Changes to encourage investment were a theme of the Budget.

Temporary two year increase in AIA limit for plant and machinery

Companies will be able to claim £1m as AIA for expenditure incurred from 1 January 2019 to 31 December 2020.

Special rate WDA reduction from 8% to 6%

The reduction, from 6 April 2019, will apply to qualifying plant and machinery.

New 2% structures and buildings allowance

An allowance will apply to expenditure on non-residential buildings, for which construction contracts are entered into after 29 October 2018. SBA is aimed at extending the capital allowance regime already applying to buildings’ integral features, to buildings and structures, excluding land and dwellings (mixed use buildings SBA s to be approportioned to the commercial part).

How the SBA will work:

  • qualifying costs relate to construction, improvement, conversion, including demolition costs and land alterations costs (cost of land itself and planning permissions is not included)
  • allowance is claimed at 2% pa (adjusted for longer or shorter accounting period), over 50 years, once the structure comes into use; if additional qualifying works are carried out after the structure came into use, a separate SBA allowance must be claimed in relation to those costs.
  • applies to UK and overseas structures built by companies who have interest in the land on which the structure is erected and who are within UK CT charge
  • SBA will pass on to the purchaser of the structure, no balancing allowances will arise to the seller
  • SBA does not stop when the building is demolished, but continues for the remaining term until it reaches 50 years
  • the use of the structure must be for a qualifying activity:  trade, profession, vocation, property business which qualifies as ordinary business for capital allowances, or property management business. Costs incurred more than seven years before the structure is put to the qualifying use do not qualify for SBA
  • if the building or structure ceases to be used for a qualifying activity, SBA will cease after two years from that point, and recommence once the building is brought back into qualifying use
  • each structure or building is treated separately for SBA
  • SBA not claimed is lost and cannot be claimed later
  • lessees incurring qualifying expenditure themselves are eligible for SBA. Once the leased asset reverts to the head lessor or freeholder, the person with the retained interest (lessor or freeholder) is entitled to claim SBA as long as the qualifying use of the building continues
  • for short term leases (less than 50 years) full SBA is claimed by the lessee when the capital element of the premium paid is 75% or more of the total of capital amount of the premium and value of interest retained by the lessor (which includes rents receivable). Otherwise SBA is claimed by the lessor.

Anti-avoidance provisions target the use of leases and manipulation of contracts such as revoking or revising contracts entered into before 29 October 2018 and include:

  • preparatory works connected to the structure or building commenced before 29 October 2018 (whether self-constructed or carried out by a developer from whom the structure was bought after 29/10/2018)
  • preparatory works unconnected to the structure commenced before 29/10/18 will not invalidate SBA claim.

Example 1

Company A builds a new commercial building on which the construction costs were £50m. 10 years later, there is a fire, which causes heavy damage. The building is partially insured, and insurance payments will cover £10m. The cost of rebuilding (including costs of partial demolition) are estimated at £12m.

At the time of the fire, Company A is claiming SBA at a rate of £1m per year. For the period after the fire, Company A continues to claim SBA while it decides on a replacement. If it rebuilds, it will continue to claim SBA for the remaining 40 years of the original building, while the net costs of rebuilding (£2m, taking into account insurance receipts) may be claimed as a new investment over 50 years. If it does not rebuild, it may continue to receive a “shadow SBA” on the original construction costs.

Example 2

Company A buys a new office building from a developer at a total cost of £15m of which £5m relates to the land leaving a construction cost of £10m. It brings it into use for the purposes of its trade at the beginning of its accounting period ending on 31 December 2021. The annual writing down allowance will be

£10m x 2% = £200,000 SBA each year, for 50 years.

 On 31 December 2030 the building is sold to Company B for use in its trade. The price paid was £12m of which £7m relates to the land.

 Company B will be entitled to claim SBA on the original construction costs of £10m, less the portion already received by company A.

 Company A will have received SBA for 10 years totalling £2m. The allowable cost when calculating its capital loss on the land and building (which are a single asset for capital gains purposes) is reduced by that amount. The capital loss of £3m (£15m less £12m) is therefore reduced to £1m.

In 2032 Company B decides that the building needs improvement and it becomes unoccupied for two years during a £4m renovation project. The company can continue to claim the original £200,000 allowance because this period it is less than two years (or up to five years where the building substantially no longer exists following extensive damage). When the building is brought back into use then a separate SBA of £4m x 2% = £80,000 can also be claimed from 2032 onwards.

Article from ACCA In Practice