Capital Allowances for Construction Companies
The Autumn 2018 Budget saw the chancellor give with one hand and take away with the other in many areas of taxation, with significant changes being announced to the Capital Allowances regime. By and large the new policy changes were designed to stimulate business investment in the economy by providing increased incentives for businesses to invest in capital assets.
The Annual Investment Allowance
The Annual Investment Allowance (AIA) is a 100% in year allowance which can be applied to qualifying expenditure up to the pre-set annual limit or restriction. Where qualifying capital expenditure exceeds the annual limit, this attracts relief in either the main pool or the special rate pool.
The 2018 Budget saw the AIA limit increase to £1,000,000 from the £200,000 it has been set at since 1 January 2016. The increase is deemed to be temporary and in place until 31 December 2021. Although the increase to £1,000,000 is significant, it may not benefit everybody equally in the first year. This is because an accounting period which straddles the two allowances must be apportioned accordingly.
For instance, where a business has a 12-month accounting period which ends on 31 March 2019, the first nine months of the accounting period fall into the period where AIA was £200,000 and the final three months of the accounting period fall into the increased AIA of £1,000,000. Therefore, the available AIA will be:
(9/12 x 200,000) + (3/12 x 1,000,000) = £150,000 + £250,000 = £400,000
These complex transitional rules could catch out businesses who have accounting periods which straddled the date of the change. Even if they do not incur more than £200,000 of qualifying capital expenditure, they will have to pay attention to the timing of their expenditure to ensure the fluctuating limit does not result in an unintended consequence.
The New Structures and Buildings Allowance
Capital expenditure incurred on most structures and buildings have been excluded from the capital allowances regime. A new Structures and Buildings Allowance (SBA) has been introduced for expenditure incurred on new non-residential structures and buildings, where the contracts for construction works are entered into on or after 29 October 2018. The relief will be at 2% on a flat rate basis, essentially spreading the cost of construction over 50 years, which ties closely to the majority of depreciation policies for accounting purposes. If the allowances are not claimed, they cannot be carried forward to later periods and will be lost.
SBAs will not qualify for the 100% AIA. However, plant and machinery including integral features as defined by CAA 2001 s33A, will continue to qualify for Capital Allowances and benefit from AIA, and as such remains essential to segregate these for tax. In many respects, SBAs sound similar to the Industrial Buildings Allowances (IBAs) that were abolished from 2011. Although the new SBAs will be more widely available than the former IBAs, the rate of relief is half of what IBAs attracted.
On sale, there will be no balancing allowances or charges. Buyers will simply inherit the residue of expenditure not yet written-off for tax and there will never be an uplift resulting from apportioning an increased market value. Unfortunately, the absence of balancing adjustments means that, in contrast to PMAs, claiming SBAs will reduce the owner’s capital gains base costs. As such, relief may be clawed back on disposal by increasing a gain.
Abolition of Enhanced Capital Allowances
Enhanced Capital Allowances (ECAs) were introduced for purchases of qualifying plant and machinery and listed on the Energy Technology List (ETL) in 2001 and Water Technology List (WTL) in 2003. The lists outline qualifying assets which are either energy efficient or environmentally beneficial.
A measure introduced in the 2018 Budget will update the lists of energy efficient and environmentally beneficial technologies and products which are eligible for first year allowances (FYA) known as ECAs. The measure will also end the FYA for products featured on the ETL and WTL including the associated first year tax credit for loss making businesses as of April 2020 onwards.
Capital Allowances are a complex area of tax, where it is easy to miss out on maximising vital reliefs. When investing in assets such as real estate, whether through acquisitions or development, it is important to seek professional advice to understand the reliefs available to you throughout the process.
If you would like to discuss Capital Allowances with us in more detail or if you would like to speak with a member of our Construction & Real Estate team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.
This article featured in issue 11 of our construction and real estate newsletter series. Read the full newsletter here: Real Estate Matters – Issue 11