Revenue Note for Guidance

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Revenue Note for Guidance

274 Balancing allowances and balancing charges

Summary

Where capital expenditure has been incurred on the construction (including, by virtue of section 270, refurbishment) of an industrial building or structure and capital allowances have been made in respect of that expenditure, a balancing allowance or charge (that is, an adjustment to the quantum of the allowances made) may arise in a chargeable period where any of the following events occurs —

  • the relevant interest in the industrial building or structure is sold,
  • the relevant interest, being a leasehold interest, comes to an end except where the interest holder acquires the reversionary interest,
  • the building or structure is demolished or destroyed or otherwise ceases altogether to be used, or
  • consideration (other than rent or an amount treated or partly treated as rent under section 98) is received by the person entitled to the relevant interest in respect of an interest subject to that relevant interest.

A balancing charge may also arise where certain health related and childcare facilities (defined as “relevant facilities” – see subsection (2A)) cease to be relevant facilities.

Where any of the above events occurs —

  • a balancing allowance arises where the amount of the residue of the expenditure (the unused capital allowances) is greater than the sale, insurance, salvage or compensation moneys or other consideration,
  • a balancing charge arises where the amount of the residue of the expenditure is less than the sale, insurance, salvage or compensation moneys or other consideration, but any such charge cannot exceed the amount of any capital allowances actually made in respect of the industrial building or structure.

However, no balancing charge or allowance can arise where the event occurs outside the industrial building or structure’s relevant “holding period” for balancing event purposes. In some case, this may be the length of time it takes to write off the capital expenditure on the construction of the industrial building or structure by way of annual writing-down allowances. However, in more recent times the holding period of a building or structure for balancing event purposes may be greater than the writing-down period for the building or structure e.g. the holding period for private hospitals and other health related facilities is, generally, now 15 years whereas the writing down period is only 7 years.

Thus, the holding period of any particular industrial building or structure depends on the type of building or structure involved.

Details

Events giving rise to a balancing allowance or charge

(1)(a) Where an industrial building (initial) allowance or a writing-down allowance has been made in respect of capital expenditure incurred on the construction (including, by virtue of section 270, refurbishment) of an industrial building or structure, a balancing allowance or a balancing charge will arise on the occurrence of any of the following events —

(1)(a)(i)
  • the relevant interest in the industrial building or structure is sold (this may cover the sale of a freehold interest or the sale or assignment of a leasehold interest),
  • (1)(a)(ii) the relevant interest, being a leasehold interest, comes to an end except where the interest holder acquires the reversionary interest (the exclusion covers the case where, for example, a person with a leasehold interest in a building or structure acquires the freehold),
  • (1)(a)(iii) the building or structure is demolished or destroyed or otherwise ceases altogether to be used, or
  • (1)(a)(iv) consideration (other than rent or an amount treated or, as respects consideration received on or after 26 March 1997, partly treated as rent under section 98) is received by the person entitled to the relevant interest in respect of an interest subject to that relevant interest. [Section 98 deals with the treatment of premiums payable under short leases (50 years or less) and, essentially, apportions part of the premium as rent.]

The provision in subparagraph (iv) is essentially designed to prevent avoidance of a balancing charge through the device of creating a new interest out of the relevant interest in a building or structure which is marginally inferior to the relevant interest (for example, a 999 year lease is created out of the freehold interest). In the absence of that provision, the consideration received for the creation of such an interest would avoid the balancing charge procedure and, thus, escape a charge to income tax or corporation tax. It should be noted that the inclusion of the words “or partly treated” secures that most premiums for short leases are excluded from the provision. In effect, the provision principally applies in the case of long leases (50 years or more). The provision does not apply, however, in the case of buildings or structures covered by subsection (2).

A balancing allowance or charge is to be made on the person holding the relevant interest in the building or structure immediately before the event giving rise to the allowance or charge. The allowance or charge is made for the chargeable period related to the event, that is, in the case of corporation tax, for the accounting period in which the event occurred and, in the case of income tax, for the year of assessment in the basis period for which the event occurred.

