Budget 2007 - industrial buildings allowance

Industrial buildings

The allowance is available for construction costs of 'qualifying buildings' used in 'qualifying trades'. In very broad terms, the relief is available where buildings are used in industrial purposes, such as manufacturing processes. See the Capital Allowances Act 2001 section 274 for more details.

The relief is given to the person with the 'relevant interest' in the building, normally the owner of the freehold. A lessee may hold a 'relevant interest' if he incurred the expenditure at the time he held the lease. However, in certain circumstances where a 'long lease' (ie one with a term greater than 50 years) is granted, both lessee and lessor may make a joint election with the effect that the lessee (and not the lessor) becomes entitled to claim the allowance.

The construction costs that are eligible for relief (ie the 'qualifying expenditure') include costs incurred in preparing land for building. However, the purchase price of the land does not qualify. This is taken into account when the land is sold, so there is no need to give relief here. Ineligible expenditure will also qualify under the de minimis rule, if the total such cost is less than 25 per cent of the total construction cost.

The relief is given as a 4 per cent writing down allowance, which operates on a straight line basis. The result is that, if the building has been in industrial use throughout, at the end of 25 years, there should be no more allowances to claim.

To acertain whether a building qualifies for the allowance for any tax year, look at the last day of the accounting period of the trade in which the business is used. If it was in industrial use on that day, it qualifies. If not, it doesn't. Even if the building is not in use, a notional 4 per cent allowance is deducted, in other words, you pretend as if there was an allowance. If the building was not in use (whether industrial or non-industrial) on the last day of the accounting period, you must look back to decide 'when the building was last in use, was it in industrial use or not?'. If it was, then you assign it as being in industrial use, and deduct the 4 per cent allowance. If it wasn't, you assign it as not being in industrial use, and deduct the 4 per cent, but only notionally.

Balancing adjustments

Suppose you decide to sell the building before the 25 year period is up?

First, you cannot claim a 4 per cent reduction in the tax year in which the building is sold.

Second, at the point you come to sell the building, you will have a brought forward 'written down value', which is what the building should be worth, after taking into account both real and notional deductions.

Third, you need to do a 'balancing adjustment'. The way this works is that you look at the proceeds of sale. If the proceeds of sale are greater than the cost of the building, ie you make a profit, then it means that the allowance should not have been given in the first place.

The allowance is meant to shield you from the reducing value of the building, so if you sold at a profit, then it means that there was no need for the allowances. You will have to repay all the allowances you claimed over the years. This is called a 'balancing charge'.

If, however, you sold the building at a loss, you need to check whether you have claimed all the allowances you should have, or even whether you had claimed more than you should.

The first question to ask is, was the business in industrial use for the whole period in which you owned it? If the answer is yes, then deduct the amount you received on the sale from the written down value of the business. If you end up with a positive figure, you have a balancing allowance, ie more tax relief. If you end up with a negative figure, it means you have claimed more allowances than you should have, and you need to pay the excess to HMRC.

If the building was not in industrial use the whole time, you need to do an apportionment calculation to find the proportion of the cost that related to industrial use. Then deduct from the 'adjusted net cost' any allowances you have already taken. You will have a balancing allowance or charge, depending on whether you end up with a positive or negative figure.


And what about the purchaser of the building? He is also entitled to allowances if the building is still in the 25 year period. However, he does not just pick up from where you left off, and go on claiming a 4 per cent allowance per tax year. His annual allowance is worked out as follows:

{Residue after sale/Building's remaining tax life in months} x 12

The 'residue after sale' is the tax written down value of the building, less the balancing allowance, or plus the balancing charge, as appropriate. If the residue after sale is greater than the price the purchaser paid for the building, it is restricted to that price.

Effect of changes in the Budget

The effect of the changes announced in the Budget is that for contracts of sale of an industrial building made on or after 21 March 2007, there will be no more balancing adjustments. There will be no calculations to see if too little or excess allowances have been claimed.

And as for the purchaser, rather than using the formula above, he just takes over the written down value of the building, and claims a 4 per cent deduction every tax year, as the original owner would have done.

For people making contracts to sell after that date, good news for those whose buildings have been in non-industrial use, as they will escape the balancing charge. However, not very good news for those who would have been entitled to a balancing allowance, as they will not now be getting it.