Our Head of Capital Allowances, Jeremy Chapman, discusses the latest changes following last month’s Budget.
The Office of Tax Simplification didn’t recommend wholesale changes to the capital allowances regime back in the summer, but it did recommend that some tweaks would be helpful to make the relief more accessible. So, what did the Chancellor do in the Budget last month?
The good news
- A new Structure and Building Allowance (SBA) – the Chancellor introduced a 2% straight-line basis relief on all construction contracts entered into on or after 29 October 2018. We’re awaiting draft legislation, however, as with other allowances, this will not apply to land. The usual plant and machinery claims can still be made in preference to this relief.
Construction contracts are likely to include refurbishments and extensions, so this is great news when it comes to relieving building works that couldn’t previously be claimed for. The relief has a hint of the old Industrial and Agricultural Buildings Allowances, such as being a flat rate each year, but is open to all commercial property. The Technical Note does hint at some key differences to the previous forms of building reliefs.
The key take-away? Don’t assume that the SBA will apply to your project and that you will get the full relief if you do not hold it for 50 years. Take advice to ensure that the allowances are maximised and accelerated as far as possible.
- Annual Investment Allowances (AIA) – these increased to £1m a year from £200,000. This is great news but is limited to a two-year window from 1 January 2019 to 31 December 2020. Also, there’s the usual minefield of transitional rules. These add complexity to businesses and individuals that do not have a 31 December year end.
The key take-away? Take advice before assuming that the £1m of purchases post 1 January 2019 will be eligible in full for AIA.
- Enhanced Capital Allowances (ECAs) on car charging points – as expected, this 100% relief has been extended to purchases up to 31 March 2023 (5 April 2023 for individuals).Zero emission electric cars are still eligible for ECAs until 2021.
The key take-away? This gives buyers longer to decide to make the move to electric cars and to still receive enhanced tax relief for it.
The bad news
- The end of ECAs for ‘green’ energy and water technologies – this comes into effect from 1 April 2020, along with the tax credit for loss making companies. This area of legislation was complex and often inaccessible for small and medium sized businesses without specialist advice. The good news on AIA above will hopefully address this change for those businesses in the short term.
However, for larger building intensive businesses such as retail, hotel and care home businesses the change will only serve to slow down the tax relief available for them.
The key take-away? ECAs served as a useful incentive to accelerate tax relief for investment in green technologies, so plan the timing of those purchases so they don’t fall after March 2020 (especially if your annual Capex is more than £1m).
- The Special Rate Pool will reduce from 8% to 6% from 1 April 2019 – this is a key change as a large proportion of the tax relief available currently for most building projects will be within the Special Rate Pool. This change is effectively funding the SBA relief above. For those that remember when special rate pool eligible expenditure received a 10% rate of relief, this may seem like another step towards aligning a large proportion of mechanical and electrical services with the rate of relief for the fabric of the building.
The key take-away? As the transition rules time-apportion the rate for accounting periods straddling 1 April 2019, where possible businesses should take advice on whether incurring the capex in an accounting period ending before 1 April 2019 will accelerate relief.
The bad news
- Alteration of land for the purposes of creating an asset that functions as plant in common law – whilst this point may not affect the majority of businesses, this is clearly HMRC responding to losing a recent tax case by introducing effectively retrospective legislation to close out any future claims in this area, even in relation to expenditure incurred prior to the Budget Day. In that case tunnels which were formed as part of the creation of an underground hydro-electric power scheme were allowed.
Key take away – the door is shut for future claims, but gives clarity on HMRC’s position.
As always with anything capital allowances related, please don’t hesitate to get in touch with me to see how to maximise your tax relief.