Driven by a review from the Office of Tax Simplification, there were a number of Budget announcements which will impact on the timing of tax relief for investing in property and plant. Although the announcements sounded like a tax giveaway, the Government’s impact assessment shows that it expects net tax receipts to rise as a result of these measures, so they are not as generous as they might first seem.
First the headline grabbing good news.
The annual investment allowance which is available to all businesses if they have enough profit and spend enough money is being massively increased for a short term period.
Businesses can obtain 100% tax relief on the first £1m spend on plant and equipment each year for two years from 1 January 2019 to 31 December 2020 before reverting to the current ‘permanent’ rate of £200,000.
This is a welcome temporary increase from the current allowance.
It’s designed to encourage businesses to spend on investment rather than stalling because of Brexit fears.
A new structure and buildings allowance (SBA) will provide 2% tax relief for the cost of new or renovated commercial structures, where construction commences on or after 29 October 2018. Relief will be limited to the original cost of construction or renovation, relieved across a fixed 50-year period, regardless of ownership changes.
No balancing charges or allowances will apply, so there will be no claw-back on sale – the allowances will pass on to the next owner. Care will need to be taken to consider when contracts are entered into for construction or where there are residential elements to a property.
The allowances can be claimed once the building comes into qualifying use. When the property is sold the SBA claimed will reduce the allowance cost of the asset, thereby increasing the eventual capital gain. The new relief brings tax relief for investment in property forward, instead of having to wait for the eventual sale.
It is not yet clear how the rules will deal with situations where a property is – for instance – destroyed within the 50 year period.
Presumably, the owner will have to wait through the full 50 years to obtain their tax relief. These ‘new’ allowances bring to mind the previously abolished industrial and agricultural buildings allowances – although they are not as generous, and contain no provision for initial allowances.
The tax raising measure is that writing down allowances for integral features in properties (such as heating and lighting) are reducing from 8% to 6% from April 2019. In addition to the obvious transfer of tax relief from existing structures to new structures, as noted above, the Government expects to raise tax overall from the combination of capital allowance measures. However, the net effect is likely to benefit certain businesses in particular, such as farmers who typically won’t have large integral features claims on barns etc, and landlords of commercial sheds, since they will be able to claim allowances on the ‘shell’ whilst the occupier’s allowances for integral features will reduce.
Also, the ability to claim 100% first year allowances on energy-efficient and water-efficient plant is to end in April 2020. However 100% tax relief can be claimed for the cost of electric charge-point equipment until March 2023 which provides a welcome extension to the current deadline.
So where does this leave expenditure for items qualifying as fixtures? The good news is that integral features and other fixtures will continue to qualify for capital allowances under the existing rules. Fixtures can still qualify for the annual investment allowance (which provides 100% tax relief on the first £1m from January 2019) or alternatively for writing down allowances at 18% or the lower rate of 8% (which will decrease to 6% from April 2019) for integral features.
So the Budget verdict overall for those investing in property and plant? A bit of a curate’s egg, with accelerated relief on the first £1m spend on plant and the ability to claim for the cost of a building during its life-cycle rather than waiting for sale, counter-balanced by a reduction in relief for integral features.