This ninth edition of David Chappell’s bestselling guide has been revised to take into account changes made in 2011 to payment provisions, and elsewhere. This remains the most concise guide available to the most commonly used JCT building contracts: Standard Building Contract with quantities, 2011 (SBC11), Intermediate Building Contract 2011 (IC11), Intermediate Building Contract with contractor’s design 2011 (ICD11), Minor Works Building Contract 2011 (MW11), Minor Works Building Contract with contractor’s design 2011 (MWD11) and Design and Build Contract 2011 (DB11).
Chappell avoids legal jargon but writes with authority and precision. Architects, quantity surveyors, contractors and students of these professions will find this a practical and affordable reference tool arranged by topic.
April 2012: 234 x 156: 160 pp Pb: 978-0-415-50890-2: £25.99
Introduction
Capital Allowances provide tax relief by prescribing a statutory rate of depreciation for tax purposes in place of that used for accounting purposes. They are utilized by government to provide an incentive to invest in capital equip- ment, including assets within commercial property, by allowing the majority of taxpayers a deduction from taxable profits for certain types of capital expenditure, thereby reducing or deferring tax liabilities.
The capital allowances most commonly applicable to real estate are those given for capital expenditure on existing commercial buildings in disadvantaged areas, and plant and machinery in all buildings other than residential dwellings. Relief for certain expenditure on industrial buildings and hotels was withdrawn from April 2011, although the ability to claim plant and machinery remains.
Enterprise Zone Allowances are also available for capital expenditure within designated areas only where there is a focus on high value manufacturing. Enhanced rates of allowances are available on certain types of energy and water saving plant and machinery assets, whilst reduced rates apply to ‘integral features’ and items with an expected economic life of more than 25 years.
The Act
The primary legislation is contained in the Capital Allowances Act 2001. Major changes to the system were announced by the Government in 2007 and there have been further changes in subsequent Finance Acts.
The Act is arranged in 12 Parts and was published with an accompanying set of Explanatory Notes.
Plant and Machinery
The Finance Act 1994 introduced major changes to the availability of Capital Allowances on real estate. A defini- tion was introduced which precludes expenditure on the provision of a building from qualifying for plant and machinery, with prescribed exceptions.
List A in Section 21 of the 2001 Act sets out those assets treated as parts of buildings:
Walls,floors, ceilings, doors, gates, shutters, windows and stairs. Mains services, and systems, for water, electricity and gas. Waste disposal systems.
Sewerage and drainage systems.
Shafts or other structures in which lifts, hoists, escalators and moving walkways are installed. Fire safety systems.
Similarly, List B in Section 22 identifies excluded structures and other assets.
Both sections are, however, subject to Section 23. This section sets out expenditure, which although being part of a building, may still be expenditure on the provision of Plant and Machinery.
List C in Section 23 is reproduced below:
Sections 21 and 22 do not affect the question whether expenditure on any item in List C is expenditure on the provision of Plant or Machinery
1. Machinery (including devices for providing motive power) not within any other item in this list. 2. Gas and sewerage systems provided mainly–
a. to meet the particular requirements of the qualifying activity, or
b. to serve particular plant or machinery used for the purposes of the qualifying activity. 3. Omitted
4. Manufacturing or processing equipment; storage equipment (including cold rooms); display equipment; and counters, checkouts and similar equipment.
5. Cookers, washing machines, dishwashers, refrigerators and similar equipment; washbasins, sinks, baths, showers, sanitary ware and similar equipment; and furniture and furnishings.
6. Hoists.
7. Sound insulation provided mainly to meet the particular requirements of the qualifying activity. 8. Computer, telecommunication and surveillance systems (including their wiring or other links). 9. Refrigeration or cooling equipment.
10. Fire alarm systems; sprinkler and other equipment for extinguishing or containingfires. 11. Burglar alarm systems.
12. Strong rooms in bank or building society premises; safes.
13. Partition walls, where moveable and intended to be moved in the course of the qualifying activity. 14. Decorative assets provided for the enjoyment of the public in hotel, restaurant or similar trades. 15. Advertising hoardings; signs, displays and similar assets.
