Generally speaking, you can’t claim a tax deduction against your business profits for the cost of buildings or structures, but there are exceptions. When does a building qualify for capital allowances and when are you entitled to make a claim?
Is it a building?
Any accountant will tell you that it’s one of the most contentious issues in tax: whether a structure is a building or a piece of fixed equipment (plant). Usually it’s easy to tell: if it has four or more walls and is covered by a roof, it’s a building. However, when the structure in question is, say, a smoking shelter, it’s far more tricky.
Why does it matter?
While plant qualifies for a tax deduction from your company’s profits under the capital allowances (CAs) system, HMRC’s equivalent of depreciation, buildings don’t. Instead, you take the cost into account when you sell the structure and work out the profit (gain) on which you’ll pay tax. Either way, it would seem you get tax relief in one form or another, but actually that’s not always the case.
Delayed or even no tax relief
There are three main tax disadvantages to treating the structure as a building compared to plant:
- You’ll usually have to wait longer for a tax deduction.
- If you sell a building for less than it cost you, you won’t receive tax relief for the difference, i.e. the loss. This can only be claimed against future capital gains and if you don’t make any you’ll never get a tax deduction for the loss.
- If you knock down the structure, whether or not you replace it, you’ll never be entitled to a tax deduction of any sort.
Advice. Wherever possible, categorise a structure as plant, as this will almost always ensure you’ll receive the maximum tax saving.
HMRC v the law
You can forget about claiming your factory as plant, but other structures like cycle sheds and smoking shelters fall into a very grey area. HMRC will almost certainly want to treat them as buildings. However, the courts have taken a different view. In fact, in 2010 a tribunal had no trouble in ruling that a smoking shelter was plant and not a building. The main factors were, it:
- was clearly not part of the main business premises
- was attached by its own weight alone
- could have been moved
- was a relatively open structure.
If in doubt claim it
If, after considering the factors, you’re still not sure whether a structure counts as plant or a building, our recommendation is to treat it as the former and claim CAs.
Advice1. Keep a record of the research you’ve done and what factors you took into account in arriving at your decision. The worst case scenario is that HMRC will persuade you that you were wrong and claw back the under-charged tax. It isn’t allowed to charge a penalty where you can show that you took reasonable steps in arriving at your original decision.
Advice 2. If your accountant is edgy about treating a structure as plant, by all means write a letter of instruction. That way he won’t be worried about any comeback.