The new clauses will be inserted into the Capital Allowances Act 2001 at section 270.
Prior to releasing this version of the Regulations, HMRC published a summary of responses to the technical note and the consultation around the draft legislation, to which Operis contributed. HMRC’s guidance on the SBA was published on 15 August.
Student accommodation will not qualify for SBA
Highway concessions are brought within the regime
Good news for lessees with leases over 35 years
SBA will now continue through periods of disuse
What has changed?
While the general principles remain the same, there are a number of changes to the original proposals in the technical note, and I focus on these.
Evidence Requirement – “Allowance statements”
More detail is now known on evidence requirements before the relief can be claimed. The first claimant will need to produce a written statement called an “allowance statement”. New owners will inherit the vendor’s allowances, and must obtain the allowance statement from the previous owner.
This statement must include
The date of the earliest written contract for the construction of the building or structure
The amount of qualifying expenditure incurred on its construction or purchase
The date on which the building or structure was first brought into non-residential use
Information to identify the structure, such as the address
How are Project Finance sectors affected?
It was unclear whether the Government would consider representations made to include student accommodation within the SBA regime, but it has now confirmed that student accommodation will not qualify for SBA.
A section of the new legislation deals specifically with the student accommodation sector, and excludes accommodation that is
purpose built or converted for occupation by students, and
available for occupation by students on at least 165 days of each calendar year.
On a brighter note, there is a specific section of the legislation for highway undertakings and concessions, which enables claims, even though the concessionaire would not normally have the relevant interest in land for a claim.
Under the new rules, being entitled to a highway concession will give you the relevant interest in land for the relief, if you incurred the expenditure on the construction of a road. The legislation is designed to assist concessionaires in claiming SBA and allowing roads to fall within the regime.
Under SBA a road will be eligible for relief if it is commissioned by a public body, which is defined as the Crown, or any government or public or local authority.
Composite trader tax treatment may still be relevant for some roads, and so each one will need to be considered on its own merits.
What is new for Disposals and Periods of Disuse?
It is confirmed that there is no claw back of relief through the SBA regime, so no balancing allowances or charges.
When a building or structure on which SBA has been claimed is sold, it will be treated as a capital gains tax (CGT) event. Originally the Government intended to claw back the SBA relief already claimed by reducing the amount of the allowable by cost in the gains calculation by that amount. The new claw back mechanism increases the sale proceeds by the amount of the SBA already claimed instead.
The purchaser will inherit the tax written down value of the building and continue claiming the 2% straight line relief.
Periods of Disuse
The Government originally intended that no SBA would be available for periods of temporary disuse. However, it acknowledges that record keeping would be onerous for taxpayers if they were required to monitor periods of disuse, and also that commercially, there is a strong incentive for owners or investors to minimise periods of disuse.
The rules on disuse have been amended so that a structure or building will retain its SBA eligibility during a temporary period of disuse, provided it is not used for a residential purpose during that time.
Leases – Good News for Lessees
Lessees with leases over 35 years now have enhanced rights. Where the lease exceeds 35 years and the market value of the lessor’s interest is less than one third of the amount paid as a capital sum by the lessee, then the allowances are transferred to the lessee for the duration of the lease.
It was originally intended that SBA would pass to the landlord when a lease expired or was terminated, even though the tenant had paid for the works. The Government has now agreed that tenants will keep the benefit of the SBAs if the lease is renewed, extended or replaced. The tenant’s entitlement to SBA will cease if they receive a payment from the landlord or the new tenant for the surrender of the lease.
Where the term of a lease is not more than 35 years then the lessor will normally have the relevant interest in land to claim the allowances.
The Regulations provide more detail and clarity around the new rules, and the regime should prove useful to certain types of infrastructure assets in the Project Finance industry.
Claiming the SBA will not be right for everyone, and its interaction with corporation tax and CGT should be considered. The clawback of allowances, and no relief for unrelieved capital expenditure at the end of the project life make it less attractive than some alternative reliefs.
Where the tax payer was unable to claim any tax relief on buildings or structures before, the cashflow benefit of the tax reduction over a period of years will be worth having, even if it is ultimately clawed back towards the end of the project life.
We expect to see Project Finance industry take up of the relief in the financial models that we see at Operis.