Capital Allowances for Construction

In the construction industry, knowing the advantages of capital allowances can make a significant impact. You might qualify to claim the Structures and Buildings Allowance (SBA) on certain expenses, which can provide annual tax relief. This allowance can be applied to costs associated with buying, building projects, or renovating the structure. It’s a clever way to save on property-related taxes while following tax laws.

Capital Allowances for Construction Projects Explained

Capital allowances in the UK, in the context of construction, offer a proactive approach to tax relief for businesses. Basically, when a business invests in certain capital assets like commercial property, machinery, or equipment, it becomes eligible to claim capital allowances. This means they can deduct a portion of these costs from their taxable profits over time, effectively reducing their overall tax liability.

The UK government sets specific rates for different asset categories, which outlines how much a company can claim each year. This not only helps businesses manage their tax burden more efficiently but also stimulates economic growth by providing an incentive for capital investment. It does this by freeing up funds that can be reinvested back into their operations.

It’s important to note that investments in Research and Development (R&D) often coincide with capital expenditure on assets like commercial properties and equipment.

What Are Capital Allowances?

Claiming Capital Allowances for Structures and Buildings

Capital allowances are available on qualifying structures and buildings and can be a game-changer for businesses looking to optimise their tax situation. This section will guide you through the process of claiming these allowances, shedding light on the type of expenditure that qualifies, the rates at which you can claim, and the essential steps to make a successful claim. Navigating the intricacies of capital allowances need not be daunting, and with structured planning, it can yield substantial benefits. Let’s explore further.

Qualifying Expenditure

To qualify for Structures and Buildings Allowances, the expenditures you incur should be related to physical structures and buildings. Here are some of the costs that are considered as qualifying expenditure:

  • Capital expenditure on renovations of existing commercial buildings or structures. If you have spent money on improving, restoring or altering an existing commercial property, you could claim these costs.
  • Capital expenditure on converting existing commercial buildings or structures. If your business has invested in converting an existing property, perhaps from one type of function to another, these expenses can be factored in.
  • Construction costs of a new property. Any costs associated with the construction of a new property can be claimed.
  • Associated costs with the construction of a new commercial property. This covers any extra costs that are directly related to the construction process of a new commercial property.
  • Specific demolition costs. The costs of demolishing a property in order to build a new one can be claimed under this allowance.
  • Specific costs which relate to alterations to the land. Any costs incurred in altering the land where the property is located could also be eligible.

Residential Use 

Buildings and structures classified as residential use encompass a wide variety of property types, including private dwellings, student accommodations, senior living facilities, boarding schools, and even prisons. However, there are some exceptions worth noting, such as hotels and nursing/care homes, which do not fall under the ‘residential use’ category for capital allowances.

When a property serves both residential and non-residential purposes, it is crucial to allocate the associated costs fairly and reasonably between the two elements. This means that the portion of costs allocated to the residential use of a mixed-use property may not be eligible for capital allowances.

Relevant Interest

To successfully claim the Structures and Buildings Allowance (SBA), it’s crucial for the taxpayer to have a ‘relevant interest’ in the properties or structures. In simple terms, this means having an interest in the land, which can be a freehold title, a lease, or an agreement to lease. However, it’s worth noting that a simple licence, unless it’s essentially a lease, doesn’t qualify as a ‘relevant interest’.

Annual Relief

Starting from April 2020, Structures and Buildings Allowances (SBAs) are available on a straight-line basis over 33⅓ years, which means at a rate of 3% per year. It’s important to note that if you don’t claim SBAs within a specified period, you won’t be able to carry them forward to a later period, and you’ll lose the potential benefits. Therefore, for every new capital project, you need to assess the availability of SBAs individually. If applicable, SBAs will be provided on a straight-line basis over 33⅓ years from when the new additions are put into service, with the first year’s allowance time apportioned from this date.

Continued eligibility for SBAs is maintained even if the building or structure is temporarily not in use, as long as you maintain the relevant interest. However, for properties that are completely demolished, SBAs will no longer be available, and any unclaimed SBAs will be lost. SBAs claimed up until the demolition point will be treated as consideration in the computation of Chargeable Gains.

It’s worth highlighting that SBA expenditure does not qualify for the Annual Investment Allowance (AIA), as this is only available for expenditure incurred on the provision of plant and machinery.

Commencement

To be eligible for Structures and Buildings Allowances (SBAs), it’s important to grasp the timeline constraints imposed by the UK government. All contracts for physical property construction must be entered into on or after 29 October 2018. This timeline also extends to contracts for demolition or enabling works done in preparation for constructing a specific building or structure.

