Revenue Tax Briefing Issue 69, September 2008
Finance Act 2000 restricted the availability of capital allowances for property developers for expenditure incurred on the construction or refurbishment of certain industrial and commercial buildings. A property developer could no longer claim capital allowances where he/she, or a person connected with him/her, had incurred the capital expenditure on the particular building. An article on the restriction was included in Tax Briefing 41. Finance Act 2008 extended the restriction on the availability of capital allowances to persons connected with property developers. The purpose of this article is to outline the new restriction.
A property developer is defined as a person (includes a company) carrying on a trade that consists wholly or mainly of the construction or refurbishment of buildings with a view to their sale. Accordingly, if more than 50% of the turnover from a person’s trading activities arises from such construction or refurbishment, the person is regarded as a property developer. Where the person is involved in a number of trading activities, the test is applied to the aggregate of the turnover from all of those activities.
In the case of an individual, the turnover test is applied at the end of the basis period for the year of assessment to which the claim relates. In the case of a company, the test is applied at the end of the company’s relevant accounting period.
Section 10 TCA, 1997 defines “connected person”. Some common examples of connected persons are an individual and his or her spouse, relatives and in-laws, partners in a partnership, companies under common control and a company and its controlling shareholder(s).
Following Finance Act 2000, a property developer could not claim capital allowances where the capital expenditure on the particular building had been incurred by that property developer or by a person connected with that property developer. The restriction applied only to an actual property developer. Thus, for example, a person could claim capital allowances where the capital expenditure on the building had been incurred by a company of which that person had control if that person was not a property developer in his/her own right. The fact that the company of which the person had control was a property developer was not relevant.
Section 29 of Finance Act 2008 extended the restriction on the availability of capital allowances to cover both property developers and persons connected with property developers. The restriction now applies in the following circumstances:
A property developer or a connected person who engages an unconnected builder to carry out the construction is regarded as incurring the capital expenditure.
While a property developer, or a person connected with a property developer, cannot claim capital allowances where either party has incurred the capital expenditure, or it was incurred by some other person connected with the property developer, they can claim capital allowances where they purchase a newly constructed (or refurbished) building from an unconnected person who may or may not be a property developer. This arises from the Revenue interpretation and application of Section 279 TCA, 1997. As outlined in Tax Briefing 41, in the context of the original restriction, Section 279 applies where a property developer purchases a newly constructed building, or a building that has been used for less than a year from its first use, from an unconnected person where no capital allowances have been claimed on the building. For the purposes of the extended restriction, Revenue takes the view that, because Section 279 only deems the purchaser to have incurred the construction expenditure, the property developer, or a person connected with a property developer, has not incurred the actual capital expenditure where they purchase from an unconnected person who has incurred the expenditure and can, therefore, claim the capital allowances. The restriction would apply where the actual construction expenditure was incurred by either party, or it was incurred by some other person connected with the property developer.
The effective date for commencement of the extended restriction is 1 January 2008. It is possible to interpret the new legislation in a way that could result in capital expenditure on certain buildings having to be apportioned between qualifying expenditure (pre I January 2008) and non-qualifying expenditure (post 1 January 2008). As such an apportionment could result in unfair treatment of certain projects where work had commenced before 1 January 2008, Revenue will treat the extended restriction as applying only where expenditure that would qualify for capital allowances is first incurred on a building on or after 1 January 2008.
The original restriction on the availability of capital allowances applied to the following schemes:
The latest restriction was not extended to some of the above schemes because of their 31 July 2008 termination date. It applies to the following schemes: