Finance Act 2019
Despite the sense that all that Parliament has been addressing in recent months is Brexit, the Finance Act has been published changing the taxation landscape in relation to the taxation of properties. Bearing in mind that for many motor dealers property assets are the single most significant added value component of the net worth of a business, the changes should be reviewed carefully to ensure that the best taxation value is obtained.
Firstly, capital allowances have been changed to allow up to £1,000,000 of qualifying expenditure to be allowed as expenditure for the purposes of computing Corporation Tax in the calendar years 2019 and 2020 (annual allowance). Whilst there has been a significant slowdown in the construction of new showrooms, this relief is very welcome because it covers both new buildings as well as capital improvement work that is often a considerable burden on the new car dealership.
Secondly, writing down allowances on the general pool of assets remains at 18% on the balance brought forward but the writing down allowance on the special pool of assets has been reduced from 8% to 6%. This change simply slows down the rate by which expenditure is allowed as expenditure for the purposes of computing Corporation Tax but the increase in the annual allowance from £200,000 to £1,000,000 more than adequately offsets this change.
Chris Cummings Head of Tax at ASE Plc commented that “many clients will be frustrated by the fact that the annual allowance of £1,000,000 was not available in previous years when manufacturers were swept away by a desire to have franchises occupy purpose build showrooms”.
However, he commented further that many franchises would take up the challenge to get full value from the increase in the annual allowance” whilst reminding dealers that “if the expenditure exceeds current year profits, the ability to carry back losses may enable a recovery of tax paid in an earlier year”
Structures and Building Allowance
Unexpectedly a new relief was introduced
SBA allows the owner of a building to offset 2% of the cost of the building (as opposed to the aspects of the building that qualify for capital allowances) as expenditure against current year Corporation Tax liabilities.
The effect will be to enable the owner to use the base cost to reduce ongoing taxation liabilities but by doing so it will effectively exhaust the tax base cost of the building if it were to be sold. However, whilst 2% of the cost of a building may be significant if the building costs £5,000,000, the tax saving will be only £19,000.
The real issue is whether the SBA can be claimed without recourse to the tax base cost of the building been a factor in any disposal. For example, Chris Cummings Head of Tax at ASE Plc identifies the possibility of the sale of the property where it is part of the assets of the subsidiary under the terms of the substantial shareholding exemption that would otherwise eliminate tax on the disposal of the subsidiary.
SBA will not be available to non-taxable entities. David Holroyd of DHA Consulting, who has specialised in evaluating and determining the level of capital allowances for motor dealerships, remarked “dealers now considering sale and leaseback of new dealerships need to take into consideration the fact that transferring property into a pension fund will almost certainly result in this valuable relief being lost”
The new SBA is welcome and whilst intellectually it may have limited appeal, it may do so not least because where a project started before 29 October 2018, the expenditure will be treated as not qualifying for SBA purposes. This may well restrict the take up of the relief within the first few years of its introduction.
In case of any questions please contact ASE Tax Department for more help: Tel: +44 (0)161 493 1930
Author: Chris Cummings