Balancing charge for “relevant facilities”

(2A) A balancing charge may also arise where certain health related and childcare facilities (defined as “relevant facilities”) cease to be relevant facilities. This provision applies to such facilities that are first used (or first used after refurbishment) on or after 1 January 2006. For the purposes of calculating the balancing charge to be made, section 318(e) deems an amount of money to have been received.

(2A)(a) The types of buildings and structures involved are:

(2A)(b) Subject to paragraph (c), a balancing charge will arise where:

  • a building or structure is a relevant facility,
  • allowances have been made under this Chapter in respect of capital expenditure incurred, and
  • the building or structure ceases to be a relevant facility. This cessation could be because of a change of use, for example, where a building is converted into apartments. It could also be because some other condition in relation to the facility is broken e.g. where it ceases to be registered appropriately, does not have certification from the Health Service Executive or ceases to comply with appropriate underlying regulations etc. without actually changing use.

(2A)(c) A balancing charge will not be imposed under paragraph (b) where a building or structure ceases to be one type of relevant facility but becomes another type of relevant facility within 6 months.

No balancing allowance/charge after the end of the holding period

(1)(b) Generally, no balancing allowance or charge is made where the event occurs after the end of the holding period of the building or structure for balancing event purposes. The length of this period depends on the type of industrial building or structure involved and the time when the expenditure on its construction was incurred. The holding period generally runs from the time when the building was first used. The holding period is a period of —

  • (1)(b)(i) in the case of a building or structure in use for the purposes of a trade carried on in a mill, factory, etc, or in a mineral laboratory, or for the purposes of a dock undertaking, 25 years from first use (or, where the expenditure was incurred before 16 January 1975, 50 years from first use),
  • (1)(b)(ii) in the case of a building or structure in use for the purposes of a trade of market gardening or for the intensive production of cattle, etc, 10 years from first use,
  • (1)(b)(iia) subject to subparagraph (iib), in the case of a building or structure in use for the purposes of a trade which consists of the operation or management of a registered private nursing home (including associated qualifying residential units for the aged or infirm), or a convalescent home, 10 years from first use, or 15 years from first use (or first use after refurbishment) where this occurs on or after 1 February 2007,
  • (1)(b)(iib) in the case of qualifying residential units – see section 268(3A)) – where capital expenditure on construction or refurbishment is incurred under contracts or agreements entered into on or after 1 May 2007, 20 years from first use or first use after refurbishment,
  • (1)(b)(iii) in the case of a building or structure in use for the purposes of a trade of hotel-keeping, including a holiday camp (but not including a registered holiday cottage, a registered guest house, a registered holiday hostel or any other building or structure which is deemed to be in use for such purposes):
    • 25 years from first use, where the capital expenditure is incurred on or after 4 December 2002 [or after 31 December 2006 where subsection (1A) applies or after 31 July 2008 where subsections (1A) and (1B) apply,
    • 7 years from first use, where the capital expenditure was incurred on or after 27 January 1994,
    • 10 years from first use, where the capital expenditure was incurred before 27 January 1994,
  • (1)(b)(iv) in the case of a registered holiday cottage which qualified prior to the termination of relief for such buildings, 10 years from first use,
  • (1)(b)(iva) in the case of a registered guest house or a registered holiday hostel to which section 268(2C) applies (i.e. which is deemed to be a building or structure in use for the purposes of a trade of hotel-keeping), 25 years from first use where the capital expenditure is incurred on or after 3 February 2005,
  • (1)(b)(ivb) in the case of buildings and structures which are comprised in, and are in use as part of, premises which are registered in the register of caravan sites and camping sites, 25 years from first use where the capital expenditure is incurred on or after 1 January 2008,
  • (1)(b)(v) in the case of an airport runway or an airport apron, 25 years from first use, or in the case of Aer Rianta (now known as the Dublin Airport Authority and including the Cork Airport Authority and the Shannon Airport Authority where relevant), 25 years from vesting day (1 January 1999),
  • (1)(b)(vi) in the case of other categories of airport buildings or structures, 25 years from first use (for new expenditure) or, in the case of buildings or structures which existed on vesting day (Aer Rianta) or on 27 March 1998 (other airport operators), 25 years from that day or date,
  • (1)(b)(via) in the case of a building or structure in use for the purposes of the operation or management of a qualifying hospital, 10 years from first use, or 15 years from first use (or first use after refurbishment) where this occurs on or after 1 February 2007,
  • (1)(b)(vii) in the case of a building or structure in use for the purposes of the operation or management of a qualifying sports injuries clinic, 10 years from first use, and
  • (1)(b)(viii) in the case of a building or structure in use for the purposes of the operation or management of a qualifying mental health centre, 15 years from first use. This scheme commenced with effect from 23 January 2007.
  • (1)(b)(ix) in the case of a building or structure in use for the purposes of the operation or management of a qualifying specialist palliative care unit, 15 years from first use. [This scheme is, subject to EU approval, to be commenced by order of the Minister for Finance].
  • in the case of an aviation services facility:
    • (1)(b)(x)(I) 7 years from first use (or first use after refurbishment) where the capital expenditure incurred is specified capital expenditure,
    • (1)(b)(x)(II) 25 years from first use (or first use after refurbishment) where the capital expenditure incurred is not specified capital expenditure.

