SLIDE 1
10/9/2019 1
CAPITAL ALLOWANCES
9 OCTOBER 2019
10/9/2019 CAPITAL ALLOWANCES 9 OCTOBER 2019 1 WHAT ARE CAPITAL - - PDF document
10/9/2019 CAPITAL ALLOWANCES 9 OCTOBER 2019 1 WHAT ARE CAPITAL - - PDF document
10/9/2019 CAPITAL ALLOWANCES 9 OCTOBER 2019 1 WHAT ARE CAPITAL ALLOWANCES Government tax incentive not a scheme Determined by legislation and 100 years of case law Interpreted and claimed by tax payers; not automatically
SLIDE 2
SLIDE 3
10/9/2019 3
CASH FLOW BENEFIT OF £1M
- Benefit claimed over a number of
years
- Claim the relief at different rates
- Can carry forward unclaimed
allowances
- Utilise AIA of £1m on expenditure
up to 31 Dec 2020 Tax Planning Need to analyse the expenditure to claim the relief at the highest writing down allowances available
HOW TO UNLOCK THE BENEFIT
Hold as investment Own the relevant interest in land Incur capital expenditure
Tax Free Fixtures Non Qualifying Capital
CLAIM OPPORTUNITY 1 - ON ACQUISITION
- Claim on second hand fixtures
- Who has entitlement, one claimant
per fixture
- Valuation exercise of building, land
and P&M Tax Planning Have two years to agree value of Capital Allowances, contract provision critical to enable purchaser to address post completion
7 8 9
SLIDE 4
10/9/2019 4
CLAIM OPPORTUNITY 2 - ON DEVELOPMENT
- Available on certain qualifying
fixture
- Based on actual costs incurred
- Apportion certain allowable costs
Tax Planning Accelerate basic rates of tax relief for energy efficient plant & machinery, must be certified at the time of expenditure
CLAIM OPPORTUNITY 3 - ON LEASE INCENTIVES
- Type of lease incentive
- Who pays for what
- Structure agreement
Tax Planning If contribution paid towards expenditure qualifying for capital allowances, tenant can treat as non taxable income receipt
CLAIM OPPORTUNITY 4 - REFURB OF CORES
- Capex reviews, capital vs revenue
- Assist cost feasibility
- Recovery via the service charge
Tax Planning Consider empty voids where landlord contributes to service charge pot
10 11 12
SLIDE 5
10/9/2019 5
CLAIM OPPORTUNITY 5 - FULL REFURBISHMENT
- Main structure already in place,
higher qualifying %
- Claim incidental expenditure under
s25
- Capital vs revenue considerations
Tax Planning Allowances available where the thermal qualities of a building are improved
ACQUISITIONS – 3 STEPS
- Entitlement
- Eligibility
- Valuation
ACQUISITIONS - ENTITLEMENT
- Fixed Value & Pooling Requirement
- S198 election / Tribunal / Written Statement
- Relevant interest acquired?
