Structures and Buildings Allowance – Capital Allowances
Structures and Buildings Allowances (“SBA”) was previously introduced to provide relief on qualifying expenditure on non-residential commercial buildings or structures incurred on or after 29 October 2018. SBA is a form of capital allowances which allows the SBA to be deducted when calculating the taxable profits for the business.
Since its inception, there have been some changes to the allowance and further changes were announced in the Finance Act 2021 on Freeport qualifying expenditure. Please note that this article does not discuss requirements where the ‘relevant interest’ is the lease of a building.
What expenditure can qualify for the SBA?
The SBA is available for qualifying expenditure on non-residential commercial structures and buildings which includes the costs of construction, conversion and/or renovation in both the UK and overseas. Overseas structures are able to qualify for the SBA as long as the business is within the charge of UK tax.
Broadly speaking, expenditure incurred can qualify in the following circumstances:
- Capital expenditure incurred on construction;
- Purchase of a unused building, either from a developer or another source; and
- Purchase of a used building, either from a developer or another source.
Please note that there are additional requirements to be met which determine the amount of qualifying expenditure available under these circumstances.
HMRC have provided useful guidance on examples of construction costs that can qualify for the SBA (e.g. preparing site for construction & fees for design), along with guidance of costs that will not be classed as qualifying expenditure (e.g. legal expenses & financing costs).
What are the main conditions for claiming the SBA?
There are a number of important conditions that must be met in order to claim the SBA, including:
- The construction of a building or structure must have begun on or after 29 October 2018;
- The qualifying expenditure must be incurred on or after 29 October 2018 on its construction or acquisition;
- The first use of the building or structure, after the qualifying expenditure is incurred, is non-residential use;
- The person incurring the expenditure must be using the structure for a ‘qualifying activity’;
- The person is entitled to the SBA for a chargeable period if the person incurring the expenditure has the ‘relevant interest’ for any day during the chargeable period in the building or structure and the building or structure is in non-residential use; and
- If the person incurs the expenditure on the building or structure for the purpose of a ‘qualifying activity’ that has not yet commenced, expenditure will only qualify if incurred not more than 7 years before the ‘qualifying activity’ commences.
In order to make a claim for the SBA, an ‘Allowance Statement’ is required and must include the following:
- Details of the building or structure;
- The date of the earliest contract for the construction of the building or structure;
- The amount of qualifying expenditure incurred on its construction or purchase; and
- The date on which the building or structure is first brought into non-residential use.
Where you are the purchaser of the building, you should obtain the Allowance Statement from the seller and retain it for the business’s records and future claims. Failure to obtain the Allowance Statement could mean the rejection of any claim for the SBA.
What rate of relief does the SBA provide?
Where the ‘chargeable period’ began on or after 1 April 2020 for corporation tax purposes or 6 April 2020 for income tax purposes, the rate of the SBA is 3% per annum of the qualifying expenditure on a straight-line basis for an allowance period of 33 1/3 years. The allowance period is where the business is entitled to claim the SBA for the qualifying expenditure.
Prior to this date, the SBA was 2% of the qualifying expenditure, so the additional 1% can be claimed by affected business provided that they do not dispose of the asset in 33 1/3 years to cover the this shortfall.
Please note that the SBA is proportionately reduced where the chargeable period is less than a full ‘chargeable period’.
The position on Freeport qualifying expenditure is slightly different, details of which have been provided at the bottom of this article.
What costs cannot be included?
There are a number of costs that cannot qualify as qualifying expenditure including:
- The costs incurred on acquiring the land or rights in or over the land such as stamp duty land tax or land transaction tax or other incidental costs attributable to the acquisition;
- The cost of integral features or fixtures included in the price of the structure;
- The cost incurred on seeking planning permission;
- Expenditure that is eligible for plant and machinery allowances such as AIA;
- The costs of altering land including landscaping, land reclamation and land remediation; and
- The cost of expenditure that exceeds the market value amount.
In addition, where the building or structure is demolished, the person will no longer be able to claim the SBA.
Capital expenditure can be apportioned on a just and reasonable basis into qualifying expenditure and non-qualifying expenditure. This would include circumstances where the building or structure could be mixed-used (i.e. residential and non-residential).
What happens when you sell the asset?
There are no balancing adjustments when the building is sold. The SBA entitlement will pass to the purchaser of the building who will be able to claim for the remaining allowance period. As noted above, the Allowance Statement should be provided by the seller to the purchaser where relevant.
Importantly, the seller should be also aware of the capital gains implications on claiming the SBA as if the SBA is claimed, then you must add the total amount of the SBA claimed to the seller’s disposal receipts to calculate any chargeable gain or loss.
Finance Act 2021 Changes: Freeports
The Finance Act 2021 included changes for the SBA for Freeport qualifying expenditure.
It introduced an enhanced SBA for Freeport qualifying expenditure of 10% rather than the ordinary SBA of 3% and will be available for qualifying expenditure incurred on buildings or structures situated in a Freeport tax site on or before 30 September 2026, with several additional requirements needing to be met. The enhanced SBA will reduce the allowable period for relief from 33 1/3 years to 10 years and will be used on straight-line basis.
There will an apportionment on a just and reasonable basis where the Freeport qualifying expenditure is incurred on structures or buildings partly in and out of the Freeport tax sites.
There are a number of complexities and additional conditions with regards to who/what can qualify for the SBA and the amount of the qualifying expenditure, so independent tax advice should be sought before making a claim.