Capital allowances for structures and buildings

ICAEW has responded to the Technical Note, Capital allowances for structures and buildings, published by HM Revenue & Customs (HMRC) on 29 October 2018. This representation is available as ICAEW REP 21/19 and follows a round table with HMRC and HM Treasury in December 2018 in which members related their own experiences and views.

We have welcomed the reintroduction of a tax relief for the construction cost of structures and buildings and note that it has been made effective from the date its announcement on 29 October 2018. However, a change of this magnitude should have begun with a full and open discussion with specialists from business before being implemented. While we understand the government’s desire to encourage businesses to begin qualifying investment as soon as possible, delegating the specifics of this relief to secondary legislation, does not give the clarity and certainty the tax system needs.

We are particularly concerned about the absence of balancing adjustments on disposal. Although the simplicity of the remaining allowances passing to the next owner is attractive in straightforward cases, for many commercial situations this creates far more complexity. Our understanding is that any SBA already given will be used to reduce cost when the taxpayer’s chargeable gain is calculated. This would in fact mean that rather than being a new additional allowance, the SBA is merely a timing benefit, with any benefit being clawed back when the property is sold.

We understand that the final interaction with chargeable gains is still being considered. The grant and assignment of leased property produces some complexities of its own, and the interaction with capital gains for wasting leases are not completely explained.

We note the need to retain a record of original construction costs for 50 years, even after a property has changed hands and been extended several times, or where the property is located overseas.

We are unclear how the SBA can continue to be given for a building which has been demolished.

We are concerned that this new relief is being financed in part through the reduction to the rate of WDA on special rate pool assets which is being reduced to 6% per annum. This was the rate used when long life assets were first introduced to cover assets with an expected economic life of over 25 years.

The Industrial Buildings Allowance (IBA) was abolished in 2008. While IBAs were restricted to particular types of buildings, the system had the advantage of having been defined and tested over many years. When we met representatives of HMRC and HM Treasury teams responsible for the new SBA policy, the 20 or so capital allowances specialists we assembled to represent ICAEW agreed unanimously that the reintroduction and tweaking of the old IBA legislation would be preferable to a proposed new allowance, with a completely new set of rules, and the inevitable teething problems that would result. It is highly likely that the biggest part of these teething problems will be where the legislation doesn’t interact as intended with other existing tax legislation, but which the IBA legislation had already dealt with.