In cases where construction is carried out by internal employees and doesn’t involve a specific contract, SBAs are still available. However, the construction work must have commenced on or after 29 October 2018. Understanding these timelines is vital to determine eligibility for SBAs and ensure businesses make the most of their capital allowances.

Lessees

Just like individuals can claim Plant and Machinery Allowances (PMAs), lessees also have the opportunity to make Structures and Buildings Allowance (SBA) claims for the property they lease, as long as they have incurred their own qualifying SBA expenditure. This could be a part of a tenant fit-out, for example. The lessee is entitled to claim SBAs throughout the duration of its lease.

However, once the lease expires, the ability to claim SBAs stops. But don’t worry, there’s a silver lining. The remaining balance of unclaimed SBAs can be effectively converted into a capital loss for the lessee. This loss can then be offset against other capital gains within the company or group. It’s important to note that understanding these provisions can have a significant impact on the lessee’s financial strategy and forecast.

Transactions

In the context of property sales, when it comes to Structures and Buildings Allowances (SBAs), the SBAs claimed during the time the seller owned the property are considered as additional consideration when calculating Chargeable Gains. This is different from the rules for plant and machinery, where Plant and Machinery Allowances (PMAs) cannot create or increase a capital loss but do not affect a capital gain.

To ensure compliance, the seller needs to provide an ‘allowance statement’ to the buyer. This document should include:

  • The date of the earliest contract for constructing the building or structure
  • The amount of qualifying SBA expenditure incurred
  • The date the structure was first used

Once the buyer receives this allowance statement, they will inherit the remaining SBA pool, which will be gradually written down over the remaining 33⅓ year period. This applies regardless of whether the seller is subject to UK tax, as the 33⅓ year period starts from the date of first use, regardless of whether SBAs have been claimed or could have been claimed.

Additionally, if a long lease is granted (for a term of more than 35 years and conferring at least 75% of the property’s market value), the lessee is treated as acquiring the relevant interest and is entitled to claim SBAs, transferring the entitlement from the lessor.

When acquiring a newly built property from a developer, the new owner may be able to claim SBAs based on the portion of their purchase consideration that relates to the building or structure.

Anti-avoidance Provisions

The UK government has implemented specific measures to discourage the misuse of Structures and Buildings Allowances (SBAs). These measures aim to prevent or limit tax benefits when arrangements are made primarily to exploit SBAs for a more advantageous tax position. Therefore, it is crucial for businesses to engage in transactions with integrity, prioritizing the economic advantages rather than solely focusing on potential tax benefits.

Capital Allowance Claims Information

Leasing a Structure

If you’re leasing a structure, it’s important to know that you can still make claims on construction costs. That’s right, even if you’re not the original owner of the property, you have the opportunity to claim capital allowances. This can provide great financial relief, especially for businesses that lease their premises. The key is to ensure that you’ve incurred qualifying construction expenditure on the structure. As long as you meet the requirements set by the HM Revenue and Customs (HMRC), you can definitely benefit from Structures and Buildings Allowances, maximizing the potential of your leased property.

Buying a Structure From a Developer

When you buy a brand new building from a developer, you can claim the Structures and Buildings Allowance (SBA) based on the price you paid to the developer, after excluding non-claimable items. However, if the building, which has been sold multiple times by the developer, is being used for the first time by you, you can claim the Structures and Buildings Allowance based on the lower of the two prices: the price you paid for the building or the price paid to the developer during their sale.

It’s worth noting that if you purchase a used building from a developer, you can claim the Structures and Buildings Allowance based on the developer’s construction costs. Understanding these rules will help you maximize your capital allowance claims and reduce your property-related taxes.

Buying a Structure From Someone That is Not a Developer

If you are purchasing a structure from someone who isn’t a developer, the approach to claiming Structures and Buildings Allowances (SBAs) varies depending on whether the structure has been used or not. For an unused structure, you can claim SBAs on the lower of either the price you paid for the structure or the original construction cost, after deducting items you cannot claim for.

However, if you acquire a used structure from someone who isn’t a developer, you are entitled to claim SBAs on the same amount that the previous owner was eligible to claim. It’s important to note that if any previous owner was able to claim a Research and Development Allowance, you can claim what’s left of the allowance period. However, the amount you can claim cannot exceed the amount you paid for the structure. Understanding these nuances can help you maximise your capital allowance claims and make the most out of your property related tax savings.

