Kingston Smith’s David Goodridge explains some tax saving opportunities based on fixtures – both integral and other features in a building – in the wake of the discontinuation of Industrial Buildings Allowances.
Until April 2008 it was possible for businesses to reduce their Corporation Tax liability by claiming tax relief for the cost of industrial buildings.
These Industrial Buildings Allowances (IBAs) meant that a business could, over the course of 25 years, obtain tax relief for the entire cost of an industrial building.
From April 1, 2008 IBAs began to be phased out and no allowances will be available after April 1, 2011. Given the phasing out of IBAs it is now more important than ever that manufacturing companies consider carefully what other tax saving opportunities are available to them.
Other available allowances – Fixtures
While industrial buildings qualified for an annual tax writing down allowance of 4% of cost, plant and machinery qualifies for an annual allowance of either 20% or 10% on a reducing balance basis. While the whole of the cost of constructing an industrial building would generally qualify for IBAs, certain parts of the building could also qualify for plant and machinery allowances: these items are called, collectively, ‘fixtures’. Fixtures in a building fall into two categories:
1. Integral features – these include electrical systems, cold water systems, space and water heating, ventilation, air cooling, lifts, escalators and moving walkways. These qualify for a 10% reducing balance annual allowances.
2. Other fixtures – any item of plant or machinery that is part of a building, but is not an integral feature. These qualify for a 20% reducing balance annual allowance.
What you need to consider
Many businesses may have relied on claiming IBAs to obtain tax relief for expenditure on a building. Now that IBAs are being phased out, businesses should be looking closely at buildings that they are acquiring or constructing in order to maximise claims for plant and machinery allowances.
In order to make a claim for plant and machinery allowances on fixtures, it is necessary to identify the items and the qualifying cost of those items. If those costs have been directly incurred by the business it should be relatively straightforward to identify the relevant costs, although this can be complicated if the fixture is part of a wider project or construction of a new building.
If the business is acquiring a new building it is still possible to claim plant and machinery allowances on fixtures in that building in respect of a proportion of the purchase price. Costs can be allocated based on the replacement cost of the building and several firms of surveyors specialise in maximising claims for capital allowances on fixtures.
What if I have already claimed IBAs?
If a business has already claimed IBAs on a building then there may still be a possibility of amending that claim in respect of expenditure incurred up to three years ago, provided that the tax returns for these years are not ‘closed’. Essentially, a company may amend its tax return within two years of the end of an accounting period. For example, a company with a 30 September year end has until 30 September 2009 to amend its tax return for the year to 30 September 2007 covering expenditure incurred since October 2006.
If you have made IBA claims in respect of costs incurred in the last two years you should review this expenditure to see whether you could improve your tax position by making claims for plant and machinery allowances in relation to fixtures.
If the tax return in which IBAs have been claimed is ‘closed’, i.e. it is no longer possible to amend the return, it will generally not be possible to change a claim for IBAs to a claim for plant and machinery allowances.
This is because HM Revenue and Customs state that a business has a choice to claim either IBAs or plant and machinery allowances. If a business chooses to claim IBAs this cannot be said to be an error or mistake in the tax return.
Manufacturing businesses should be speaking to their advisers in order to identify capital allowances claims that can be made in relation to fixtures and integral features both in relation to recent costs and future planned expenditure. Delay could result in allowances being lost and increased tax liabilities.
David Goodridge is a partner in the manufacturing group at Kingston Smith LLP.