Agricultural buildings allowances (ABA) are available for capital expenditure incurred on the construction of agricultural buildings. These include barns, farm buildings, and cottages. A farmhouse also qualifies, but the allowance is restricted to only a third of the expenditure incurred.
For capital expenditure to qualify, it must be expenditure incurred on the construction of an agricultural building, for the purposes of husbandry on the land. In addition, the 'relevant interest' should not have been sold, or if it has been sold, it has been sold only after the first use of the building. Generally speaking, the 'relevant interest' is the freehold or leasehold to which the person incurring the expenditure was entitled.
'Husbandry' includes any method of intensive rearing of livestock or fish on a commercial basis for the production of food for human consumption, and the cultivation of short rotation coppice.
Unlike industrial buildings allowance (IBA), there are no provisions for restricting allowances if the building is not in agricultural use at the end of an accounting period. However, if the first use of an agricultural building is for non-agricultural purposes, no allowances are to be given. Any allowances already given are clawed back.
Like IBA, relief is given at 4 per cent per year on a straight-line basis, with the result that no relief is given after the building has passed its 25th year.
Balancing adjustments
Budget 2007 provides for the phasing out of ABAs with effect from 2009-10. However, in order to ease the way to its abolition, 'balancing adjustments' are withdrawn in respect of any contracts entered into for the disposal of agricultural buildings on or after 21 March 2007.
In the last post, we saw the operation of balancing adjustments for IBA. The position differs for ABA in that a balancing event does not automatically take place. For ABA, the default position is that the seller claims the allowance in the final year, but only in proportion to the length of time he owned the building in that year. So if he sold the building in the ninth month of his accounting period, his ABA for the final period will be:
'4 per cent of qualifying expenditure on the building x 9/12'.
The buyer is entitled to the remaining 3/12 of the allowance.
However, if the seller and buyer agree, they can elect jointly for a balancing adjustment to be made.
In order to work out whether a balancing allowance or charge has arisen, one must have recourse to the 'residue of qualifying expenditure' (RQE). The RQE is expressed in the following formuls:
QE +B - A
where QE is the qualifying expenditure;
B is the total amount of any charges that have been made in respect of that expenditure, and
A is the total amount of any allowances that have been given in respect of that expenditure.
Let us take the example of a farmer who incurred qualifying expenditure of £100,000 on the construction of a barn in the year ending 31 December 2005, and who has just sold the building for
(a) £100,000 and
(b) £50,000.
As he would have claimed ABA for both the year ending 31 December 2005 and 31 December 2006, he would have a RQE of £92,000 (ie £100,000 x 4 per cent in two years).
In scenario (a) above, the proceeds (ie £100,000) are greater than the RQE (£92,000). It means that no allowances should have been given, and all allowances given are therefore clawed back, in the form of a 'balancing charge' on the seller. The balancing charge is equal to the amount by which the proceeds exceed the RQE, ie £100,000 - £92,000 = £8,000.
In scenario (b) above, the proceeds (£50,000) are less than the RQE (£92,000). This means that the farmer has not yet received enough to compensate for the qualifying expenditure he incurred. A 'balancing allowance' will therefore arise, equal to the amount by which the RQE (£92,000) exceeds the proceeds(£50,000), ie £42,000, and the seller can deduct this in his tax computation.
In doing the calculations, if proceeds exceed cost, you must restrict them to cost.
And what happens to the buyer? He takes over the RQE and spreads it over the remaining tax life of the building, claiming the allowances that way.
The changes announced in Budget 2007 will mean that for contracts entered into on or after 21 March 2007, the above calculations will no longer apply. Instead, the 'default' method must be used in all cases, the seller claiming a time-apportioned allowance, and the buyer claiming the rest. This is bad news for sellers who would otherwise have been entitled to balancing allowances.
One more thing: the Budget rules only mention 'contracts'. What happens in the case of deemed disposals, eg where a building is destroyed or demolished? I expect to see some legislative provision for that, setting in such cases the date of destruction or demolition as the relevant date on which balancing adjustments will cease.