Capital allowances are available in relation to the construction of an industrial building. An industrial building is a factory mill or similar premises.
Parts of the building not so used are excluded including for example, offices showrooms and retail premises within an industrial building (if they exceed 10% of total cost). In the case of refurbishment, the allowance is limited to the capital element; the repair element is allowable an income tax deduction.
There are and have been various incentive schemes over time which extended capital allowances and capital allowances like deductions to all manner of buildings. Most have been discontinued. See generally the section on income tax.
The principles applicable to capital allowances on industrial buildings are similar to those for plant and machinery. A balancing allowance or balancing charge arises only where the disposal of the building takes place within the capital allowance life of the building.
Capital allowances for buildings and business premises are very restrictive. Apart from special incentives designed to stimulate particular types of expenditure (many of which have been or are being phased out) allowances are only available for so called “industrial buildings”. This may be a building or structure.
Capital allowances may be available for capital expenditure on the construction of qualifying buildings or structures. This includes expenditure on preparatory work reinforcement and strengthening, the addition of walls, access roads, stairways and services. Expenditure on the acquisition of land is not allowed, Expenditure on plant and machinery is not allowed under this category, but may be allowed under the plant and machinery category .
Expenditure is incurred when the obligation to pay arises, for the purpose of the various transitional timelines and dates for qualification.
An industrial building includes a factory, mill or similar premises. It includes an airport, dock, buildings used for intensive production of fruit, vegetable and farm animal, hotels, private nursing homes, convalescent homes, certain qualifying hospitals, sports clinic and caravan and camping sites.
Office or shop and retail building are specifically excluded .Where the non-qualifying part is less than 10% of the entire, the allowances is available (e.g. office in a factory). Where more than 10% is non-qualifying, the full cost referable to non-qualifying part is not allowed.
Capital allowances will be allowed for extensions, strengthening, additions, improvements, addition of fixtures, etc. , as well as the original construction or acquisition cost. Repairs and expenses allowed against income are not allowed as capital allowances, but would generally be allowed against income tax as a revenue expense. It is the cost of work that is allowed. The part of the cost referable to the land or a site is not allowed.
Definition of industrial building
Industrial buildings are also defined to include those in use
- as a factory or mill
- for the purpose of a business comprising the operation and management of an airport where the works comprise a airport runway or apron used for passengers or cargo for hire or reward;
- for the purpose of a business comprising the operation and management of an airport (other than works comprising an airport runway or apron);
- for the purpose of a dock undertaking,
- for the purpose of growing fruit, vegetables and produce in the course of market gardening;
- for the intensive production of cattle, pigs, poultry, eggs, sheep in the course of a trade other than farming;
- for the purpose of hotel keeping and subject to conditions, holiday cottages;
- for the purpose of a registered nursing homes;
- for the purpose of trade of a managing a convalescent home for treating acutely ill persons;
- for the purpose of management of a qualifying hospital, qualifying sports injury clinic, qualifying mental health centre or specialist palliative care unit.
The classic industrial building is a mill or factory. There words are used in their everyday sense. There have been many cases interpreting the meanings of “mill or factory”. It generally implies manufacturing or processing. Providing services such as cleaning, repairing or servicing equipment is not generally sufficient.
Questions may arise as to whether ancillary buildings which are not used for manufacture or processing in themselves, but are used in the relevant business are themselves industrial buildings. On first principles, administrative offices and showrooms which are not an integral part of the building itself will not qualify. If the functions are integrated into the main factory or mill building itself, they are more likely to qualify.
The definition of industrial building excludes any part of a building used as a house (not being a holiday cottage or residential unit), a show room or office, retail shop or any purpose ancillary to the above. Where the part of the expenditure attributable to the non-industrial building use, is less than 1/10 of the total cost, it is disregarded. In other cases, it is apportioned.
What is or is not an office, depends on its function. If activity is an integral part of the processing or fabrication rather than an administrative function it is not an office.
Industrial building allowance/Relevant interest
A fundamental principle of industrial buildings allowances is that that the person incurring the capital expenditure, must have the relevant interest (e.g. freehold or leasehold interest in the property), at the time the expenditure is incurred. The relevant interest may, for example, be the occupational interest of the freehold owner who himself incurs expenditure. It may be the interest of an investor, who later leases the premises to an operator / user.
Industrial buildings allowances are generally available at 4% a year on a straight line (even) basis. In the case of the various incentivised types of development as above, the allowances were typically available over seven or ten years, depending on the nature of the scheme. This coincided with an investment and financing period, being commonly repurchased by the operator at the end of the relevant period.