Super Deduction

SBA Eligibility

To qualify for the Structures and Buildings Allowance (SBA), the structure must adhere to several key criteria. Firstly, the structure must not have been utilised as a residence when it was initially put to use or at any time during the claim period. Secondly, it must be used for a qualifying activity, which is subject to taxation in the UK. This encompasses a wide range of businesses such as trade, professions, vocations, and includes activities such as managing a company’s investments, mining, quarrying, fishing, and other land-based trades like running railways and toll roads. Notably, it also covers UK or overseas property business, excluding residential and furnished lettings. Lastly, an ‘allowance statement’ must be present for the property. Understanding these eligibility criteria is crucial in ensuring successful capital allowance claims.

Important Considerations for Construction Capital Allowances

Applicable Rates and Allowance Period

The applicable rates for construction capital allowances differ based on the type of tax and the period when the claim is made. For corporation tax, the rate for claims made between 29 October 2018 and 31 March 2020 is 2%. However, for claims made from 1 April 2020 onwards, the rate increases to 3%. Similarly, for income tax, the rate is 2% for claims made between 29 October 2018 and 5 April 2020, and 3% for claims made from 6 April 2020 onwards. Understanding these rates is essential as it directly influences the amount of allowance you can claim.

Allowance Period and Claiming Process

The allowance period lasts for 33 and one third years, starting from the beginning of the allowance period. You can make claims throughout the entire duration, starting from either the date the building is first used for a non-residential purpose or the date the qualifying expenditure is incurred, whichever is later. If there are any additional qualifying costs, you can bundle them together, and claims can be initiated on the first day of the subsequent accounting period.

The Structures and Buildings Allowance (SBA) can be claimed for the remaining allowance period if you purchase a structure from someone who has already claimed, use the structure for a qualifying activity, or if the structure is temporarily out of use after being used for a qualifying activity. However, when you sell or dispose of the structure, the SBA will end. Make sure to receive a copy of the allowance statement as the new owner, so you can claim any remaining allowances.

Claims for SBA should be made on your tax return. You’ll need an allowance statement for the structure, which should include information to identify the structure, such as the address and description, the date of the earliest written contract for construction, the total qualifying costs, and the date the structure started being used for a non-residential activity. If the structure is used, make sure to obtain a copy of the allowance statement from the previous owner.

What You Must Use the Structure for

To be eligible for the Structures and Buildings Allowance (SBA), the use of the structure is a key criterion. Specifically, it must be utilized for a qualifying activity that is taxable within the UK. This includes any trades, professions, and vocations. Property businesses, either UK-based or overseas, also qualify, though this excludes residential and furnished holiday lettings. If the structure is used in the management of a company’s investments, this too is a qualifying activity. Additionally, sectors such as mining, quarrying, fishing, and other land-based trades such as running railways and toll roads are encompassed within the qualifying activities. Understanding and adhering to these usage requirements is vital to successfully claiming your construction capital allowances.

What You Can Claim the Allowance On

The Structures and Buildings Allowance applies to actual construction costs and allows you to claim in various scenarios:

  • Paid Over Market Value: If you paid more than the market value for a structure, you can only claim for the original market value.
  • Construction Costs: Eligible expenses include fees for design, site preparation, construction works, refurbishment, repair, conversion costs, and fitting out works.
  • Building or Renovating: You can claim based on the amount spent on construction costs, even if you lease the structure.
  • Buying from a Developer: If you buy an unused structure from a developer, you can claim on the price paid after deducting ineligible items. If the structure has been sold multiple times, claim on the lower of the price paid to the developer or your purchase price.
  • Buying from Non-Developer: For unused structures, claim on the lower of the purchase price or original construction cost. If the structure is used, claim the same amount as the previous owner.
  • Research and Development Allowance: If a previous owner claimed a research and development allowance, you can claim for the remaining allowance period, not exceeding the amount paid for the structure.

How Long you Can Claim the Allowance for

To make the most of the Structures and Buildings Allowance (SBA), it’s important to understand the timeframes for making claims. The allowance period lasts for 33 and one third years, starting from either the date when the building was first used for non-residential purposes or the day when the qualifying expenses were incurred, whichever is later. It’s worth noting that the allowance period continues even if the structure changes ownership. So, if you buy a structure from someone who has already made a claim or use it for a qualifying activity, you can still claim the SBA for the remaining allowance period. Even if the structure is temporarily unused after a period of qualifying activity, you can still make SBA claims. Having a clear understanding of these timeframes is crucial for making accurate and beneficial capital allowance claims.

