The life of the Business Premises Renovation Allowances (BPRA) scheme has had more major character twists and turns than a pub landlord from Albert Square. The scheme was due for extinction following review by the Office for Tax Simplification but was subsequently extended by the Treasury and has now been tweaked in Finance Bill 2014 and now again in Finance Bill (no.2) 2014.
The scheme is due to continue until April 2017 and will operate under the following new guise from 1st (or 6th) April 2014:
(i) Definition of Qualifying Expenditure:
The existing legislation simply referred to qualifying expenditure being capital expenditure incurred in connection with the conversion, renovation or repair of a qualifying building and had been open to wide (and creative) interpretation.
Subsection (1) s.360B, Capital Allowances Act (CAA) 2001 will be amended to stipulate that conditions A and B must now be met for the expenditure to qualify for BPRAs. Condition A reiterates that the expenditure must be incurred on the conversion, renovation or repair of a qualifying building, whilst Condition B states that the expenditure must be incurred on:
- Building works,
- Architectural or design services,
- Surveying or engineering services,
- Planning applications, or
- Statutory fees or statutory permissions.
This exhaustive list was designed to remove the ambiguity which led to claimants including diverse items of expenditure such as rental guarantees, financing costs or so-called super profits for developers within a claim for BPRAs.
However, the legislation provides that if the expenditure does not fall within the list, the claimant may still include the additional expenditure but only up to a value of 5% of the first three categories mentioned above.
Previously, if an item was deemed to be a ‘fixture’ as defined within s.173, CAA 2001, the expenditure could be included within a claim for BPRA. This allowed claimants to include expenditure on plant & machinery (P&M) within a BPRA claim if the P&M was affixed to the property.
The proposed legislation in Finance Bill (no.2) 2014 amended this definition to allow BPRAs only on items of P&M which are deemed to be integral features within s. 33A, CAA 2001 and falls within the new subsection 3A:
(a) Integral features within s.33A;
(b) Automatic control systems for opening and closing doors, windows and vents;
(c) Window cleaning installations;
(d) Fitted cupboards and blinds;
(e) Protective installations such as lightning protection, sprinklers, fire fighting equipment including fire alarms and fire escapes;
(f) Building management systems;
(g) Telecommunications and network cabling;
(h) Sanitary appliances and bathroom fittings;
(i) Kitchen and catering facilities for occupants;
(k) Public address systems;
(l) Intruder alarm systems.
Therefore, tax relief will be accelerated for items such as electrical systems, cold water systems or lifts which would usually qualify for writing down allowances at 8% per annum only.
(iii) Market Value Restriction
Expenditure will be excluded if it exceeds the market value for the works or services. Market value is defined as a cost which is ‘normal and reasonable’ considering current market conditions and which would be expected to be charged between parties operating at arm’s length.
(iv) Delay in Works
The Government was concerned that BPRAs were claimed for expenditure which may have been subject to a long delay and occasionally on projects which were not completed. In an attempt to counteract this perceived weakness in the legislation, section 360BA will be inserted to CAA 2001 to disqualify expenditure which have not been completed or provided within 36 months of the date of expenditure.
(v) Balancing Adjustments
At present if a disposal event occurs within 7 years of the date of expenditure, a full clawback of the BPRA will be executed. This limit is reduced to 5 years making the scheme much more flexible.
No initial allowance or writing-down allowance will be available if the expenditure or any other expenditure incurred by any person in respect of the same building and on the same single investment project is met by a relevant grant or other relevant payment.
The initial allowance or writing-down allowance will also be withdrawn if that expenditure is subsequently met by a relevant grant or relevant payment, or if any other expenditure in the same building and investment is met by a relevant grant or relevant payment within 3 years.
This restriction will apply to projects which have been met by a State Aid or similar grant or payment which is deemed to be relevant by the Treasury.
The BPRA scheme is a particularly generous though underutilised form of taxation relief available for property investment. The 100% upfront tax relief for usually non-qualifying expenditure provides a genuine incentive to undertake development in disadvantaged areas though there are several conditions which must be considered.
The relief is available to persons chargeable to corporation tax or income tax, therefore the effective cost saving could be up to 45% for additional rate income tax payers. Importantly, sideways utilisation of BPRAs against general income is not caught within the income tax relief cap which was introduced in Finance Act 2013.
For more information, please contact Andrew Reid via email at firstname.lastname@example.org or on 028 2564 7022.