Not so very long ago, if a farmer asked me whether expenditure on a new agricultural building might attract any tax relief, the answer was usually somewhere between "not much" and "none at all". Thankfully the position today is much improved, due in no small part to a relatively new allowance for capital expenditure known as the "Structures & Buildings Allowance" (or SBA for short).
To explain, expenditure incurred by a farm on acquiring/ constructing a new agricultural building is capital expenditure, rather than revenue expenditure, and that means the expenditure is initially recognised as a fixed asset in the balance sheet. Fixed assets are normally "depreciated" over a period of several years, which means that the outlay on the building is eventually recognised in the profit & loss account as a trading expense, often over many years.
UK tax rules, however, do not recognise depreciation as an allowable expense (there are one or two very limited exceptions which we don't need to go into here). Instead, there is a system of "capital allowances" which gives the business relief for its capital costs - but only for certain assets.
Until the SBA came into being, the cost of constructing or renovating buildings often attracted relatively little tax relief. Certain "integral features" included within the fabric of a new building qualified for capital allowances, including electrical systems, cold water systems, heating and ventilation systems; but in many agricultural buldings such features may represent a very small proportion of the overall cost.
That all changed in 2018. Expenditure on a building or structure under a construction contract entered into on or after 29 October 2018 should now attract the SBA, where the building or structure is used in a qualifying activity; in the context of this article a farming trade which is taxable in the UK. The allowance can only be claimed on construction costs, which include:
- design fees
- site preparation
- construction works
- fitting out
- repairs and renovation
A business can claim SBA whether it is the freeholder or leaseholder, so for example a farm trading as a limited company which leases the farm land & buildings should be able to claim SBA in respect of expenditure on renovating an agricultural building owned by the landlord.
The rate of SBA is currently a flat rate of 3% per annum on qualifying expenditure; prior to April 2020 the rate was 2%. This may not sound like a lot, but it's a whole lot better than before and it does mean that qualifying expenditure of £100k, for example, could attract a tax saving of upwards of £40k over a 30 year period (the exact tax saving will depend on the status of the taxpayer and future income or corporation tax rates).
SBA claimants must maintain an "allowance statement" detailing the building/ structure, date of the earliest construction contract, total qualifying costs and (where relevant) the date it started to be used for a non-residential activity.
It is not possible to claim SBA in respect of any costs which attract allowances as normal qualifying plant & machinery or integral features. Since those allowances provide a higher rate of relief than SBA, the correct approach is to identify all construction costs which qualify as plant & machinery or integral features first; then identify the remaining costs that attract only the SBA.
Expenditure on certain buildings and structures which, superficially, looks like it might attract only the SBA, may in fact qualify as plant & machinery - and therefore attract much higher rates of relief. The Capital Allowances Act 2001 provides a long list of "exceptions to the rule" that buildings & structures don't qualify as plant & machinery. In an agricultural context, slurry pits, sileage clamps, silos and storage tanks can all qualify as plant & machinery, attracting relief at rates of up to 100% (using the Annual Investment Allowance).
If you'd like to discuss any of the points in this article, contact us today.