Transitional arrangements: Hotels and holiday camps

(1A) and (1B) The increase in the length of the holding period for hotel buildings and holiday camps to 25 years (see subsection (1)(b)(iii)) will not apply as respects capital expenditure incurred on the construction or refurbishment of a building or structure by 31 December 2006 or by 31 July 2008 where certain conditions are met.

(1A) The increase in the holding period will not apply in relation to capital expenditure incurred by 31 December 2006 if:

  • a planning application (other than for outline permission), in so far as planning permission is required, in respect of the building or structure is made in accordance with the Planning and Development Regulations 2001 to 2002, the planning authority acknowledge under article 26(2) of the Planning and Development Regulations 2001 that the application was received on or before 31 December 2004, and the application is not an invalid application under article 26(5) of those regulations,
  • a planning application (other than for outline permission), in so far as planning permission was required, in respect of the building or structure was made in accordance with the Local Government (Planning and Development) Regulations 1994, the planning authority acknowledge under article 29(2)(a) of those regulations that the application was received on or before 10 March 2002, and the application was not an invalid application under article 29(2)(b)(i) of those regulations,
  • the construction or refurbishment work represented by the expenditure is exempted development for the purposes of the Planning & Development Act 2000, by virtue of section 4 of that Act or by virtue of Part 2 of the Planning and Development Regulations 2001 (S.I. No. 600 of 2001) and the following conditions are satisfied not later than 31 December 2004:
    • a detailed plan in relation to the development work is prepared,
    • a binding contract in writing exists under which the expenditure on the development is incurred, and
    • work to the value of 5 per cent of the development costs is carried out,

    or
  • the construction or refurbishment of the building or structure is development in respect of which a valid application is made for a certificate under section 25(7)(a)(ii) of the Dublin Docklands Development Authority Act 1997 and the application is acknowledged by the Dublin Docklands Development Authority as having been received on or before 31 December 2004.

(1B) The increase in the holding period will not apply in relation to capital expenditure incurred by 31 July 2008 if:

  • (1B)(a) the relevant planning application etc. condition in subsection (1A) was met,
  • (1B)(b) work to the value of at least 15 per cent of the actual construction or refurbishment costs is carried out by 31 December 2006,
  • (1B)(c) a binding contract in writing in relation to the construction or refurbishment is in place by 31 July 2006, and
  • (1B)(d) any other conditions, relating to compliance with State aid issues, which the Minister for Finance may specify in regulations, have been satisfied.