- Historic Property Ownership
- Timing of Historic Expenditure
- CPSEs / Questions / Contract Wording
- Allowance Statement - SBAs
13 14 15
SLIDE 6
10/9/2019 6
ACQUISITIONS – ELIGIBILITY & VALUATION
- Eligibility
- Ownership of Fixtures
- 100% v 18% v 6% v 2%
- Valuation
- Measurement – Land & Buildings
- Costs From 1st principle at Market
Value as New
- HMRC Apportionment Multiplier
Purchase Price x Plant and Machinery Land + Building + Plant and Machinery INCREASE CLAIM OPPORTUNITIES ON ACQUISITIONS
No CAs Available £2 s198 Election Not Applicable
Never Assume No Allowances Are Available Irrespective What Advised by Seller….. Why? On basis of who’s entitlement position? What is included or excluded within the election? Not true - Capital Allowances now applicable on every transaction INCREASE CLAIM OPPORTUNITIES ON ACQUISITIONS Timing of Expenditure Pre / Post April 2008 Capital Contributions Fall Outside of s198 election Non Tax Paying Tenants s181 - Claim on tenants fit out Properties Acquired Vacant / Part Vacant Potential claim on retained fixtures Unclaimed Allowances Property Fixtures v Loose Equipment S198 elections Check inclusions / exclusions
16 17 18
SLIDE 7
10/9/2019 7
CASE STUDY - SHOPPING CENTRE ACQUISITION Barrier: Acquired with £2 s198 Election in Place Value: £345,000,000 Client: UK REIT Background: Acquired 2 Assets a) Taxpayer with £2 Election b) Council who Developed 17 Capital Contributions Made by Vendor CASE STUDY - COMPANY ACQUISITION Barrier: CA Position Silent and No Info Provided Value: £50,000,000 Client: Overseas Investor Cash Saving: £1,500,000 INCREASE CLAIM OPPORTUNITIES ON CAPEX SPEND
S25 Works / Ancillary Costs Qualifying Demolition Costs, Reports, Fees Floors, Walls, Ceilings, Cladding, Roofing Qualifying for Capital Allowances Plenum / Moveable / Thermal / Trade Related Revenue Deductions – Contract Documents Don’t Clearly Identify These Items Out Structure Grants or Contributions Specialist Structures Historic Expenditure – time restriction and lack of cost information? Irrecoverable VAT
19 20 21
SLIDE 8
10/9/2019 8
MISSED CLAIMS – GRANT ALLOCATION & VAT
Case Study – Barrier to Claim – Failure to Efficiently Allocate Grant & Consider VAT Implications
- £1,300,000 Final Account for Extension
- Grants received
- NHS
£500,000
- Adjacent Pharmacy
£670,000
- Perceived negligible claim available by CA advisor
Methodology
- Review both grants for specific allocations
- Treatment of VAT within grant amounts
- Allocate grants to non qualifying direct expenditure
- Consider s25 expenditure
- £205,000 tax saving split between 5 Partners
WHO IS UNDERCLAIMING?
Widespread but particularly:
- Family Trusts
Historic & Current Expenditure
- Non Property Sectors
- Occupiers (retail, restaurant, office)
- GPs, Dentists, Care Home Owners
- Offshore Investors
Ability to offset tax, but….
CORPORATION TAX REFORM Increased future tax liability for Offshore Companies April 2019 CGT applies. Most effect in 3-4 years time April 2020 Tax rate reduced from 20% to 17%, but Restriction on deductible interest to value of £2m across Group Capital Allowances will become more important to offshore investors What Next? Plan for future tax liabilities. Claim now and build up allowances
22 23 24
SLIDE 9
10/9/2019 9
STRUCTURE AND BUILDING ALLOWANCES “SBA” New Allowance Over 95% of a building will now qualify for tax relief 2% per annum, should I claim? Tax saved £350,000 over 10 years on £10m Industrial unit Paid back on disposal STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)
Contracts Entered Into after 29 October 2018 Available on Construction and Purchase Excludes residential (incl student accommodation), but allows hotels, care homes 2% per annum for 50 years New build, refurbishments, extensions and fit outs Applicable to Capital Contributions Cannot Claim Annual Investment Allowance on SBA Applicable from later of date first brought into use and date expenditure incurred CGT liability on Sale – increases sale proceeds on sale for CGT Excludes disposal to connected person Cash saving v Cash flow
STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS) Sale of Unused Building (other than by developer)
