Development Checklist No 7 - Capital Allowances Update 2 (21 October 2011)

Check 7.1: Check whether the development or project  is of compliant in respect of one or more conditions or caveats applicable to a particular capital allowance. The conditions include the likes of the following:

• it is a building of a particular type;
• it is located where a particular allowance is available;
• the "timing" of the project fits the scheme of the allowance;
• it is a fixture in or integral feature of a building used for business; and,
• it complies with other conditions for a particular allowance.

Check 7.2: Check the at an early stage of the project, eg at the design stage, that expenditures can be identified as capital expenditures and whether an allowance is available.

Check 7.3: Ensure that the appropriate records are made for tax calculations, etc.

 Fit
If any "fit" under the Checks above is obtained, the capital expenditure can be "annualised" as a capital allowance and hence be used to reduced net taxable income for income tax purposes. In some instances the cost of works may be "splittable" into:

1. revenue expenditure (allowable as a whole); and,
2. capital expenditure which may be further split into a)that treated as a capital allowance allowable and b) "pure" capital expenditure.

The last item [2(b)] should be recorded as capital expenditure - it may then be used in any calculation for capital gains tax  on any future disposal of the building.

Most of these matters will be covered in detail by the accountant, lawyer or specialist professioanl surveyor.

Availability
When applicable capital allowances are normally available in respect of business premises, and of  property held by an investor. They include the following:

• Business Premises Renovation: In a "disadvantaged area" capital allowances may be claimed for expenditure on works of renovation to  business premises. A number of conditions must be confirmed before the allowance is given. It is due to end in 2012!
• Flats: Where flats are installed by converting upper floors above shops and other commercial ground floors in buildings, the expenditure  is available for capital allowances. Many conditions apply!
• Integral Features to Buildings: Capital allowances may be claimable in respect of expenditure on certain features regarded as integral to business buildings, eg a cold water system. A number of such features are listed; again conditiona apply!
• Plant and Machinery: For buildings used for business purposes a substantial number of certain types of plant and machinery installed into them may result in the cost being allowable (the buildings do not include residential investments). 
• Thermal insulation; Expediture on thermal insulation installed in an existing business property, such as industrial buildings, offices, and shops,  is available for a capital allowance. 

Development Process:

• Property acquisition: Check when building is purchased on the availability of any unused capital allowances hitherto available to the vendor.
• Design:  Check that at the design stage the best options for capture of capital allowances are considered and, if appropriate, adopted.
• Finance and funding: Check that the construction records and accounting systems "pick up"  records of:   a) revenue expenditures on repairs and maintenance; b) capital expenditures on new build and improvements, c) apportionments of appropriate expenditures, ie between repairs and improvment [Please note this is for purposes of income taxation. capital gains taxation and capital allowances.]