By virtue of paragraphs (a) and (b) of section 270(7) local authority certification is required in respect of the condition that work to the value of at least 15 per cent of the construction or refurbishment costs is carried out by 31 December 2006. Such certification must include details of actual expenditure incurred to 31 December 2006 and of projected expenditure post 31 December 2006.

Exception from the rule in subsection (1)(a)(iv)

(2) The rule that a balancing event arises where consideration (other than rent or an amount treated or partly treated as rent under section 98) is received by the person entitled to the relevant interest in respect of an interest subject to that relevant interest does not apply where the relevant interest is in a building or structure in use for the purposes of hotel-keeping and a binding contract for the provision of the building or structure had been entered into in the period from 28 January 1988 to 31 May 1988.

Balancing allowance

(3) In the case where there are no sale, insurance, salvage or compensation moneys (defined in section 318) or consideration of the type referred to in subsection (1)(a)(iv), or where the residue of the expenditure (defined in section 277) on the building or structure immediately before the event exceeds those moneys or that consideration, a balancing allowance is made. The amount of the allowance is the amount of the residue or, where such moneys or consideration are received, the excess of the amount of the residue over those moneys or that consideration. It should be noted, however, that this subsection will not apply in the case of consideration of the type referred to in subsection (1)(a)(iv) which is received on or after 5 March 2001.

Example

A factory was constructed in 1981 at a cost of €100,000. No industrial building (initial) allowance or free depreciation was claimed in respect of the expenditure. For the years of assessment 1981–82 to 2000–2001 annual writing-down allowances of 4% per annum were claimed (20 @ 4%), totalling €80,000. Thus, the residue is €20,000.

If the building is scrapped in the short tax year 2001 and no sale, insurance, etc moneys are received, a balancing allowance equal to the residue will be made, that is, €20,000. If, however, the building were sold in the short tax year 2001 for €15,000, the allowance to be made would be €5,000, being the excess of the residue over the sale price.

Balancing charge

(4) In the case where the sale, insurance, salvage or compensation moneys or consideration of the type referred to in subsection (1)(a)(iv) exceed the residue, if any, of the expenditure on the building or structure immediately before the event, a balancing charge is made. The amount of the charge is the excess of those moneys or that consideration over the residue or, where the residue is nil, the amount of those moneys or that consideration.

Example

If in the last example the factory had been sold in the short tax “year” 2001 for €35,000, a balancing charge of €15,000 would be made, being the excess of the sale price over the residue of €20,000.

Balancing allowance/charge where building or structure in use for industrial purposes for part of its life

(5)(a) The “relevant period” is the period beginning when the building or structure was first used and ending on —

  • if the event giving rise to the balancing allowance or charge occurs on the last day of the chargeable period or (in the case of income tax) its basis period, that day, or
  • if that event occurs on some other day, the last day of the preceding chargeable period or (in the case of income tax) its basis period.

However, if before the event giving rise to the balancing allowance or charge the building or structure had been sold while an industrial building or structure, the “relevant period” begins on the day following that sale or, if there had been more than one such sale, on the day following the last of those sales.

(5)(b) In order to ensure that an excessive balancing allowance or charge does not arise in relation to a building or structure which for part of the “relevant period” was not an industrial building or structure, any balancing allowance or charge arising is to be reduced in the same proportion that the years of industrial use bear to the total years of use (the “relevant period”) of the building or structure at the time of the event giving rise to the balancing allowance or charge. For this purpose, non-industrial use is use in a chargeable period for which a writing-down allowance has not been made.