If Your Lease is for 35 Years or More

When it comes to leasing a structure for 35 years or more, certain conditions could allow you to claim the Structures and Buildings Allowance (SBA). If the person you lease the structure from (the lessor) has qualifying costs and their interest in the structure is less than one third of the capital you paid for it, you can claim the SBA for the remaining allowance period. Additionally, if you’ve taken over someone else’s lease within this period, you can continue claiming the allowance. However, if neither of these situations apply to your circumstances, it’s important to note that the lessor may be entitled to claim the remaining allowance. Understanding these specific rules can help you navigate the complexities of claiming allowances on leased structures and ensure you optimize your tax savings.

When Your Allowance May Be Adjusted

There may be times when your allowance needs to be adjusted. This can happen if your accounting period is longer or shorter than a year, if you don’t meet all the SBA conditions every day of your accounting period, if your entitlement ends within your accounting period, or if the structure is used for multiple activities. The adjustment can result in either a decrease or an increase in your allowance, depending on the number of days in your accounting period. Understanding these specific situations is crucial for staying compliant and accurately claiming your allowances.

If You Sell the Structure

When a structure that has previously qualified for Structures and Buildings Allowance (SBA) is sold or disposed of, the allowances cease. It is your responsibility to pass on the allowance statement to the new owner, so they can continue claiming any remaining allowances. The rules of SBA state that if the structure is repurposed for non-qualifying activities, demolished, or sold, your claim concludes. Moreover, selling a structure might increase your Capital Gains Tax or Corporation Tax liability. This is because the total amount of the structures and buildings allowance claimed must be included in your disposal receipts when calculating your capital gain or loss. Understanding these aspects can help you navigate the financial implications of selling a structure that has benefited from capital allowances.

How the 3% Rate of Allowance Works

The Structures and Buildings Allowance (SBA) rates and periods vary depending on the type of tax applicable to your business and the timing of the claim. For businesses subject to Corporation Tax, the claim rate is 4% per annum from 1 April 2021 on qualifying costs. The allowance period terminates 33 and a third years from the latter of: the date the structure was first utilised for non-residential purposes or the date on which the qualifying expenditure occurs.

Similarly, for businesses subject to Income Tax, a 4% yearly rate may be claimed from 6 April 2021 on qualifying expenses. The allowance period concludes 33 and a third years from the later of: the date the structure first entered non-residential use, or the date the qualifying expenditure is incurred.

If the chargeable period for capital allowances commences before 1 April or 6 April, proportion the period and claim 3% annually for each day before 1 April or 6 April and 4% yearly for each day on or after.

Example

Consider a factory costing £1,200,000, with all contracts for works being signed on 7 January 2020. The factory was completed on 21 November 2020, and you initiated its use in your engineering business from 1 December 2020. You prepare annual accounts ending on 31 December.

In your chargeable period to 31 December 2021, you can claim 3% yearly for 96 days from 1 January 2021 to 5 April 2021, and 4% annually for 270 days from 6 April 2021 to 31 December 2021.

96/365 * £1,200,000 * 3% = £9,452

Plus 270/365 * £1,200,000 * 4% = £35,342

Total claim £44,794 for the year ended 31 December 2021.

Maintain a record of all the days you claimed the 3% rate for in this period or a prior period. If the structure is not sold or disposed of within 33 and one third years from the start of the allowance period, you may claim for any deficiency in allowances at the conclusion of that time.

How to Make an SBA Claim on Construction Work

To claim the Structures and Buildings Allowance (SBA) on construction work, you’ll need to include it in your tax return and have an allowance statement for the structure. If you’re the first person using the structure, it’s important to create a written allowance statement before making a claim. This statement should include:

  • Information to identify the structure, like its address and description.
  • The date of the earliest written contract for construction.
  • The total qualifying costs.
  • The date you started using the structure for a non-residential activity.

If you acquire a structure that was previously used, you can claim the allowance if you have a copy of the allowance statement from the previous owner. If you make any extensions or renovations after you start using the structure, you can choose to include these costs in the allowance statement or create a new one.

You need to keep information about the earliest construction contracts in your records, which could be formal contracts, emails, or notes from meetings.

When it comes to the start date of your claim, you should initiate it from whichever date is later: the date you start using the structure for a qualifying activity or the date you’re due to pay for the structure or construction. If you have additional qualifying costs, you can group them together and start your claim for these costs on the first day of your next accounting period.

Understanding these steps and requirements can help you effectively claim your allowances and optimize your tax savings.

Why Choose Elect to Help You Claim Capital Allowances on a Construction Project?

