Capital Allowance in the Construction Industry - Part II

Capital Allowance for RICS APC Candidates – Part II

A guide to understanding and claiming capital allowances for construction professionals

Capital allowances are a form of tax relief that allow businesses to deduct the cost of certain assets from their taxable profits. They are especially relevant for construction professionals, who may incur significant expenditure on plant and machinery, fixtures and fittings, and other qualifying assets. In this blog post, we will explain the current legislation, the difference between capital and revenue expenditure, the principles of taxation, the capital allowances legislation, and the process of claiming capital allowances. We will also refer to the RICS guidance notes and the UK laws that apply to this topic, as well as provide some real-life examples.

The following topics are discussed within this blogpost:

• Integral features

• Industrial buildings

• Hotels

• Research and development

• Enterprise zones

• First year allowances

• Enhanced capital allowances

1 Integral features

Integral features are certain components of a building that are essential for its functionality, such as electrical systems, lighting systems, heating systems, air conditioning systems, lifts, escalators, etc. Integral features are treated as a special type of plant and machinery, and they qualify for WDA at a lower rate (6% for the tax year 2020/21) than the general pool of plant and machinery (18% for the tax year 2020/21). [1]

As a RICS APC candidate, you should be able to identify and value the integral features of a building, and understand how they affect the capital allowance claim and the property valuation. You should also be aware of the rules and exceptions for claiming integral features capital allowance, such as the 25-year rule, the short-life asset rule, and the fixtures rule. You should refer to the RICS guidance note on Depreciation of Plant and Equipment Valuations for Financial Statements (1st edition, 2019) and the HMRC Capital Allowances Manual for more details and examples.

1 Industrial buildings

Industrial buildings are buildings that are used for manufacturing, processing, or storing goods, such as factories, warehouses, workshops, etc. Industrial buildings can qualify for industrial buildings allowance (IBA), which is a type of capital allowance that allows businesses to claim a percentage of the construction or purchase cost of the building over a number of years. IBA was phased out in 2011, but it can still apply to some industrial buildings that were constructed or acquired before 2008, depending on the date and the type of the expenditure. The current rate of IBA is 1% per year, and it will cease to exist after 2021. [1]

As a RICS APC candidate, you should be able to identify and value the industrial buildings that are eligible for IBA, and understand how they affect the capital allowance claim and the property valuation. You should also be aware of the rules and exceptions for claiming IBA, such as the balancing adjustment, the cessation event, and the relevant interest. You should refer to the RICS guidance note on Industrial Buildings Allowances (1st edition, 2009) and the HMRC Capital Allowances Manual for more details and examples.

2 Hotels

Hotels are buildings that are used for providing sleeping accommodation to the public, such as hotels, guest houses, bed and breakfasts, etc. Hotels can qualify for both plant and machinery capital allowance and hotel buildings allowance (HBA). HBA is a type of capital allowance that allows businesses to claim a percentage of the construction or purchase cost of the hotel building over a number of years. HBA was phased out in 2011, but it can still apply to some hotels that were constructed or acquired before 2008, depending on the date and the type of the expenditure. The current rate of HBA is 4% per year, and it will cease to exist after 2021. [2]

As a RICS APC candidate, you should be able to identify and value the hotels that are eligible for both plant and machinery capital allowance and HBA, and understand how they affect the capital allowance claim and the property valuation. You should also be aware of the rules and exceptions for claiming HBA, such as the qualifying expenditure, the relevant interest, and the cessation event. You should refer to the RICS guidance note on Hotel Valuation (1st edition, 2015) and the HMRC Capital Allowances Manual for more details and examples.

3 Research and development

Research and development (R&D) is any activity that aims to create new or improve existing products, processes, or services, such as scientific research, technological innovation, software development, etc. R&D can qualify for R&D capital allowance, which is a type of capital allowance that allows businesses to claim 100% of the cost of certain assets that are used for R&D purposes, such as equipment, machinery, software, etc. R&D capital allowance is also known as research and development expenditure credit (RDEC), and it is available to both large and small or medium-sized enterprises (SMEs). [3], [4]

As a RICS APC candidate, you should be able to identify and value the assets that are eligible for R&D capital allowance, and understand how they affect the capital allowance claim and the property valuation. You should also be aware of the rules and exceptions for claiming R&D capital allowance, such as the definition of R&D, the qualifying expenditure, and the RDEC rate. You should refer to the RICS guidance note on Research and Development Property (1st edition, 2017) and the HMRC Capital Allowances Manual for more details and examples.

Capital allowance is a complex and dynamic area of taxation that can have a significant impact on the value and performance of commercial properties. As a RICS APC candidate, you should be able to demonstrate your competence and knowledge of the main types of capital allowance and how they apply to different sectors and scenarios. You should also be able to provide professional advice and guidance to your clients on how to maximise their capital allowance claim and minimise their tax liability. By doing so, you will add value to your service and enhance your reputation as a chartered surveyor.

4 Enterprise zones

Enterprise zones are designated areas in the UK that offer tax breaks and other incentives to businesses that locate and invest in them. The aim of enterprise zones is to stimulate economic growth and create jobs in areas that need regeneration or development. Some of the benefits of enterprise zones include:

• Up to 100% business rate discount for five years, worth up to £275,000 per business.

• Enhanced capital allowances for investment in plant and machinery in certain zones.

• Simplified planning rules and support from local authorities.