16. Swimming pools (including diving boards, slides & structures on which such boards or slides are mounted). 17. Any glasshouse constructed so that the required environment (namely, air, heat, light, irrigation and tem- perature) for the growing of plants is provided automatically by means of devices forming an integral part of its structure.
18. Cold stores.
19. Caravans provided mainly for holiday lettings.
20. Buildings provided for testing aircraft engines run within the buildings.
21. Moveable buildings intended to be moved in the course of the qualifying activity. 22. The alteration of land for the purpose only of installing Plant or Machinery. 23. The provision of dry docks.
24. The provision of any jetty or similar structure provided mainly to carry Plant or Machinery.
25. The provision of pipelines or underground ducts or tunnels with a primary purpose of carrying utility con- duits.
26. The provision of towers to supportfloodlights. 27. The provision of–
a. any reservoir incorporated into a water treatment works, or
b. any service reservoir of treated water for supply within any housing estate or other particular locality. 28. The provision of–
a. silos provided for temporary storage, or b. storage tanks.
29. The provision of slurry pits or silage clamps. 30. The provision offish tanks or fish ponds.
31. The provision of rails, sleepers and ballast for a railway or tramway.
32. The provision of structures and other assets for providing the setting for any ride at an amusement park or exhibition.
33. The provision offixed zoo cages.
Capital Allowances on plant and machinery are given in the form of writing down allowances at the rate of 18% per annum on a reducing balance basis. For every £100 of qualifying expenditure £18 is claimable in year 1, £14.76 in year 2 and so on until either all the allowances have been claimed or the asset is sold.
Integral features
The category of qualifying expenditure on‘integral features’ was introduced with effect from April 2008. The fol- lowing items are integral features:
An electrical system (including a lighting system) A cold water system
A space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system
A lift, an escalator or a moving walkway External solar shading
A reduced writing down allowance of 8% per annum is available on integral features. Thermal insulation
For many years the addition of thermal insulation to an existing industrial building has been treated as qualifying for plant and machinery allowances. From April 2008 this has been extended to include all commercial buildings but not residential buildings.
A reduced writing down allowance of 8% per annum is available on thermal insulation.
Long-life assets
A reduced writing down allowance of 8% per annum is available on long-life assets. Allowances were given at the rate of 6% before April 2008.
A long-life asset is defined as plant and machinery that can reasonably be expected to have a useful economic life of at least 25 years. The useful economic life is taken as the period fromfirst use until it is likely to cease to be used as afixed asset of any business. It is important to note that this is likely to be a shorter period than an item’s physical life.
Plant and machinery provided for use in a building used wholly or mainly as dwelling house, showroom, hotel, office or retail shop or similar premises, or for purposes ancillary to such use, cannot be long-life assets. In contrast, plant and machinery assets in buildings such as factories, cinemas, hospitals and so on are all poten- tially long-life assets.
Case law
The fact that an item appears in List C does not automatically mean that it will qualify for capital allowances. It only means that it may potentially qualify.
Guidance about the meaning of plant has to be found in case law. The cases go back a long way, beginning in 1887. The current state of the law on the meaning of plant derives from the decision in the case of Wimpy Inter- national Ltd and Associated Restaurants Ltd v Warland in the late 1980s.
The Judge in that case said that there were three tests to be applied when considering whether or not an item is plant.
1. Is the item stock in trade? If the answer is yes, then the item is not plant.
2. Is the item used for carrying on the business? In order to pass the business use test the item must be employed in carrying on the business; it is not enough for the asset to be simply used in the business. For example, product display lighting in a retail store may be plant but general lighting in a warehouse would fail the test.
