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Budget 2018: capital allowance changes 'spur to capital investment for business'

The UK government is planning to introduce a new capital allowance for expenditure incurred on non-residential buildings and structures and to temporarily increase the annual investment allowance to £1 million, the chancellor announced in the budget.02 Nov 2018

However, allowances on some items of plant and machinery with a longer life will be reduced from 8% to 6% and 100% allowances for energy saving and environmentally beneficial technology will be abolished.  

"This package is a spur to capital investment for business," said Richard Croker, a property tax expert at Pinsent Masons, the law firm behind Out-law.com.

The new 'structures and buildings allowance' (SBA) will give tax relief on eligible construction costs incurred on or after 29 October 2018. The relief will be given at 2% a year on a straight-line basis over a 50 year period.

"Although the detail is scant it is pleasing that in introducing SBAs the government has at last listened to lobbying and decided to give limited relief for capital expenditure on the non plant element of building works including repairs and refurbishments, which goes some way to encourage investment in stock and mitigate the reduction in the rate of relief for the special rate pool," Croker said.

Under the current system, buildings and structures do not qualify for capital allowances, but allowances are available for machinery and plant inside a building. Before 2008 industrial buildings allowances were available at the rate of 4% for expenditure on industrial buildings. The allowances were gradually withdrawn between 2008 and 2011.

Structures and buildings qualifying for the new structures and buildings allowance will include offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses. Capital expenditure on renovations or conversions of existing commercial structures or buildings will also qualify. The new allowance will not apply to dwellings or to expenditure on the land itself.

Although it has been announced that the new allowance will apply to projects where all the contracts for the works are signed after 29 October 2018, the new rules will not be finalised until a statutory instrument is enacted, sometime after Royal Assent to the Finance Bill 2019.

A sale of the building or asset will not result in a balancing adjustment clawing back any of the relief given under the structures and buildings allowance, according to a technical note issued by HM Revenue & Customs (HMRC). Instead, the buyer will take over the remainder of the allowances, written down over the remaining part of the 50-year period.

Under the current system, although a building itself does not qualify for allowances, machinery and plant within a building normally qualifies for a 20% writing down allowance on a declining balance basis. Certain long life assets and items within a building which constitute 'integral features', such as lifts, escalators and air conditioning, qualify for allowances at a lower rate. This lower rate is currently 8%, but it was announced in the Budget documents that this 'special rate' will be reduced to 6% from April 2019.

Businesses can claim an annual investment allowance for capital expenditure incurred on most items of plant and machinery. The annual investment allowance currently gives 100% capital allowances on expenditure up to £200,000 a year. In the budget it was announced that the annual investment allowance will be temporarily increased to £1 million from January 2019, for two years.

It was also announced that 100% capital allowances for energy-saving and environmentally beneficial plant and machinery are to be abolished from April 2020. After this time expenditure will only be eligible for the normal rate of machinery and plant allowances. Although for many businesses 100% allowances will effectively still be available as the expenditure will be covered by the increased annual investment allowance.

The budget documents also announce a technical change to the capital allowances legislation to clarify which expenditure on altering land may qualify for capital allowances for the purposes of installing plant and machinery. The HMRC policy paper says "The measure will put beyond doubt Parliament’s intention that land alteration expenditure may qualify for plant or machinery capital allowances only where the plant or machinery itself qualifies for capital allowances".

"The measure looks to be designed to reverse a recent win by energy company SSE in a tax tribunal case which decided that capital allowances were available for works involving the alteration of land in connection with the construction of a hydro-electric scheme," Croker said.