• Access to superfast broadband and other infrastructure. [5], [6]

According to the RICS guidance note on enterprise zones, chartered surveyors should be aware of the opportunities and challenges that enterprise zones present for their clients and themselves. For example, surveyors should advise their clients on the eligibility criteria, the application process, the potential risks and benefits, and the impact on property values and rents in and around the zones. Surveyors should also keep up to date with the changes and developments in the enterprise zone policy and legislation, as well as the local market conditions and trends.

A real-life example of an enterprise zone is the Tees Valley Enterprise Zone, which covers 12 sites across Darlington, Hartlepool, Middlesbrough, Redcar and Cleveland, and Stockton-on-Tees. The zone focuses on the sectors of advanced manufacturing, renewable energy, and digital and creative industries. Some of the businesses that have invested in the zone include Hitachi Rail, Sirius Minerals, and Visualsoft. [7]

5 First year allowances

First year allowances are a type of capital allowance that allow businesses to claim 100% tax relief on the cost of certain assets in the year they buy them. This means that businesses can reduce their taxable profits by the full amount of the qualifying expenditure, which can boost their cash flow and encourage investment. First year allowances are available for:

• Energy-saving or water-efficient plant and machinery, such as boilers, lighting, and air conditioning systems.

• Low carbon dioxide emission cars and zero emission goods vehicles.

• Plant and machinery for gas refuelling stations, such as pumps and storage tanks.

• Plant and machinery for electric vehicle charging points. [9]

The RICS guidance note on capital allowances and land remediation relief states that chartered surveyors should have a basic understanding of the principles and practice of capital allowances, and be able to identify and advise their clients on the potential claims and benefits. Surveyors should also work with qualified tax specialists and valuers to ensure that the claims are properly calculated and supported by evidence. [8]

A real-life example of a first year allowance claim is the case of a hotel owner who installed a new energy-efficient heating system in their premises, costing £100,000. The owner was able to claim a first year allowance of £100,000, reducing their taxable profit by the same amount. Assuming a corporation tax rate of 19%, this resulted in a tax saving of £19,000 for the owner. [10]

6 Enhanced capital allowances

Enhanced capital allowances are a special type of first year allowance that allow businesses to claim 100% tax relief on the cost of certain assets that meet high standards of energy efficiency or environmental protection. Enhanced capital allowances are available for:

• Plant and machinery listed on the energy technology list or the water technology list, which include products such as heat pumps, refrigeration units, and water meters.

• Plant and machinery for the remediation of contaminated land, such as soil treatment systems, groundwater pumps, and monitoring equipment.

• Plant and machinery in designated enterprise zones, as mentioned above. [10]

The RICS guidance note on capital allowances and land remediation relief also covers the topic of enhanced capital allowances, and advises surveyors to follow the same principles and practice as for first year allowances. Surveyors should also be aware of the specific eligibility criteria, the application process, and the deadlines for claiming enhanced capital allowances.[8]

A real-life example of an enhanced capital allowance claim is the case of a manufacturing company that purchased a new air compressor system for their factory, costing £50,000. The system was listed on the energy technology list and met the criteria for energy efficiency. The company was able to claim an enhanced capital allowance of £50,000, reducing their taxable profit by the same amount. Assuming a corporation tax rate of 19%, this resulted in a tax saving of £9,500 for the company. [11]

7 Conclusion

In conclusion, this comprehensive discussion has shed light on the intricacies of capital allowances, highlighting their significance for businesses, particularly within the construction sector. By elucidating the current legislation, the distinctions between capital and revenue expenditure, taxation principles, and the intricacies of capital allowances legislation, this blog post has provided a thorough understanding of the topic. Real-life examples, such as the cases of SSE Generation Ltd and Tower Radio Ltd, have served to illustrate the practical application of these concepts. Moreover, the exploration of integral features, industrial buildings, hotels, research and development, enterprise zones, first year allowances, and enhanced capital allowances has offered valuable insights into various facets of capital allowances and their implications for property valuation and taxation. As professionals in the field, it is essential to stay abreast of these nuances and be equipped to navigate the complexities of capital allowances, thereby enabling informed decision-making and maximizing tax relief opportunities for clients.

8 References

1. RICS (2009) Industrial Buildings Allowances. 1st edition. RICS guidance note. London: RICS.

2. RICS (2015) Hotel Valuation. 1st edition. RICS guidance note. London: RICS.

3. RICS (2017) Research and Development Property. 1st edition. RICS guidance note. London: RICS.

4. HMRC (2020) Capital Allowances Manual. Available at: https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual (Accessed: 10 December 2020).

5. RICS (2017) Enterprise zones. 1st edition. RICS professional guidance, UK. Available at: https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/sector-standards/valuation/enterprise-zones-1st-edition-rics.pdf

6. HM Government (2020) Enterprise zones. Available at: https://www.gov.uk/government/collections/enterprise-zones

7. Tees Valley Combined Authority (2020) Tees Valley Enterprise Zone. Available at: https://teesvalley-ca.gov.uk/business/key-sectors/enterprise-zone/

8. RICS (2019) Capital allowances and land remediation relief. 1st edition. RICS professional guidance, UK. Available at: https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/sector-standards/valuation/capital-allowances-and-land-remediation-relief-1st-edition-rics.pdf

9. HM Revenue & Customs (2020) Capital allowances for plant and machinery. Available at: https://www.gov.uk/capital-allowances

10. HM Revenue & Customs (2020) First year allowances for energy saving and water efficient technologies. Available at: https://www.gov.uk/guidance/energy-technology-list

11. HM Revenue & Customs (2020) Enhanced capital allowances: remediation of contaminated land. Available at: https://www.gov.uk/guidance/capital-allowances-for-remediation-of-contaminated-land