(5)(c) The availability of industrial buildings (initial) allowances under section 271 and accelerated writing-down allowances (free depreciation) under section 273 could mean that in many cases writing-down allowances will not be made for chargeable periods for the reason that the allowances which would otherwise have been made for those periods have been aggregated by acceleration into an earlier period. In the absence of a provision to the contrary, this could result in periods of genuine industrial use being treated for the purposes of subsection (5)(b) as periods of non-industrial use. Thus, where a writing-down allowance would have been given for a chargeable period but for section 272(6) (which ensures that no further writing-down allowances will be given once the whole of the original cost of a building or structure has been written off) or section 321(5) (which limits the aggregate amount of writing-down allowances and initial allowance to the expenditure incurred), it is provided that the writing-down allowance will be deemed to have been given and, accordingly, any balancing allowance or charge will not be reduced by reference to such a chargeable period.

Example

On 1 January 2002 a company whose accounting year ends on 31 December buys a building which was first used in January 1997. At the time of sale the building is an industrial building. The tax life of the building is 25 years and the residue of expenditure after taking into account a balancing charge on the seller is €100,000. Accordingly, the buyer has the expectation of writing off the €100,000 by way of annual writing-down allowances of €5,000 over the years 2002–2021 (the remaining 20 years of the tax life).

The company does not continue to own the building until the year 2021; instead the company sells it during the year 2017 for €40,000. Also, the company did not use the building for industrial purposes throughout its period of ownership but diverted it to non-industrial use from 1 January 2007 to 31 December 2011 so that no writing-down allowances were made for the 5 years 2007 to 2011. The calculation of the balancing charge on the sale in the year 2007 is as follows:

Residue at time of purchase in January 2002

€100,000

Writing-down allowances for years 2002 to 2006 (5 years @ €5,000)

€25,000

Notional writing-down allowances (see section 277(4)) for years 2007 to 2011 (5 years @ €5,000)

€25,000

Writing-down allowances for years 2012 to 2016 (5 years @ €5,000)

€25,000

€75,000

Residue

€25,000

Sale proceeds

€40,000

Provisional balancing charge

€15,000

Relevant period 1/1/2002 – 31/12/2016 (15 years)

Industrial use within relevant period (10 years)

Balancing charge is reduced to €15,000 × 10/15

=

€10,000

The new owner takes over the residue of expenditure computed as follows —

Original residue on 2nd sale (as computed above)

€25,000

Add balancing charge

€10,000

Residue

€35,000

Assuming the new owner continues to use the building for industrial purposes, such owner will be entitled under section 272(4) to writing-down allowances in respect of the residue of the expenditure which will be written off on a straight-line basis over the un-expired part of the tax life of the building.

Holiday cottages

(6) A holiday cottage is an industrial building or structure (i.e. in relation to capital expenditure incurred prior to the termination of relief for such cottages) only if it is registered in the register of holiday cottages. If a holiday cottage ceases to be so registered in circumstances where (apart from this provision) a balancing allowance or charge could not be made under this section (for example, the cottage is converted into a family home by the owner), then, the holiday cottage is deemed to have been sold while it was an industrial building or structure at a price equivalent to the expenditure incurred on its construction. The effect of this provision is to enable a balancing charge to be made which will recover the total capital allowances granted in respect of the capital expenditure incurred on the construction of the holiday cottage. The exclusion of section 272(4) from the application of this provision is designed to ensure that, where a holiday cottage is sold while it is not in use as such, the buyer will not have any entitlement to capital allowances even if the cottage is subsequently re-registered.

(7) However, if the holiday cottage is not sold during the period of its non-registration and is subsequently re-registered by the person on whom the balancing charge was made under subsection (6), that person will be entitled to writing-down allowances equivalent to what a buyer of the holiday cottage would be entitled. The normal provisions relating to balancing allowances and charges would apply if, during the second period of registration, the holiday cottage were sold by the person on whom the balancing charge was made under subsection (6).

Limit on balancing charge

(8) Where a balancing event arises in relation to an industrial building or structure, the amount of a balancing charge to be made on a person cannot in any circumstances exceed the amount of any capital allowances made to the person in respect of the capital expenditure incurred on the industrial building or structure.

Relevant Date: Finance Act 2021