Michelle Corazzo explores whether tax incentives can serve the dual purpose of improving the sustainability of buildings while being cost-effective.
Even in the midst of a crisis, the issues of climate change and sustainability remain as pressing as ever, and owners and occupiers of commercial buildings will be under pressure to meet net zero carbon targets once the current situation has eased. Perhaps, with so many of us now working from home, the lockdown is an ideal time to consider how a property could be made more sustainable, and how to do this cost-effectively.
To incentivise the sustainability of commercial properties, the government has introduced a number of tax reliefs or exemptions. However, many owners and occupiers are unaware of the extent to which these could be applied to expenditure on their property.
For example, since 2001, expenditure on Carbon Trust-approved plant and machinery receives faster capital allowances, and is eligible to receive tax relief in one year, instead of the relief being spread over many years. This particular tax relief expires for expenditure incurred after April 2020, and it was expected that the Treasury would introduce a replacement scheme in the March 2020 Budget. Surprisingly, however, there was no mention of any such alternative by the chancellor, leaving the UK out of step with other countries, such as Ireland, the Netherlands and the USA, which still have specific green energy fiscal advantages.
Despite the lack of announcements incentivising energy efficiency in the Budget, there are still many other existing tax reliefs available for expenditure on sustainable measures. Now is a good time to incur construction expenditure on commercial properties, with a range of fiscal incentives making the UK an attractive place to invest. The tax incentives fall into five main categories:
Plant and machinery
For plant and machinery, the first £1m of expenditure incurred can have a 100% tax relief in the first year, due to the annual investment allowance. For instance, £1m incurred on plant, such as heating or lighting, can provide a first-year tax saving of £190,000 (£1m x 19% corporate tax rate). Any excess expenditure on plant can also provide a tax saving, but this will be provided at a slower rate of 18%, reducing the balance for general pool plant such as fire alarms or computers, and 6% for items such as heating or electrics.
Thermal insulation
The addition of thermal insulation to an existing building is also eligible for capital allowances, which can be claimed either as part of the annual investment allowance or as an integral feature.
Contaminated land relief
Expenditure incurred on decontamination, such as removing asbestos, Japanese knotweed or oil tanks, may qualify for 150% tax relief. This is a very generous tax relief and applies to property developers, occupiers and investors.
Repairs
If repairs or replacements that help to improve a building’s sustainability are carried out, such as replacing single-glazed windows with more energy-efficient double-glazing, this may qualify as a repair, which can potentially receive 100% tax relief in the first year.
Structural and buildings expenditure
Expenditure incurred on structural building elements does not attract one of the other allowances, but instead, slow tax relief at 2% may be available, spread evenly over a 50-year tax life. In the Budget, this relief was increased to 3% spread over a 33-year tax life for expenditure after April 2020.
Many building owners are unaware of which tax incentives their property or any repairs may be eligible for, and as a result these are frequently under-claimed. This may be partly due to the fact that costs are not clearly segregated in builders’ invoices. However, specialist capital allowances advisers can review an invoice’s details and clearly differentiate the costs to which any tax incentives may apply.
Allowances or incentives can be claimed in a current tax year as and when the expenditure is incurred. However, it is possible to revisit old expenditure and, if the allowances were missed or not fully claimed in earlier years, retrospective claims can be made in the current year.
Rewarding sustainable innovation
Aside from the reliefs and incentives for retrofitting a property, innovation and developing methods to become more sustainable may qualify for the UK’s research and development (R&D) tax incentive scheme. This relief is not just designed for scientists, but applies to all industries and sectors. The ingenuity of companies to create solutions to reduce their environmental impact should be considered for R&D tax relief claims.
R&D is, for tax purposes, defined as a project which seeks to achieve an advance in a field of science or technology through the resolution of uncertainties. R&D tax relief provides for a higher rate of corporation tax deduction on eligible R&D expenditure, as well as a repayable tax credit in some cases – often a key resource to cash-strapped companies.
The current rate of deduction under the SME scheme for qualifying expenditure is 230%, with a 14.5% tax credit repayment available in certain circumstances. As a result, companies able to claim an R&D tax credit can receive up to 33.5p for every qualifying £1. Following consultation last year, the introduction of the PAYE cap on payable tax credits was intended to take effect from 1 April 2020; however, the latest proposal from the 2020 Budget is that this measure will be delayed, with a view to being effective from 1 April 2021.
Large companies can claim under the research and development expenditure credit (RDEC). The 2020 Budget announced an increase in the RDEC from 12% to 13% from 1 April 2020, thereby supporting business investing in R&D and helping to drive innovation.
With the built environment accounting for nearly 40% of the world’s energy-related carbon emissions, the sector is under pressure to lessen its impact on the planet, and many owners or occupiers may look to improve the sustainability of their buildings. Not only are property owners incentivised by the moral need to improve a building’s energy efficiency or net emissions, but tax reliefs in place could make such measures cost-effective too.
Michelle Corazzo is a director at haysmacintyre
