Industrial Buildings Allowances

Capital Allowances

Depreciation and other provision for capital expenditure, are not allowed as a deduction in calculating the profits of a for income or corporation tax purpose. The financial accounts must therefore be adjusted to add back amounts for depreciation, amortization and other write off  of capital expenditure over time

Tax law allows for capital allowances” as a deduction for certain, but not all capital expenditure. This rules for capital allowances are much more rigid and limited than may be allowed under accounting practice in financial accounts. Certain types of  capital expenditure, in particular for offices and business premises, other than industrial buildings (mainly factories) are not allowed as deductions at all.

Industrial buildings

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.

Ancillary buildings

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.

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.

Amount available

A capital allowance differs from the other common type of taxation incentive, whereby expenditure may be immediately written off a against wide class of income upfront. It is a critical aspect of the capital allowance scheme, that the writing down allowance is available, only while the relevant facility or building is in use for the particular trade or purpose, at the end of the relevant tax year. If the building or facility is not in use for that year, the allowance is denied and (that annual element) is not later available.

Industrial allowances are granted on a straight-line basis. That is an even amount, allowed each year. Some plant and equipment allowances in the past have been on a reducing balance basis. This applied a percentage to the remaining residue of unused allowances.

Amount of Allowance

Where the construction, refurbishment et cetera cost is incurred by the taxpayer, the cost is that related to construction and associated costs.. This includes construction, fees and preparatory site works. Fixtures and fittings which become part of the building may be treated as part of the building works rather than as fixtures and fittings. The cost of land is not allowed

Persons who buy buildings within two years of construction, from a property developer, which have not previously been used,  are entitled to allowances based on the expenditure incurred on construction (referred to as the net price). They is a formula to determine the percentage of the purchase price referable to construction and thereby available as an allowance. This is assessed by reference to the percentage that the qualifying construction costs bears to the construction costs plus site costs.

Where the first sale is by a non-property developer, allowances are granted on the basis of the lower of the construction costs incurred by that party or the net price paid.

The net price is the actual construction cost over actual construction cost plus cost of land  times the amount paid. The amount paid need not equal the actual construction cost plus cost of land as the builders profit etc. is excluded.

In the case where a non-builder incurs the development expenditure, the allowance is the lower of the actual construction cost or the net price paid by the purchaser.

There is provision for swapping between use in the following categories of use; nursing home, qualifying residential unit, a private hospital, mental centres and certain childcare facility. In this case, subject to conditions where it ceases to be used for one purpose and it is used for another within six months, a balancing charge does not apply.

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.