Choosing Elect CA as your specialist for capital allowance tax relief opens the door to a world of professionally managed and hassle-free tax relief solutions. Our dedicated team of capital allowances experts brings extensive experience to the table, equipped to navigate any challenges that arise. 

We take pride in providing tailored services to each and every client, while ensuring strict adherence to HMRC regulations. In addition to our mastery of complex tax codes, we also possess expertise in property-related expenses. By leveraging cutting-edge technology, including our custom-made app for Apple devices, we meticulously explore every potential opportunity for tax relief.

In the unlikely event that HMRC contests any aspect of our report, we are committed to supporting your claim. With our impeccable track record, you can have confidence in the fact that we have never had a claim rejected.

FAQs

Can you claim capital allowances on work in progress?

In general, you cannot claim capital allowances on work in progress. This is because, in order to make a claim under the Structures and Buildings Allowance (SBA), the structure or building needs to be in use for a qualifying activity. So, if a property is still under construction or renovation, the expenditure on it would be considered as work in progress and not eligible for capital allowances. However, once the construction or renovation is complete and the property is being used for the qualifying activity, you can initiate the capital allowance claim.

Essentially, the claim period begins either from the date the structure is first used for a qualifying activity or the date the expenditure is incurred, whichever comes later. For example, if you started using the property for your business immediately after completing the construction, you would start your claim from the date the actual construction work was completed. But, if the property remained vacant for a while after construction, you would start your claim from the date you first started using it.

What structures do not qualify for capital allowances?

Not all structures and costs qualify for capital allowances. Key instances where you cannot claim include:

  • Residential properties: Any residence or any structure located within the grounds of a residence does not qualify.
  • Plant and machinery: Costs that qualify for plant and machinery allowances are not eligible for additional capital allowance claims.
  • Previously claimed allowances: Costs already claimed under another allowance cannot be claimed again.
  • Included items in the price of the structure: You cannot claim for items included in the structure’s price, including land, integral features, and fixtures.
  • Planning permission: Costs associated with obtaining planning permission are not allowed.
  • Financing costs: Costs associated with financing the project, such as loans, are ineligible.
  • Public enquiries or legal expenses: You cannot claim for public enquiry or legal expenses.
  • Landscaping or land reclamation: These costs are also not eligible.
  • Grants or contributions: If you received a grant or contribution for the cost, you cannot claim it.

Is SBA capital allowance same as depreciation?

No, the Structures and Buildings Allowance (SBA) is not the same as depreciation. While both are related to the use and wear of a property over time, they have different purposes and are treated differently for tax purposes. Depreciation is an accounting concept used to spread out the cost of an asset over its useful life. This helps to understand the actual cost of using the asset in a specific period. This cost is deducted from revenue when calculating a business’s profit.

On the other hand, SBA is a type of tax relief provided by the government to encourage investment in new construction or renovation of existing structures for business purposes. It allows businesses to deduct a percentage of their spending on these structures from their taxable profit, reducing their tax liability. Unlike depreciation, which is only an accounting concept, capital allowances directly affect a business’s tax bill.

It’s important to note that the rate of depreciation used in accounting can vary depending on the method used and the estimated useful life of the asset, while the SBA rate is fixed by the government.

What other types of capital allowances you may consider? 

In addition to the Structures and Buildings Allowance, there are several other types of capital allowances available which you might want to consider based on their features and qualifying assets:

  • Annual Investment Allowances (AIA): This form of capital allowance allows you to deduct 100% of the first £1 million spent on qualifying plant and machinery in the year of purchase.
  • Main Pool Plant & Machinery: This allowance applies to most items of plant and machinery, allowing for an 18% deduction each year on a reducing balance basis.
  • Land Remediation Relief: This provides relief at 150% for the costs of remediating contaminated land.
  • Special Rate Pool – Integral Features: This applies to integral features within a building, such as air conditioning and heating systems, with a 6% deduction each year on a reducing balance basis.
  • Structures and Buildings Allowance (SBA): This allowance covers the construction of non-residential structures and buildings, allowing for a 3% deduction each year on a straight-line basis.
  • Enhanced Capital Allowances: These allow for a 100% first-year allowance for the cost of installing energy-saving technologies, but only apply to expenditure incurred before April 2020.
  • Full Expensing: Full expensing is a deduction that comes as a replacement of the Super Deduction, an incentive that was available between 1 April 2021 and 31 March 2023 and allowed you to claim 130% capital allowances on plant and machinery fixed assets and 50% on qualifying machinery or special rate assets. With full expensing, the entire first year allowance for qualifying expenditure can be claimed in the year of purchase.