Structures and buildings allowances – the property capital expenditure dumping ground?

Structures and buildings allowances (SBAs) were introduced from 29 October 2018 in respect of new expenditure incurred by businesses on non-residential buildings and structures. SBAs provide tax deductions for expenditure incurred on certain assets that would not previously have qualified for capital allowances, with relief currently given at 3% per annum on a straight-line basis.

As with many recent changes to the capital allowances regime (such as the recent super-deduction for expenditure on new plant and machinery by companies ), the purpose of SBAs is to stimulate capital investment in the UK. 

Longer-term benefit

The almost glacial speed of tax relief (the rate was 2% until April 2020) saw SBAs initially given a lukewarm reception by companies and property investors. However, prior to their introduction, a large proportion of expenditure on property was typically ineligible for tax relief, and therefore SBAs offer a longer-term prize that was overlooked to some extent. For example, on a £10m new build office, perhaps only £3m (30%) of expenditure would qualify for tax relief via plant and machinery capital allowances, leaving 70% of the expenditure ineligible for relief. With the addition of SBAs, the rump of this expenditure also largely qualifies for tax relief, meaning up to £7m additional capital expenditure is brought within the capital allowances regime and up to £1.75m of additional tax relief can typically be realised over time (based on a company paying tax at the 25% corporation tax rate applicable from 1 April 2023). Therefore, despite the slow pace of tax relief, SBAs can often account for the largest element of a capital allowances claim in respect of a new property. 

Sounds good, so let’s just crack on with the claims?

Whilst the additional tax relief is valuable, it is important to stop and think before claiming SBAs, as the conditions to make a claim are stringent. In addition to rules regarding the timing of the contract and the time when the asset is brought in to use, other exclusions must be taken account of.

Of key importance is that expenditure that qualifies for plant and machinery allowances does not qualify for SBAs. This must be borne in mind when considering capital allowances claims.

Another issue to bear in mind is what constitutes a ‘structure’. It can be easy to identify a ‘building’, but less obvious what might be considered to be a structure, a term that is not defined in the SBAs legislation. The guidance provided by HMRC helps in this situation: 

‘Treat something as structure if it has been erected or constructed and is distinct from the earth surrounding it…. Land is not a structure even if it has been cultivated or modified in some way. For example, grass or earthed surfaces such as tennis courts, rough areas, greens and fairways on golf courses, grass football pitches, and grass bowling greens are not usually structures.’

HMRC’s compliance approach

We have recently seen significant levels of HMRC correspondence with businesses, asking an extensive list of questions related to their SBA claims. The questions are particularly probing and include requests for copies of the contract for works, and other documentary evidence demonstrating that a freehold or leasehold interest is held in the building or structure, the date it was brought in to use, and how the qualifying expenditure has been calculated. 

In short, the probing nature of the questioning will expose incorrectly made claims. Identification of incorrect SBA claims could also be the thin end of the wedge, providing an opportunity for HMRC to lose confidence in other aspects of a taxpayer’s affairs and broaden out its enquiries.

Take advice

Whilst SBAs can be perceived as a ‘poor relation’ or ‘safe haven’ within the capital allowances regime, the relative value of claims can be high, and strict criteria to make a claim are in place. Therefore, it is imperative that property-related expenditure is given due care and attention as part of capital allowances claims, and not just dumped in the ‘one size fits all’ SBA pool.

RSM’s capital allowances specialists can provide guidance and support in relation to SBA claims, helping to ensure compliance with the legislation by using solutions such as our Capital Expenditure Review Tool (CERT) for multi-site operators.

For more information, please get in touch with Peter Graham, Paul Smith, Rupert Guppy or your usual RSM contact