How to maximise capital allowances on farm buildings
© Tim Scrivener Farms could be paying more tax than necessary by overlooking or wrongly applying the structures and buildings allowance (SBA), say advisers.
This is a capital allowance (CA) of 3% a year on a straight line basis and charged against business income for expenditure on the fabric of most farm buildings and other commercial construction projects.
It was introduced in October 2018 and, despite the name, the 3% allowance is available on some items that are neither a structure nor a building, points out Peter Griffiths, tax director with accountant Hazlewoods.
“In fact, it’s available on almost anything that effectively alters the nature of the land,” he says.
See also: Business Clinic: can we convert farm building to a large house?
Examples of relevant expenditure include farm buildings, offices, commercial buildings to let out, new build diversification projects such as a farm shop or play barn, reservoirs, new roads, fencing, walls, bridges and tunnels.
SBA also applies to expenditure on new conversions or renovations, as long as they are non-residential. Buildings must be in use for SBA to be claimed and at 3%, it takes just over 33 years to get the full tax relief.
Detailed quotes and invoices
It’s important to get detailed quotes and invoices for any project because much of the expenditure that makes up the remainder of the building qualifies as plant and machinery, attracting the far more favourable 100% available in the year of expenditure through the £1m annual investment allowance (AIA).
The list of eligible items – fixtures, fittings and integral features – is a long one, but the most common items are electrical, lighting, ventilation, heating and hot water systems.
Moveable dairy equipment, such as a bulk tank, or movable cattle pens/troughs and so on within a big beef or dairy shed, would qualify for plant and machinery CAs and could be covered by the AIA.
Once the full AIA has been used by a company, sole trader or partnership business for such items, then any further qualifying expenditure will usually be eligible for a 6% writing down allowance (on a reducing balance basis) in what is known as the special pool for fixtures/integral features.
Expenditure on solar panels also attracts a lower “special rate” of just 6%, once the AIA has been used. Moveable plant qualifies for an 18% rate.
Additional company allowances
Companies can also claim what is known as “full expensing” which – in addition to the AIA – gives a 100% CA on qualifying expenditure and a 50% first-year allowance for certain special rate assets, such as integral features of a building and long-life assets (new assets only).
Tax efficiency of repairs
If expenditure on a building can be regarded as a repair, this is likely to be the most tax beneficial position, says Peter, as repairs are wholly allowable as a business expense in the year the expenditure is incurred.Â
When farm sales include buildings
When an asset eligible for SBA changes hands, there is no SBA balancing charge or allowance, but the SBA claimed is adjusted for in the capital gains tax calculation.
The new owner will continue to claim the annual allowance of 3% of the original cost. It is important that correct information on what has been claimed through SBA or any other CA is available to buyers.
The issue will arise at the pre-contract enquiries stage of a sale, says Peter Griffiths, with offers often being adjusted according to the CA position.
For example, if the vendor failed to make CA claims they were entitled to make, the ability to do so can pass to the buyer.
To do this, a Section 198 election is entered into to fix a value on the items included in the building that are classed as plant and machinery.
“This is a hot topic because the legislation has changed in the past and if the election is not made, it can result in a significant tax charge for the vendor and no tax relief for the purchaser,” says Peter.
“For example, on a poultry building costing £1m overall, the amount represented by these items could be approximately £500,000, which from a capital allowance perspective, would represent a missed opportunity for a tax saving if the correct claims had not been made.”
If claims have been made, the sale price allocated to those items needs to be agreed. A Section 198 election can be made up to two years after completion, but it should be agreed at completion.
Separately, if an item purchased was built before October 2018, the SBA can be claimed by the purchaser on additional subsequent expenditure, such as an extension to a building.