In an unexpected offer of generosity, as part of the Chancellor’s spring budget, temporary ‘super’ capital allowances were announced with a view to kick start the post-Covid recovery. Nolan Masters sets out what this means for different property owners, occupiers and investors, in terms of who is likely to benefit from an estimated £25bn of tax relief.
What has changed
The introduction of two temporary first year allowances (FYAs) available on new capital expenditure incurred from the 1 April 2021 to 31 March 2023 for contracts entered into after 3 March 2021, namely:
|Capital Allowance||Rate of Relief||Examples|
|Super-deductions (SDs)||130% for main plant |
& machinery pool expenditure
|firefighting systems | security systems data installation | furniture, fittings & equipment | welfare facilities|
|Special Rate (SR) allowances||50% for special rate expenditure||lifts | lighting | heating, ventilation & cooling systems | thermal insulation | water systems|
Claimable by corporate taxpayers only, which now include non-resident landlords, but excludes individuals and partnerships. Noting that the latter can still benefit from the standard rates of relief plus the annual investment allowance (AIA) which is at £1m for expenditure on both main pool and special rate pool items up to the end of December 2021, before dropping back down to £200k.
The SD and SR allowances must be claimed in the year of expenditure, otherwise the benefit is lost. Early tax planning will therefore be key to ensuring the right information is collated and entitlement issues addressed up front. There is also the potential for partial clawback of the 30% added relief for SDs, if the asset is sold within the period in which the temporary relief ends, although this can be mitigated using s198 elections where the disposal value can be fixed for as little as £1.00.
Example: Based on year 1 benefit for a company spending £10m on qualifying main plant and machinery assets:
|Previous (Before 1 April 2021)||With Super-Deduction (After 1 April 2021)|
|Deducts: Using the Annual Investment Allowance @ £1m||Deducts: £10m x super-deduction of 130% = £13m|
|Deducts: (£10m – £1m = £9m)|
using standard annual Writing Down Allowance at 18% x £9m = £1.62m
|Tax Saving: £2.62m @ CT rate of 19%|
|Tax Saving: £13m @ CT rate of 19%|
Investing in property – who benefits
Within the draft legislation, HMRC included the restriction under general exclusions in section 46(2) of the CAA 2001, for any plant or machinery which is leased. However, a recent amendment to Clause 9, will enable background plant and machinery in leased buildings to qualify for both the SD and SR allowance. This is a welcome change and allows for investors in property to be able to take the full benefit of these temporary reliefs.
Here we set out how this draft legislation applies to different investors in property.
The owner occupier
The general principle of claiming these temporary FYAs, as with standard capital allowances, is that entitlement arises because of incurring capital expenditure, owning a relevant interest in land and those qualifying fixtures are then used for a qualifying business activity.
Single purchased equipment is straight forward to identify and capture; the challenge will be for any building works which consists of expenditure on fixtures that qualify for different rates of capital allowances. For example, an electrical lumpsum cost can contain say fire alarm expenditure which qualifies for the main pool SD and general lighting which would qualify for the SR allowance. Furthermore, builders work in connection, such as ceiling works, could then be apportioned across both pools.
With the introduction of Structures & Buildings Allowances (SBAs) in October 2018, it is only too easy to allocate capitalised land and buildings expenditure to the SBA pool, rather than undertake a detailed cost analysis. Not only is this approach incorrect, as a claim for SBAs must exclude any expenditure which qualifies for plant and machinery allowances, but unlike plant and machinery allowances, the value of claimed SBAs is fully clawed back on disposal. With the introduction of these temporary FYAs, by ignoring the requirement for a more detailed cost analysis, it can lead to a significant loss of tax relief both during ownership and at the point the asset is disposed.
The tenant fit out
Similar to owner occupiers, if the tenant has incurred capital expenditure, then for those qualifying fixtures installed in the property space, which is leased, it is the tenant who can claim the temporary FYAs.