- Qualifying Expenditure is lesser of purchase price & construction cost
Sale of Unused Building by Developer
- Qualifying Expenditure is purchase price
On Sale amount of SBA to Purchaser is Nil Unless Allowance Statement is Met
- Date of earliest written date of contract
- Amount of qualifying expenditure
- Date brought into use
Lease over 35 years,
- Claim depends on market value less than 1/3 retained
25 26 27
SLIDE 10
10/9/2019 10
STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS) Excluded Expenditure: Acquisition of Land and associated costs, SDLT Land Remediation Landscaping (other than to create a structure) Costs in Connection with Planning permission Items qualifying for Plant and Machinery Items that may be allowed as a deduction in calculating profits Fees relating to any excluded expenditure STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)
- Industrial Build Cost
= £10,000,000
- P & M and Integral
= £1,000,000
- SBA
= £9,000,000
- SBA per annum
= £180,000
- Cash benefit pa at 19%= £34,200
- After 10 years
= £342,000 Tax Planning Claim plant and machinery and integral features first
CAPITAL ALLOWANCES £10M OFFICE– TIMING OF
0.5 1 1.5 2 2.5 3 3.5 4 4.5 1 2 3 4 5 6 7 8 9 10 £million Years SBA 2% Integral 6% Plant&Mach 18% AIA£1million Enhanced 100% Land Remed 150%
28 29 30
SLIDE 11
10/9/2019 11
STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS) How to claim: Do not ignore in case of future disposal Collate information for allowances statement Cost details to exclude non qualifying expenditure Claim P&M and retain Capex / ledger details maximise benefit CASE 1 – CARE HOME – SIMPLE CLAIM GONE WRONG
- Glais House Care Limited v HMRC
- Accountant instructed counsel for client
- Incorrect basis of claim by both Seller and Buyer
- Valuation Office said methodology of claim was
wrong
- Contract allocated fixtures on the wrong value
- Claim for £318,792; claim reduced by 20%, plus
significant legal fees incurred CASE 2 –HYDROELECTRIC DAM – WORKS TO LAND SSE claimed £260million, HMRC accepted £34million! Alteration of land for the concrete structure Concrete structure is not normally plant Most items in dispute were allowed on basis structures functioned as plant Since ruling new legislation was brought in clarifying alteration to land, given only where purpose of installing P & M
31 32 33
SLIDE 12
10/9/2019 12
Market Report
October 2019
2013 2014 2015 2016 2017 2018 2019
Session overview
1. The macro view - what’s changed? 2. What does this mean for construction? 3. What about Brexit? 4. Looking to the future
34 35 36
SLIDE 13
10/9/2019 13
The macro view
UK economy – what’s changed?
Dec 2018 May 2019 CPI (annual) 2.1% 2.0% Average wage growth 3.5% 3.4% GDP (annual) 1.6% 1.8% Unemployment 4.1% 3.8% Construction output (all work)
- 3.1%
2.4% Services PMI 50.4 51.0
Currency
1.06 1.08 1.10 1.12 1.14 1.16 1.18 1.20
GBP : EUR rate in 2019 H1
+1.5%
- 5.1%
37 38 39
SLIDE 14
10/9/2019 14
A weakening global economy
- Trump threats = ‘Trump slump’
- Concerns over global growth
A weakening global economy
- Trump threats = ‘Trump slump’
- Concerns over global growth
But…
- Still growth in oil demand
therefore still economic activity.
Foreign investment
- Last year the UK secured a third of all FDI
projects in Western Europe.
- 15% of global investors have put
investment plans in the UK on hold due to Brexit.
- Only 6% plan to move assets out of the UK
in the future.
- The influence of other events?
40 41 42
SLIDE 15
10/9/2019 15
Holding pattern
The impact on construction
- 10.0
- 5.0
0.0 5.0 10.0 15.0 Housing Infrastructure Commercial New work R&M All work %
Construction output has fallen
Quarter Year
Source: ONS Q2 2019
The impact on construction
But take up remains strong
43 44 45
SLIDE 16
10/9/2019 16
Construction forecasts
2019 2020 2021 Glenigan
- 8%
- 1%
5% CPA
- 0.4%
1.4% 1.7% Experian 0.9% 2.3% 2.7% Infrastructure 8 to 9.3% 9 to 9.7% 4 to 8.6% Commercial
- 7 to -6%
- 5.8 to -4%
- 1.5 to 0%
£20bn
Construction forecasts
2019 2020 2021 Glenigan
- 8%
- 1%
5% CPA
- 0.4%
1.4% 1.7% Experian 0.9% 2.3% 2.7% Infrastructure 8 to 9.3% 9 to 9.7% 4 to 8.6% Commercial
- 7 to -6%
- 5.8 to -4%
- 1.5 to 0%
£4.2bn £55.7bn £20bn
Sector overview
Residential
- Prime residential market flat.