3. Is the item the business premises or part of the business premises? An item cannot be plant if it fails the premises test, i.e. if the business use is as the premises (or part of the premises) or place on which the business is conducted. The meaning of part of the premises in this context should not be confused with the law of real property. The Inland Revenue’s internal manuals suggest there are four general factors to be considered, each of which is a question of fact and degree:
Does the item appear visually to retain a separate identity
With what degree of permanence has it been attached to the building To what extent is the structure complete without it
To what extent is it intended to be permanent or alternatively is it likely to be replaced within a short period
There is obviously a core list of items that will usually qualify in the majority of cases. However, many others still need to be looked at on a case-by-case basis. For example, decorative assets in a hotel restaurant may be plant but similar assets in an office reception area would almost certainly not be.
One of the benefits of the integral features rules, apart from simplification, is that items that did not qualify by applying these rules, such as general lighting in a warehouse or an office building, will now qualify albeit at a reduced rate.
Refurbishment schemes
Building refurbishment projects will typically be a mixture of capital costs and revenue expenses, unless the works are so extensive that they are more appropriately classified a redevelopment. A straightforward repair or a “like for like” replacement of part of an asset would be a revenue expense, meaning that the entire amount can be deduc- ted from taxable profits in the same year.
Where capital expenditure is incurred that is incidental to the installation of plant or machinery then Section 25 of the 2001 Act allows it to be treated as part of the expenditure on the qualifying item. Incidental expenditure will often include parts of the building that would be otherwise disallowed, as shown in the Lists reproduced above. For example, the cost of forming a lift shaft inside an existing building would be deemed to be part of the expenditure on the provision of the lift.
The extent of the application of section 25 was reviewed for the first time by the Special Commissioners in December 2007 and by the First Tier Tribunal (Tax Chamber) in December 2009, in the case of JD Wetherspoon. The key areas of expenditure considered were overheads and preliminaries where it was held that such costs could be allocated on a pro-rata basis; decorative timber panelling which was found to be part of the premises and so ineligible for allowances; toilet lighting which was considered to provide an attractive ambience and qualified for allowances; and incidental building alterations of which enclosing walls to toilets and kitchens andfloor finishes did not qualify but tiled splash backs, toilet cubicles and drainage did qualify along with the related sanitaryfittings and kitchen equipment.
Annual investment allowance
The annual investment allowance is available to all businesses of any size and allows a deduction for the whole of thefirst £500,000 from 19 March 2014 (£250,000 before 19 March 2014) of qualifying expenditure on plant and machinery, including integral features and long-life assets. The annual investment allowance will return to £25,000 from January 2016.
The Enhanced Capital Allowances Scheme
The scheme is one of a series of measures introduced to ensure that the UK meets its target for reducing green- house gases under the Kyoto Protocol. 100% first year allowances are available on products included on the Energy Technology List published on the website at www.eca.gov.uk and other technologies supported by the scheme. All businesses will be able to claim the enhanced allowances, but only investments in new and unused Machinery and Plant can qualify.
There are currently 15 technologies with multiple sub-technologies currently covered by the scheme:
Air-to-air energy recovery
Automatic monitoring and targeting (AMT) Boiler equipment
Combined heat and power (CHP) Compressed air equipment Heat pumps
Heating ventilation and air conditioning (HVAC) equipment High speed hand air dryers
Lighting
Motors and drives Pipework insulation
Radiant and warm air heaters Refrigeration equipment Solar thermal systems Uninterruptible power supplies
The Finance Act 2003 introduced a new category of environmentally beneficial plant and machinery qualifying for 100%first-year allowances. The Water Technology List includes 14 technologies:
Cleaning in place equipment Efficient showers
Efficient taps Efficient toilets
Efficient washing machines Flow controllers
Greywater recovery and reuse equipment Leakage detection equipment
Meters and monitoring equipment Rainwater harvesting equipment
Small scale slurry and sludge dewatering equipment Vehicle wash water reclaim units
Water efficient industrial cleaning equipment Water management equipment for mechanical seals
Buildings and structures and long-life assets as defined above cannot qualify under the scheme. However, fol- lowing the introduction of the integral features rules, lighting in any non-residential building may potentially qualify for enhanced capital allowances if it meets the relevant criteria.
A limited payable ECA tax credit equal to 19% of the loss surrendered was also introduced for UK companies in April 2008.
