We have now received further detail about the operation of the new structures and buildings allowance (SBA).
Having been announced in the Budget in 2018, and having already gone through one round of regulations and consultation, the final statutory instrument implementing SBAs was made on 4 July 2019.
The government has also published a summary of responses to the consultation.
What are SBAs?
As a quick recap: SBAs are intended to relieve the cost of physical construction of new non-residential structures and buildings commencing on, or after, 29 October 2018.
This includes the cost of renovating or converting existing premises, provided that they are in use for a “qualifying activity”. The policy intention is clearly to boost investment in the creation of commercial buildings, and it is helpful that many of the tweaks to the original proposals are intended to ease the administrative burden of claiming SBAs.
The relief is a flat rate of 2% a year of the qualifying expenditure over a 50-year period, beginning with the day on which the building or structure is first brought into non-residential use.
Any residential use will preclude relief but one of the welcome changes is that a structure or building will now retain its SBA eligibility throughout a temporary period of disuse.
Like the old industrial buildings allowances (IBAs), it is also possible to pass on the allowances to a future buyer of the “relevant interest” (the relevant interest is broadly the interest the seller held when it incurred the expenditure). So the relief is available both for those who construct, renovate or convert commercial buildings and carry on a “qualifying activity” (such as a trade or letting), and those to whom they sell the interest who also intend to carry on the qualifying activity.
Plant and machinery allowances remain paramount. SBAs cannot be claimed on such expenditure, so it is always worth the time and effort to maximise a plant and machinery claim (which have higher rates of relief, albeit the relief on integral features has been reduced to 6% as part of introducing SBAs).
When do SBAs apply?
What sort of buildings do SBAs apply to? The policy intention is clear that SBAs are only intended to apply to non-residential buildings and structures, hence expenditure on dwellings, residential accommodation for school pupils and students, and care homes is excluded.
The consultation had asked for input as to what sort of buildings should be excluded from the scope of SBAs (for example, there had been lobbying to include student accommodation) but it is clear that the policy (and therefore the legislation) has not been changed. The awaited HMRC guidance in this area will be welcome, as there will no doubt be grey areas here.
SBAs apply to expenditure on the “construction, renovation or conversion” of most commercial buildings and structures post-29 October 2018. So expenditure incurred pursuant to a contract entered into before 29 October does not qualify. However, one welcome change in the current regulations is the removal of the concept of the “connected preparatory contract”.
Previously, a construction contract entered into after 29 October would still have been problematic if a “connected preparatory contract” had been entered into before that date. This would have meant that even minor feasibility works carried out prior to 29 October could have caused a problem; but in a welcome change, this uncertainty has now been removed.
One of the key concepts in the legislation is the “allowance statement requirement”. This allowance statement must identify the relevant building or structure, and include; (i) the date of the earliest written contract for the construction of the building or structure; (ii) the amount of qualifying expenditure incurred on its construction or purchase; and (iii) the date on which the building or structure is first brought into non-residential use.
Significantly, the revised regulations have removed the rather nebulous requirement that the statement must include “any other supplementary information as may be reasonably required by HMRC”. This provides some much-needed certainty, particularly for purchasers of commercial properties – there was a concern that a purchaser would have to look to its seller for additional information (which would need to be covered in the sale contract) if HMRC decided to raise a query for which the purchaser did not have an answer (and the consequences of not being able to answer the question would have been zero SBAs). In order to further ease the administrative burden, the legislation makes it clear that a purchaser can now obtain the allowance statement from any previous owner.
The manner in which SBAs are calculated has also been simplified by the regulations (where expenditure is incurred at different times, both before and after the building is brought into use).
What next?
HMRC guidance on SBAs has been promised, and should be the first port of call for those claiming the relief of the first time (when it eventually arrives!).
Even with the (welcome) administrative changes, as would be expected, the rules can be complicated.
For example, the requirements for a person purchasing a used versus an unused property are treated separately in the legislation, so taxpayers must be familiar with the different requirements and implications for both.
Jonathan Legg is a tax team partner at Mishcon de Reya