Structures and Buildings Allowance – A Missed Opportunity?
A longstanding topic of debate within the practitioners’ community is whether the UK tax system can actively incentivise investment, especially in the construction and real estate sector. Admittedly, it isn’t a subject that polarizes popular opinion along the lines of football’s video assistant referee (VAR) or reality TV’s “Love Island.” Nevertheless, there is a healthy exchange of views as to whether tax charges or reliefs tangibly influence the decision to invest in our built environment. Here, in AECOM’s Fiscal Incentives team, we specialize in tax allowances and depreciation, regularly reviewing our clients’ expenditure to identify savings or credits generated through the tax system. Therefore any legislative changes which result in real cash benefits are always of particular interest to us.
A good example of this is the new Structures and Buildings Allowance (SBA), introduced this year. It is the first new relief under the UK’s capital allowances (CA) regime in more than 10 years. The SBA is designed to stimulate activity in the construction sector, mitigating taxable profits through expenditure incurred on non-residential buildings and structures at a rate of 2 percent per annum over 50 years. Although I won’t seek to assess the detail or operation of the SBA – plenty has been written (refer to our Technical Briefing) – but rather address the practical challenges to be considered and make the argument that this relief doesn’t go far enough as a genuine incentive.
Unlike the CA rules for plant and machinery fixtures, SBA offers only a timing relief for building owners rather than a real cash benefit. The adjustment of base costs upon disposal means that the benefit can be clawed back when you dispose of the asset. Occupiers will be the real beneficiaries as their expenditure will be fully relieved. Undoubtedly there will be a positive impact on working capital for companies that will free up cash for further investment. In practice, there is a requirement for owners to maintain and pass records to future owners for a 50-year period. This is likely to result in future stakeholders losing interest and information with the trail going cold, resulting in a loss of relief, especially where non-taxpayers and traders form part of the ownership cycle. Management of data will be critical to ensure that the benefit is identified, preserved and transferred.
The SBA rules generally exclude all forms of residential accommodation apart from care homes. Arguably, this is a missed opportunity to mitigate the deficit in UK residential development. The legislation could potentially be refined to differentiate between private domestic dwellings – and the private rented sector at the vanguard of speculative development to stimulate and support future supply.
There are examples of where the tax system actively supports construction on real estate. We would argue that Enhanced Capital Allowances (ECA), whilst imperfect and complex to administer, did a lot of good work raising the profile and use of energy and water-saving technologies in modern buildings. It was a regular point of discussion with clients and although it isn’t necessarily driving specific solutions, it did stimulate thinking within design teams. Following the withdrawal of ECA from April 2020, it will be interesting to see the detail around the replacement HM Revenue and Customs (HMRC) envisages in maintaining the sustainable agenda for our built environment.
Similarly, the tax credits for research and development capturing embedded innovation in the design process are generous, but still not broadly understood or utilized by designers for operational expenditure considered part of the “day job”.
The tax legislation around property has become increasingly complex as the sector adopts more sophisticated approaches to ownership, financing and technology. This has been an anti-avoidance response to perceived revenue leakages to HMRC. However, we are on the verge of a paradigm shift in the industry as new methods and materials impact on design and construction processes. If we are truly serious about incentivizing capital investment (especially in specific sectors), the tax system, including CA, will need to keep pace and play a significant part.
SBA may be an initial dip of the toe in the water of an admirably simplistic and broader-reaching relief, but, if adapted, it could form the basis of an effective incentive for future investment. It may even be a more interesting discussion than VAR. Here’s hoping!