From April 2012 expenditure on plant and machinery for which tariff payments are received under the renewable energy schemes introduced by the Department of Energy and Climate Change (Feed-in Tariffs or Renewable Heat Incentives) will not be entitled to enhanced capital allowances.
Enterprise Zones
The creation of 11 new Enterprise Zones was announced in the 2011 Budget. Additional zones have since been added bringing the number to 24 in total. Originally introduced in the early 1980s as a stimulus to commercial development and investment, they had virtually faded from the real estate psyche.
The original zones benefited from a 100% first year allowance on capital expenditure incurred on the construction (or the purchase within 2 years offirst use) of any commercial building within a designated enterprise zone, within 10 years of the site being so designated. Like other allowances given under the industrial buildings code the building has a life of 25 years for tax purposes.
The majority of these enterprise zones had reached the end of their 10-year life by 1993. However, in certain very limited circumstances it may still be possible to claim these allowances up to 20 years after the site was first designated.
Enterprise zones benefit from a number of reliefs, including a 100% first year allowance for new and unused non- leased plant and machinery assets, where there is a focus on high-value manufacturing.
Flat conversion allowances
Tax relief is available on capital expenditure incurred on or after 11 May 2001 on the renovation or conversion of vacant or underused space above shops and other commercial premises to provideflats for rent.
In order to qualify the property must have been built before 1980 and the expenditure incurred on, or in connection with:
Converting part of a qualifying building into a qualifyingflat.
Renovating an existingflat in a qualifying building if the flat is, or will be, a qualifying flat. Repairs incidental to conversion or renovation of a qualifyingflat, and
The cost of providing access to theflat(s).
The property must not have more than four storeys above the groundfloor and it must appear that, when the property was constructed, thefloors above the ground floor were primarily for residential use. The ground floor must be authorized for business use at the time of the conversion work and for the period during which theflat is held for letting. Each newflat must be a self-contained dwelling, with external access separate from the ground- floor premises. It must have no more than four rooms, excluding kitchen and bathroom. None of the flats can be ‘high value’ flats, as defined in the legislation. The new flats must be available for letting as a dwelling for a period of not more than 5 years.
An initial allowance of 100% is available or, alternatively, a lower amount may be claimed, in which case the bal- ance may be claimed at a rate of 25% per annum in subsequent years. The allowances may be recovered if theflat is sold or ceases to be let within 7 years.
At Budget 2011 the Government announced that the relief would be abolished from April 2013.
Business Premises Renovation Allowance
The Business Premises Renovation Allowance (BPRA) wasfirst announced in December 2003. The idea behind the scheme is to bring long-term vacant properties back into productive use by providing 100% capital allowances for the cost of renovating and converting unused premises in disadvantaged areas. The legislation was included in Finance Act 2005 and wasfinally implemented on 11 April 2007 following EU state aid approval.
The legislation is identical in many respects to that forflat conversion allowances. The scheme will apply to prop- erties within the areas specified in the Assisted Areas Order 2007 and Northern Ireland.
BPRA is available to both individuals and companies who own or lease business property that has been unused for 12 months or more. Allowances will be available to a person who incurs qualifying capital expenditure on the renovation of business premises.
An announcement to extend the scheme by a further 5 years to 2017 was made within the 2011 Budget, along with a further 11 new designated Enterprise Zones.
Legislation was introduced in the Finance Bill 2014 to clarify the scope of expenditure qualifying for relief to actual costs of construction and building work, and for certain specified activities such as architectural and surveying services. The changes will have effect for qualifying expenditure incurred on or after 1 April 2014 for businesses within the charge to corporation tax, and 6 April 2014 for businesses within the charge to income tax.
Other capital allowances
Other types of allowances include those available for capital expenditure on Mineral Extraction, Research and Development, Know-How, Patents, Dredging and Assured Tenancy.
Introduction
Value Added Tax (VAT) is a tax on the consumption of goods and services. The UK adopted VAT when it joined the European Community in 1973. The principal source of European law in relation to VAT is Council Directive 2006/ 112/EC, a recast of Directive 77/388/EEC which is currently restated and consolidated in the UK through the VAT