Tax allowances, incentives and business costs

Legislation offers tax relief by allowing expenditure on certain assets to be depreciated (offset against the taxable profits of a private commercial organisation).

The significance of tax relief depends on the volume of allowable expenditure. This varies considerably, according to the type and function of an asset, its design and sophistication (particularly in respect of services) and whether or not the project in question is a new building or a refurbishment.

The impact of tax relief on the life cycle evaluation lessens proportionately with the ratio of allowable expenditure to total expenditure, and the timing of relief, which is dependent on the annual rate of taxation allowances. For example, a new oil refinery will have a greater proportion of allowance than a shop unit shell.

The impact of tax relief should be sensitively tested at the earliest possible stage. Only if it is found to be significant should a detailed estimate of the allowable expenditure be prepared.

The following example shows the net discounted cost after tax relief of £1,000 spent on differing types of expenditure.

1. 50% of £1,000 x 25% reducing balance x 35% corporation tax with future allowances discounted at 10% per annum (a discounting calculation is required in order to establish the above figures).

Changeable rates

The Finance Act 1985 established the following capital allowances relating to real property:

Subsequent to the Finance Act 1997, first-year allowances were changed. Surveyors should check the current legislation.

In certain circumstances, allowances may be at a higher rate, relating to specific incentives, certain assisted projects or expenditure during a transitional period (such as under the terms of the Finance Act 1984, applicable until 31 March 1987).

Different types of allowances - initial, first-year and writing-down - are explained in Glossary of taxation terms.

Percentage allowances

Straight-line allowances are calculated as a percentage of original cost; at 4%, the allowance is spread evenly over 25 years. A reducing balance computation is achieved each year by first deducting all previous allowance amounts from the original cost and then applying the allowable percentage to the balance: i.e. 25% in the first year, 25% of 75% in the second year, and so on. While the building itself may be subject to a 4% straight-line allowance, the plant and machinery in the building will receive a 25% reducing balance.

It should be noted that the significant part of capital allowance relief on a 25% reducing balance basis comes in the first 5-7 years. This is included in the above example, where the amount of tax relief is a product of the incremental annual writing-down allowance, discounted.

Regional development grants (or their Northern Ireland equivalent) may also be available. These are not treated as taxable and may be disregarded when assessing the capital cost upon which tax relief is calculated.

Currently, the running and maintenance costs of an asset are deductible in full against taxable profits in the year of expenditure (i.e. an 100% allowance).