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Recent changes to capital allowances for large infrastructure projects

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The recent FTT decision in SSE Generation Ltd v HMRC [2018] UKFTT 416 (SSE) (reviewed in ‘Capital allowances in large infrastructure projects’ (Matthew Hodkin & David Schultz), Tax Journal, 12 October 2018) highlighted not only the difficulties in distinguishing where to draw the legislative line when applying the UK’s capital allowances regime in CAA 2001 to expenditure on complex infrastructure projects, but also the economic importance of obtaining capital allowances on such projects under the current ‘all or nothing’ approach to capital allowances.

Prior to the removal of industrial buildings allowances (IBAs) from 1 April 2011, expenditure on a project that consisted of a mixture of structures, buildings and equipment (such as a railway depot or factory) would typically be capable of depreciation for tax purposes almost in its entirety, with expenditure qualifying for a mixture of IBAs and capital allowances. Although IBAs were only available on a 4% per annum straight line basis, the fact that the expenditure was capable of depreciation at all was economically important to taxpayers. However, since the abolition of the IBA regime, taxpayers faced with a large mismatch between their accounting depreciation and their tax depreciation were forced into arguments such as those brought by the taxpayer in SSE (largely successfully) to the effect that expenditure on what might ordinarily be considered a structure should instead qualify for capital allowances. This gave rise to some of the difficulties highlighted by the FTT decision in SSE, such as the fact that expenditure on certain types of water conduit qualified for capital allowances, whereas other types of conduit did not so qualify and SSE therefore received no tax relief on its expenditure on those items.

The Budget 2018 announced a new regime which may go some way to addressing this ‘cliff edge’ by introducing a new structures and buildings allowance (SBA). Whilst the Finance (No. 3) Bill 2017–19 contains little detail and provides that the specific detail of the SBA regime will be introduced by way of regulations, HMRC has released a technical note that contains more information. The technical note states that there will be a straight-line 2% annual allowance for expenditure incurred to build new commercial structures and buildings (i.e. allowing the expenditure to be written off over 50 years), including costs for new conversions or renovations. This will apply where the contracts for the physical construction works are entered into on or after 29 October 2018. Unlike the IBA regime however, there is no balancing adjustment on sale of the asset. Instead, it appears that the purchaser will simply take over the remainder of the allowances written down for the remaining part of the 50 year period. Land costs will not be eligible for SBA relief.

Importantly, expenditure on ‘integral features’ and fittings of a structure or building that currently attract capital allowances as expenditure on plant and machinery will continue to qualify for those allowances, rather than being required to apply the less generous SBA regime. However, there is a provision in the Finance Bill that makes it clear that references to ‘plant’ in list C in CAA 2001 s 23 do not include plant that is excluded by either of ss 21 or 22. This means that some of the arguments made by SSE in relation to the hydro-electric plant would no longer be successful, although the availability of the SBA will help in this regard.

Whilst the SBA regime is welcome news, the Finance Bill also confirmed that the writing-down allowance in respect of ‘special rate expenditure’ (being expenditure on, amongst other things, certain long-life assets and integral features) will be reduced from 8% to 6% with effect from April 2019. 

Issue: 1422
Categories: In brief