- Continued success of build to rent, but
viability issues.
- Increased uptake of MMC and DfMA.
Infrastructure
- Government investment pledges have been
patchy.
- Uncertain future in a new government.
- Large projects are currently supporting
inflation in the wider market. Workplace
- Average project size has fallen.
- Supported by post-cycle lease events.
- Continues to be affected by constrained
construction pipeline. Commercial offices
- Heightened political uncertainty impacting
investors’ confidence.
- Slowing speculative development.
- Dwindling supply of space.
- Recent flow of global equity is a key driver of
value.
46 47 48
SLIDE 17
10/9/2019 17
Market sentiment
Generally
- Phone ringing more…
- Long term pipeline
- No evidence of prices falling – still inflation
- Wider spreads in tenders
Trade contractors
- Pushing back on stepped down contract risk
- Early trades buying better – margin
compression evidenced
- Wide spreads through CM work being
evidenced
- Want to get closer to clients
Main contractors
- Tendering activity low – long term pipeline?
- Reasonable order books for next 18 months
- Concern over late 2020 and beyond
- Single stage market the norm in fit out (value
- f fit outs smaller / few GS type projects)
- Single stage the norm for Tier 2 c £70m and
under BCIS
- Tender Panel sentiment – inflation pressure
remains (evidence and survey based – alinea sit on the panel)
- +0.4% for Q2/2019
- North West very active
12 13 14 15 16 17 18 i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv 2014 2015 2016 2017 2018
Average level of prelims
10 20 30 40 50 60 70 i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i 2014 2015 2016 2017 2018 2019
% of contractors operating at 90%-to-full capacity
Source: BCIS / CPA
- 4
- 2
2 4 6 8 10 12 14 16 18 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Annual % change in employment levels by country of birth Total EU Total non-EU
Continuing pressures - labour Non-UK-born workers = 44%
- f London’s construction
workforce
49 50 51
SLIDE 18
10/9/2019 18
Continuing pressures - materials
95 100 105 110 115
All Materials index
The influence of margin
- 12%
- 10%
- 8%
- 6%
- 4%
- 2%
0% 2% 4% 6% Materials Labour Staff, Plant, Organisation Risk / Margin Other
Layers of margin
Our forecast compared
52 53 54
SLIDE 19
10/9/2019 19
A view on Brexit
BCIS viewpoint 2019 2020 2021 2022 2023 Upside 6.4 6.6 7.0 6.0 5.7 Central View 3.6 4.4 5.1 6.4 5.8 Downside
- 3.3
- 6.9
4.1 5.8 7.1
- 8
- 6
- 4
- 2
2 4 6 8 2019 2020 2021 2022 2023 BCIS viewpoints Downside Central Upside
Established challenges, modern methods
Clive Curd Dip Prop Invest, MRICS, MCIOB clive.curd@veritasadvisory.co.uk DDI: 020 3793 7154 Mob: 07502 376 973 Nolan Masters MRICS, ATT, BSc (Hons) nolan.masters@veritasadvisory.co.uk DDI: 020 3771 4315 Mob: 07502 376 204 David Gibson MRICS, ATT, BSc (Hons) david.gibson@veritasadvisory.co.uk DDI: 020 3771 4316 Mob: 07502 376 957
30 Newman Street, London, W1T 1PT T elephone: 020 3130 0293 www.veritasadvisory.co.uk
Rachel Coleman Associate Research Analyst rachel.coleman@alineaconsulting.com DDI: 020 3818 1134 Mob: 07818 420 278