no allowances were claimed by that person. Where the seller is a builder/developer the purchaser is also entitled to claim allowances on an element of the builder/developer’s profit by virtue of the formula in the section relating to “the net price paid” (see notes on section 279).

(6) Certain amendments are made to the operation of section 279 where subsections (4) and (5) and, as the case may be, subsection (7) apply.

These are to ensure that where a building is sold, the purchaser will not be entitled to claim allowances on the full expenditure incurred but rather on that expenditure as reduced in accordance with the respective reductions to 75 per cent and 50 per cent under subsection (5) which apply to expenditure incurred in the year 2007 and the first 7 months of 2008 and any restriction on post December 2006 expenditure which may arise under subsection (7). Similarly, the revised application of section 279 will apply in relation to the reduced levels of qualifying expenditure on qualifying residential units where that expenditure is incurred under contracts entered into on or after 1 May 2007 – see subsection (8).

When calculating the formula for “the net price paid” in section 279 the numerator “C” in the formula should be the amount of construction expenditure (incurred in the qualifying period for the scheme) as reduced in accordance with subsections (5) and (7) of this section. The denominator “C” in the original formula – now “D” in the revised formula – should include the full amount of expenditure incurred on the construction of the building or structure i.e. before any restrictions and whether or not incurred in the qualifying period for the particular scheme.

Example

A builder purchases a site in a qualifying Urban Renewal area for €100,000 and constructs a commercial building, which qualifies for industrial buildings allowances, on it for a cost of €420,000. The building is completed in August 2008 and, without having been used, the builder sells it to X on 1 October 2008 for €600,000 and X immediately takes it into use for the purposes of his trade.

Construction expenditure attributable to the various periods is as follows:

Year 2006: €100,000; Year 2007: €220,000; 1 Jan. 2008 to 31 July 2008: €80,000; August 2008 €20,000.

The projected amount of post December 2006 expenditure, as certified by the local authority, was €280,000. Therefore the combined expenditure for the period 1 January 2007 to 31 July 2008 (€300,000) must be restricted to €280,000 and the restriction (€20,000) must be made in relation to the period Jan. to July 2008 in priority to the year 2007. Accordingly, expenditure treated as incurred in the period Jan. to July 2008 (before the 50 per cent restriction is applied) is €60,000 (€80,000 less 20,000).

The amount of qualifying expenditure in each period after application of the 75 per cent and 50 per cent restrictions is as follows:

Year 2006: €100,000; Year 2007: €220,000 × 75% = €165,000; Jan to July 2008: €60,000 × 50% = €30,000; August 2008: Nil (outside of the qualifying period). Total expenditure for the purposes of the numerator “C” in the formula is therefore €295,000.

The net price paid by X is —

295,000

600,000

×


= 340,000

420,000 + 100,000

X is deemed to have incurred construction expenditure on 1 October 2008 equal to the net price paid by him, that is, €340,385, and his entitlement to capital allowances will be based on that amount.

Qualifying residential units – expenditure incurred on or after 1 May 2007

(8) Where capital expenditure is incurred on or after 1 May 2007 (and up to 30 April 2010) under a contract or agreement for the construction, refurbishment or development of a qualifying residential unit which is entered into on or after 1 May 2007, then the level of qualifying expenditure is reduced. The reduction is to 75 per cent in the case of a company and to 50 per cent in any other case e.g. an individual etc. This provision applies a revised version of subsection (5) to achieve this.

Relevant Date: Finance Act 2020