Budget 2018 - Reaction

E³ Consulting highlights the key Property & Construction aspects.

Budget 2018

Chancellor Philip Hammond MP delivered another Autumn Budget – at least this time in Autumn and not the middle of December!

 E³ Consulting highlights the initial key Property & Construction aspects – as referenced from the Budget  ‘Red Book’ 2018.  

There are quite a number of more radical changes that may have longer term impacts to the property and construction sector – that will not become entirely evident for some time!  

Some of the changes ‘kick in’ immediately – whereas others will be fed through the next few tax years.  Careful and timely advice is recommended to ensure you understand the impact of these immediate and future changes to the capital allowances rules.  Tax payers need to remain vigilant as to the impact of any ‘unintended consequences’ of the precise legislation – in due course.

3.22 Annual Investment Allowance (AIA) – The government will increase the Annual Investment Allowance to £1 million for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020, to help stimulate business investment.

Boosting AIAs to the first £1m for the next two years was partly expected as both CBI and IoD has lobbied hard on increasing the AIA cap over a number of years.  At £1m this will greatly simplify the capital allowances for many Owner Managed Businesses as virtually all the available allowances will be given in the first year – for investments up to about £5m; given that on average some 20% of project expenditure is eligible for capital allowances.

3.23 Structures and buildings allowance (SBA) – New non-residential structures and buildings will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018.  This addresses a significant gap in the UK’s current capital allowances regime, and will improve the international competitiveness of the UK’s tax system.  Further information on this measure was also published alongside the Budget.

Whilst half as generous as the previously abolished Industrial Buildings Allowances (IBAs) these new capital allowances category will provide a very real incentive to property owners to invest further and secure these allowances.  For the first time – all new built commercial property will benefit from tax relief on the entire project cost – albeit some as SBAs at 2%, some as Plant & Machinery Allowances (PMAs) at 18% and Integral Feature Allowances (IFAs) at 8% but reducing to 6% from April 2019 (see below).  Clearly the Chancellor is seeking to encourage UK businesses to relax the purse strings and invest now in UK means of production.

3.24 Capital allowances special rate reduction (8% to 6%) – From April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6% to more closely match average accounts depreciation.

As we know the Chancellor has to balance his books and thus there are always some measures taking away from industry, rather than giving to.  Here Integral Feature Allowances (IFAs) and Long Life Asset Allowances (those for assets of 25 year economic life or more) are both part of the Special Rate Pool given at Writing Down Allowances (WDAs) of 8% per annum on reducing balance basis.  These will now be reduced back to 6% from April 2019 (as they were prior to April 2008).  Whilst these will reduce the cash flow benefit of these particular allowances – the SBAs (see above) will more than compensate for those investors undertaking new commercial projects from today!

3.53 Enhanced Capital Allowances (ECAs) – The government will end ECAs and First Year Tax Credits for technologies on the Energy Technology List and Water Technology List from April 2020.  These ECAs add complexity to the tax system and the government believes there are more effective ways to support energy efficiency. The savings will be reinvested in an Industrial Energy Transformation Fund, to support significant energy users to cut their energy bills and transition UK industry to a low carbon future.

This was a bit of a surprise announcement, but recognises that the current system is perhaps more complex than necessary – and often debated with HMRC.  Transformation of ECAs to link with EPCs or BREEAM ratings would have made more sense to maintain the ‘carrot & stick’ approach to encouraging Landlords and building owners to modernise their properties and improve their environmental impact – alongside the MEES regulations (the big stick!).  That said the introduction of the SBAs makes ECAs a timing difference only and for the vast majority of building projects the 100% AIAs will suffice!  So in all this is really a big simplification of the rules.

E³ Consulting provides specialist property tax advice to owners, investors and occupiers of UK real estate from offices in Southampton and London advising on Capital Allowances, Land Remediation Relief, VAT, Repairs and Maintenance and Community Infrastructure Levy (CIL). Please see our website or follow us on twitter to keep up to date with views and technical updates on property tax matters.

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