Allowances are not usually available for property other than for an industrial building. Formerly incentives were given in some cases, which allowed complete write-off of expenditure in the first year More commonly, the capital allowances are spread over a term, commonly 7 or 10 years. These initial buildings allowances have long been abolished.
Certain other premises which are not industrial buildings also qualify for the same relief subject to conditions.
- Registered hotels
- Certain registered holiday accommodation
- Certain intensive production farm buildings
- Buildings for workers recreation and welfare ancillary to industrial buildings
Special incentive schemes which have changed radically over time have extended capital allowances to other property. Most have been phased out although some may still be within their capital allowance life.
Basis of Allowance
An annual industrial building allowance is granted provided
- the claimant is entitled at the end of the relevant accounting period to an interest in the building concerned
- the building is an industrial building at this time
- the owner holds the interest in respect of which the capital expenditure was incurred in the construction or refurbishment of the building
The relevant interest is the interest of the owner who incurred the expenditure.. This might be freehold or a long lease.
See the separate sections on income tax in relation to the calculation of the allowance available. Where the building is constructed for and on behalf of the person or business claiming the allowance, the allowance is based on the construction costs and associated fees.
Where the new building is purchased from a builder/property developer, allowances are granted on the proportion of the purchase price reflecting the construction costs relative to the construction cost plus site costs (but ignoring builders profits.
Where the new building is purchased from a non-builder/property developer, the amount is limited to the lower of the construction costs incurred or the net price payable to the builder/property developer calculated as above.
Generally, the industrial buildings annual allowance is at 4% per year over 25 years. Shorter periods are allowed under the incentive type allowances, many of which have been phased out.
In the same way as with plant and machinery, where the building has not been used during a particular year a notional allowance is made. This reduces the tax written down value. No allowance is made for that year. This may also occur in the case of temporary disuse or where a building is converted to use as an industrial building having not been so used since construction.
Balancing allowances and balancing charges apply if the interest in the building is disposed of. They do not apply where the building is demolished, destroyed or ceases to be used.
Tax life of industrial building
The general capital allowance period is 25 years. After this, there is no balancing charge or allowance. A shorter period applied to incentive type allowances, for hotels, holiday camps, nursing homes etc.
Refurbishment expenditure has a tax life of its own. Other expenditure runs from the time the building is first used.
Where a building is sold during a capital allowance period, the purchaser may be entitled to an annual allowance over the balance of the period. The borrower is entitled to allowances on the cost to the original purchaser, or on his own cost whichever is lower.
Under some of the incentive schemes, the tax life differed to the writing off period.
The amount available is the tax written down value plus balancing charge or minus balance allowance to the seller. The available amount is spread over the balance of the period.
Notional writing down allowance
If the building is not in use or does not otherwise qualify, an allowance is deemed to be made for the purpose of the various calculations. The unused allowance is not available in later years. If a building is temporarily disused, the allowance period continues provided that it is used again. However in the case of permanent cessation, the above termination provisions apply.
Where the relevant interest in the premises (e.g. the interest of the lessor who incurred the expenditure) is sold, the successor may claim allowances on the above basis. It is necessary in each case that it is leased again to a lessee who uses it for one of the above qualifying uses (e.g. industrial building). If it is leased to certain industrial agencies, there may be an entitlement to allowances, notwithstanding non-use in a particular period.
If the disuse is temporary the allowance may be available. The building must have been in use as an industrial building beforehand and become temporarily disused. This may occur in the case of landlords allowances between tenants while a new tenant is being sought.
Where the building ceases to be used or where the interest is sold, there is a balancing allowance or balancing charge if the tax written down value is less time or greater than respectively down the proceeds of sale (insurance or other consideration. Where it was not used in a particular year or for a particular period, there is a notional write-down. Account is not taken of this. The balancing allowance or balancing charge should relate to the allowances actually allowed.
Where the building is purchased during the course of its 25 year or other allowance period, the purchaser may claim capital allowances for the tax written down amount plus or less a balancing charge or allowance to the vendor. This is allowed over the balance of the period. The tax written down amount would reflect the original allowances for construction or refurbishment as proportionately reduced during the part of the tax life concerned. No balancing allowance or charge arises after the tax life has expired.
The landlord may be entitled to the allowances provided the relevant conditions are complied with. It must be the owner of the relevant interest. The building must in fact be in use as an industrial building, in effect by the tenant.