The exception is where a landlord is to provide a capital contribution towards the tenants fit out works, the tenant will then need to net off the contribution in calculating their available claim. Under the capital allowance legislation, it is the landlord who is deemed to have incurred the contribution expenditure and who has the potential to claim the temporary FYAs. Landlord and tenants should now consider as part of the lease negotiations, who is best placed to incur the expenditure within the leased demise and to then allocate the contribution in the most favourable way.
For those leasehold interests where there is no disposal value, the claimed SBAs will not be clawed back, but there will still be the need to ensure that the plant and machinery expenditure is claimed at the higher rates of relief.
Fixtures which are replaced on a like for like basis with no improvement, have the potential to be taken as a revenue expense, however, it is likely to be more beneficial to now claim it as capital and qualifying for the SD at 130%.
For operators of property, whether that be for say a hotel or serviced office, the ability to claim SDs and SR allowances is determined by which entity has incurred the expenditure. In the case of an opco propco structure, it will often be the case that the propco will incur the construction expenditure with a management agreement granted to an operator. Here the entitlement to take the benefit of any capital allowances sits with the propco
With the likelihood that some landlords will be currently assessing how best to reposition their assets, how those assets are to be operated will be central to those decisions. Obtaining an understanding of the capital works and the entitlement position is vitally important to do before the expenditure, to determine which party is to benefit from the available tax reliefs, particularly with increased tax rates around the corner.
It should be noted, that under leases of background plant or machinery, the propco is restricted on claiming capital allowances on certain trade specific expenditure such as for retail displaying goods and the manufacture of goods or materials. It should therefore be considered as to which party is best to pay for these items.
The property investor
For investors in property, the initial draft legislation made for disappointing reading, with the restriction on leased plant and machinery. Roll forward a few weeks later, and after much lobbying, HMRC made a surprise U-turn and removed the restriction, replacing it with a revised draft clause giving the ability for investors to claim on background plant and machinery.
This change in effect meant that all investors that are subject to corporation tax, including non-resident landlords, could now benefit from claiming both the SD and SR allowance on any planned property expenditure before the 31 March 2023. Which given that this fiscal announcement was all about stimulating investment, it is welcome news indeed.
For those investors who have yet to put a building contract in place, the timing of the expenditure will dictate the extent to which these temporary tax reliefs can be claimed. Providing the expenditure is incurred or at the very least is ‘unconditional’ by the 31 March 2023 and to be paid within 4 months, a claim on these temporary FYAs can be made.
Most building project expenditure will now qualify for multiple rates of capital allowances, either 130%, 100%, 50%, 18%, 6%, 3% or zero, plus there is 150% for land remediation relief. The issue for clients and their advisors, is how to unlock the tax relief from the base construction cost information provided. Building projects are by their design, often complex and the pricing does not match the tax analysis required to claim the capital allowances fully. Instead, it requires an experienced expert with knowledge of the building process and hence why HMRC advise that a capital allowances specialist be used who can correctly value the capital allowances into the appropriate pools of tax relief.
It is worth noting that these temporary FYAs do not apply to second-hand acquisitions unless the property is acquired unused from a developer. Furthermore, whilst your own residential demise is excluded from claiming capital allowances, the ability to claim SDs and SR allowances still applies to the likes of care homes, student accommodation and build to rent sectors, whilst needing to consider the definition of a dwelling under SI 45/10.
Unlike the AIA there is no restriction on the amount of expenditure that can be claimed either as a SD or SR allowance. Both must be claimed in the year of expenditure as a FYA, so the relief can be used to either mitigate tax payable in that year end or if loss making, the losses can either be increased and rolled forwards or temporarily carried back for up to 3 years.
With HMRC removing the leased plant and machinery restriction, it has expanded the ability for both businesses and property investors to claim significant tax relief in bringing forward certain capital investment over the next two years.
There was always going to be a need to rebalance the books however, and this will come about by the increase in corporation tax rising from 19% to 25% from 1 April 2023. For those qualifying capital projects, the claiming of ‘super’ capital allowances represents an opportunity to generate tax relief, which will help boost cash flow now and in the future.
Veritas Advisory Ltd 2021
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