Tax allowances, incentives and business costs

Before calculating the effect of taxation allowances, certain parameters need to be established:

• the corporation tax and allowances rate that will be current at the date of construction of first use;
• the future corporation tax and allowances rate at the date of replacement;
• the corporation tax rate current at dates between the date of construction or first use and the date of replacement, against which revenue running costs can be charged;
• whether the owner will be liable for tax during the period between the date of construction or first use and the date of replacement, and whether the owner will have sufficient taxable profits to use the allowances generated in any one year;
• whether an item's economic life will be shorter than the tax write-down period. This will either generate an added write-down amount when it is demolished, or, if the item or building is to be sold at the end of its economic life, its profit or loss on cost. These circumstances will generate a taxable profit or loss on proceeds above or below the tax write-down value, and will attract a balancing adjustment; and
• the value of balancing allowances, charges or taxable profits, considered against the relevant corporation tax rate.

The impact of these adjustments needs to be taken into account in the life-cycle costing assessment.

Caution is necessary as there are further specific restrictions. The recipient must prove to the HMRC that they qualify. The entitlements are aimed at providing incentives for commercial organisations, and expenditure on residential purposes is therefore largely excluded. Entitlements are also restricted between connected persons.

Value-added tax

Capital allowances are given against the net capital cost to the taxpayer. As value-added tax (VAT) is part of that capital cost, clients will incur differing overall capital expenditure for the same item depending on whether they can or cannot recover, or can recover only a proportion, of the VAT.

Dynamics

The surveyor must appreciate the variables and frequent changes that occur in respect to the application of taxation allowances. These arise for a number of reasons, including the following:

• the government uses taxation to impose fiscal policy and influence the economy. Statutes are therefore introduced amending previous rates of depreciation, regulations and entitlements;
• the interpretation of entitlement is affected by case law precedence; and
• HMRC practices develop, as do extra statutory concessions, to address specific issues or vagaries.

Applications

Taxation allowances provide the opportunity for innovative funding arrangements whereby tax relief can be 'exported' to a party that can enjoy more benefit from the entitlement.

The allowances also need to be considered during property transfers, so that the relevant balancing adjustments can be calculated and the purchaser advised of his or her proper entitlements.

See Worked example 2 for a summary of the effect of capital and revenue allowances and Worked example 3 for a detailed calculation of the capital and revenue allowances.

Business rates

Large plant and machinery regarded as an integral part of a building can attract additional rates, which can be influenced by design niceties (such as how the plant is covered over). Expert advice should be sought in such situations.