There has been increasing financial pressure on construction and property companies over the past couple of years, with rising interest rates and inflation both of materials and wages to consider.
Additionally, tax changes such as the increase in the main rate of corporation tax to 25% are also compounding the pressure felt by all businesses, which has a knock-on effect on both the commercial and residential property market.
Consequently, the old saying that ‘cash is king’ applies again, and this can be applied to your tax bill as well.
You may be constructing or refurbishing buildings and you may be thinking about keeping cashflow going. Tax can be a second thought at this point, but there are several areas where it could create a substantial cashflow benefit for your property development or investment company.
Capital allowances – how will they help me?
These are primarily an issue for commercial buildings, although they are also available for the common parts of residential buildings, so should not be neglected there either.
Capital allowances are the tax system’s way of giving you tax relief on the acquisition and depreciation of plant and machinery.
Therefore, if you are constructing or refurbishing commercial property, these should be a substantial part of your planning. Plant and machinery in these terms includes a wide variety of things, from fixtures such as storage units through to what are known as ‘integral fixtures’, being electrics, water systems, heating systems and other similar assets.
Generally, relief is given on a reducing balance basis, at 18% or 6%, depending upon the asset, however, the first £1m of assets acquired in an accounting period are covered by Annual Investment Allowance (AIA), which is a 100% first year write off (excluding cars).
Additionally, for assets (excluding cars) acquired between 1 April 2023 and 1 April 2026, full expensing, which means a 100% first year write off for tax purposes, is available to all ‘main pool’ plant and machinery, and 50% of any ‘integral features’ as above (over and above the £1m AIA).
Depending upon the building, such assets can be anywhere from 10-25% of the build cost of a building. Additionally, during a refurbishment, there are many items that can be regarded as repairs and expensed, such as replacement of roofs or windows.
All these items are frequently not identified and claimed for, as the detail is hidden in the building documentation and QS valuations. A review of these by a knowledgeable tax adviser can free up significant amounts of tax relief.
Provided that the assets/building is still owned and in use by your company, then even if this has already happened, this can still be re-reviewed.
If this is completed within 12 months of the filing deadline of the relevant corporation tax return, then the full 100% allowances can be claimed, otherwise the lower rates of 18% and 6% per annum would apply.
Also, capital allowances are critical when buying or selling such a property, and tax advice should be taken at an early stage. For all sales of commercial property since 2014, both sides have been required to agree the value of the capital allowances to be transferred with the property, on a Section 198 Election (Section 199 for Leasehold).
If this is not completed and sent to HMRC within two years of the transaction, then the purchaser cannot claim any of the capital allowances transferred with the property.
Frequently, such elections are not compliant, and therefore tax advice should be taken to ensure these are validly enacted.
In some circumstances, depending on the prior ownership and capital allowances claims on the property, it may be possible for the buyer to make a claim for previously unclaimed capital allowances on the property.
In these circumstances, the seller must bring these capital allowances into account, pre-sale, for these to be passed onto the buyer.
The buyer can do this, make the appropriate claim, then refurbish the property and claim capital allowances on the relevant costs of the refurbishment.
Tax advice should be taken at the earliest point as frequently the standard pre-contract enquiries are not always replied to fully by commercial conveyancers, so there may be areas where professional advice is required.
Land remediation relief – why think about it now?
Land remediation relief is available to any company that is subject to UK corporation tax that could be developing or investing in property and consists of a further tax deduction of 50% on expenditure that relates to the remediation of contaminated land.
Any brownfield site could potentially contain industrial pollutants from previous industrial use, whether there or at sites in the locality, and you will be providing contingencies in the build cost to cover dealing with these.
The planning for these projects and the associated reliefs should start before acquisition of the site. Where remediation work is subsidised, then relief cannot be claimed. Therefore, it is important to review contractual documents at this point, to ensure that we don’t lose the right to these tax credits.
The difficulty with identifying these costs is always that, with the passage of time, it becomes harder to identify specific costs related to dealing with contamination.
Qualifying costs for LRR are costs that are additionally incurred to remediate land that is suffering from industrial contamination; therefore, the main difficulty comes in identifying these costs after the fact.
Whereas, if you are aware of these expenses and time costs at the time, they can be monitored on an ongoing basis, and records maintained that enable a future claim for LRR.
The LRR minimum of 24p in the pound on any remediation expenditure can make a significant difference to the bottom line for any development project, and with a little prior thought, this claim can be maximised.
How we can help
At Williamson & Croft, we take pride in our expertise and dedication to helping our clients maximise their financial benefits through strategic tax planning.
Our team of skilled professionals understands the complexities of these tax incentives and ensures that our clients can make the most of the available opportunities.
With our in-depth knowledge of the ever-evolving tax regulations, we assist businesses in identifying qualifying assets and expenditures to claim capital allowances effectively. By partnering with us, clients can confidently navigate these intricate tax schemes, reduce tax liabilities, and ultimately enhance their financial performance and competitiveness in the market.
Contact us today for further information.