Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN07 Industrial buildings allowances and agricultural buildings allowances

Who is likely to be affected?

1   All businesses claiming industrial buildings allowances (IBAs) or agricultural buildings allowances (ABAs).

General description of the measure

2   The Chancellor announced today a major business tax reform package, including reform of capital allowances to promote more efficient investment (see BN02). The reforms simplify the structure of capital allowances and remove outdated and unjustified distortions. The package includes the gradual withdrawal of IBAs and ABAs, which will be phased-out over four years.

3   To prepare the way for final abolition, this measure withdraws balancing adjustments and the recalculation of writing-down allowances in respect of balancing events occurring on or after 21 March 2007, unless

•   In pursuance of a relevant pre-commencement contract or

•   In respect of qualifying enterprise zone expenditure.

4   This measure is intended to ensure a smooth transition in cases where industrial or agricultural buildings change hands or cease to qualify for these allowances in the period between the Budget and final withdrawal. It will also ensure that purchases and sales of properties in this period are not unduly affected by tax considerations.

Operative date

5   The measure will apply to those balancing events affected (that is, excluding those in pursuance of a "pre-commencement contract" or in respect of qualifying enterprise zone expenditure) occurring on or after 21 March 2007.

Current law and proposed revisions

Industrial Buildings Allowances

6   IBAs are available under Part 3 of the Capital Allowances Act 2001 (CAA 2001). They replaced the old mills and factories allowance and were introduced in 1945 to encourage post-war reconstruction by productive industry. The broad framework from 1945 remains unchanged, but the scope of IBAs has become much wider and includes buildings and structures like tunnels, bridges, foreign plantations, highway concessions, qualifying hotels and commercial buildings in Enterprise Zones.

Agricultural Buildings Allowances

7   ABAs are available under Part 4 of CAA 2001. Whilst the two regimes are very similar they are not identical. For example, ABAs are only available where the first use of the building is for the purpose of husbandry, and balancing adjustments (see paragraph 9 below) only occur when the party or parties make an election. Where a relevant interest changes hands and no election is made then the new holder inherits the old holder's WDA entitlement.

Writing-down allowances (WDAs)

8   In general, the annual rate of writing-down allowances (WDAs) for a person who constructs an industrial or agricultural building, or buys it unused, is 4% of the qualifying expenditure (the construction cost or purchase price) on a "straight-line" basis. There is an exception for qualifying expenditure on buildings in enterprise zones, which qualifies, under Part 3 of CAA 2001, for an initial allowance of 100% and, where the full initial allowance has not been claimed, a WDA of 25% of any unrelieved expenditure. The allowances are given to the holder of the "relevant interest" who has incurred the qualifying expenditure on the building.

Balancing adjustments

9   When a person ceases to have the relevant interest in an industrial or agricultural building (typically when the building is sold or a leasehold interest comes to an end) there is a balancing event. Currently, this normally gives rise to a balancing adjustment based on any difference between the residue of qualifying expenditure ('RQE' – the cost less allowances claimed) and the proceeds from the event. Broadly speaking, there will be a balancing allowance where the sale proceeds are less than RQE, and a balancing charge where the sales proceeds exceed RQE.

Recalculated WDAs

10 Currently, the new owner on a purchase within 25 years of first use of an industrial building is entitled to a recalculated WDA. Comparable rules apply in the case of an agricultural building, but only if there is an election (see above, at paragraph 6). The recalculated WDA is based on the RQE after the sale, divided by the length of time between the date of sale and the end of the period of 25 years.

Proposed revisions

11 This measure withdraws balancing adjustments and the recalculation of writing-down allowances in respect of balancing events occurring on or after 21 March 2007, unless -

•   in pursuance of a relevant pre-commencement contract or

•   in respect of qualifying enterprise zone expenditure (see paragraphs 6 and 8).

For the new holder of the relevant interest, the WDAs will be based on the previous owner's RQE.

Transitional Provisions

12 A contract is a "relevant pre-commencement contract" if it is:

•   in writing and made before 21 March 2007,

•   unconditional, or its conditions have been satisfied before that date,

•   no terms remain to be agreed on or after that date, and

•   the contract is not varied in a significant way on or after that date.

Further advice

13 If you have any questions about this change, please contact Joy Guthrie on 0207 147 2610 (email: Joy.Guthrie@hmrc.gsi.gov.uk) or Malcolm Smith on 0207 147 2555 (email: Malcolm.Smith3@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk