Capital allowances in focus

A new structures and buildings allowance (SBA) announced in the 2018 Budget will address ‘a gap in the current capital allowances system’.

The SBA is available for eligible construction costs on qualifying, new, non-residential structures and buildings where all the contracts for the physical construction works are agreed after 28 October 2018. The relief is given at 2% a year on a straight line basis over 50 years. Full details of the SBA have not yet been announced but its main features are expected to be:

  • Only costs of buildings and structures intended for commercial activity qualify and relief is limited to direct construction costs, including demolition and land alteration.
  • For mixed-use developments, the SBA will be given on the proportion of costs that relate to the business element.
  • The relief will apply to the costs of new conversions or renovations.
  • Structures and buildings include offices, retail and wholesale premises, walls, bridges, tunnels, factories, warehouses, hotels and care homes.
  • There is no relief on the cost of land, or for work spaces in a home.
  • Relief is limited to the original cost of construction or renovation regardless of ownership changes. There are no balancing charges or allowances. 
  • Claims can only be made when a structure or building first comes into use.
  • Unclaimed relief cannot be carried forward and will be lost.

Expenditure that qualifies for plant and machinery (P&M) allowances will not qualify for the SBA. It remains important to identify all the costs of integral features of a building that qualify for P&M allowances, which are given at a higher rate than SBA.

AIA goes up, briefly
The 2018 Budget also included a temporary increase to the annual investment allowance (AIA). Businesses will be able to claim 100% relief on qualifying P&M expenditure of up to £1 million a year – instead of the current limit of £200,000 – in the period 1 January 2019 until 31 December 2020. Many businesses have accounting periods that span the start and end dates, and the limit will then be calculated by apportionment.

For example, for the period 1 July 2018 to 30 June 2019, costs of up to £600,000 will qualify for AIA: six months at £200,000 a year (£100,000) and six months at £1 million a year (£500,000).

No more than £200,000 of expenditure can qualify in the period up to 31 December 2018, so timing is a crucial consideration. The calculation is similar for accounting periods spanning 31 December 2020, and businesses may need to ensure that major expenditure occurs before 1 January 2021.

Writing down allowance changes
The third main Budget change to capital allowances is a reduction in the special rate allowance from 8% to 6% from April 2019. The special rate applies to expenditure on long-life assets, thermal insulation, integral features in buildings, and cars with CO2 emissions of more than 110g/km. A hybrid rate will apply to expenditure in periods that span 1 April (corporation tax) or 6 April (income tax). There is no change to the 18% allowance on the main P&M expenditure pool.

Please get in touch if your business may be affected by these changes.