The following article was written by John Ward and published in the National Taxation Magazine and on their website.
Can we claim tax relief on sheds?
John Ward of Davisons Chartered Accounts based in North Devon believes that despite HM Revenue and Customs’ best efforts to restrict the tax relief on sheds and buildings, there is a strong argument for claiming tax relief on far more expenditure than is realised.
THE REVENUE VIEW—NO RELIEF ON BUILDINGS ?
Most of the legislation regarding sheds and structures is contained in Capital Allowances Act 2001 Sections 21 and 22 (CAA01 S21 & CAA01 S22), and the HM Revenue and Customs guidance notes contained in CA 22000.
The Revenue guidance on agricultural sheds and buildings is quite clear – they are deemed structures and do not qualify as plant for capital allowances and AIAs.
This is laid out in CAA01 S 21 –
‘Do not give PMAs on expenditure on the construction or acquisition of a building.’
Agricultural Buildings Allowances (ABAs) are available, though these are being phased out, and with effect from the 2011/12 tax year, no further ABAs will be available, either on new or existing buildings. In addition, CAA01 S21 goes on to state that as well as denying relief on buildings, relief should also be denied on
‘assets incorporated into a building, assets which, although not incorporated in the building, is in the building and is of a kind normally incorporated in a building, or is in a building and is in the specified list’ – this includes walls, floors, ceilings etc.
CA001 S22 denies relief on structures which, although not buildings, are permanent fixtures – these include tunnels, vehicle parks, airstrips and runways to name but a few.
For farming clients on the face of it that can mean a significant amount of expenditure on which no tax relief can be claimed, or is that really the case ?
EXPENDITURE ON INTEGRAL FITTINGS/ENERGY SAVING/WATER CONSERVATION—SOME BENEFIT !
This position has been eased slightly with the recent change in rules regarding integral features, as outlined in CA22300. This has resulted in the ability to claim tax relief on some of the components incorporated within sheds and buildings, where allowances would previously have been denied under CAA01 S21. As detailed in the legislation, the intention was to
‘re draw the boundary between buildings, including their main features, and other equipment, so that the main features that are normally integral to a modern building would attract WDAs’
These integral features should now be separately classified into a 10% special rate pool, and allowances claimed accordingly on a reducing balance each year. These integral features also qualify for the 100% AIA allowance up to a limit of £50,000 expenditure per year and as such, where farming clients have erected new sheds or farm buildings, a proportion of the expense could now attract the AIA allowance. A detailed list of the items that qualify as integral features can be found at CA22320, however the majority of these are of little benefit to farmers.
The items on the list that are of benefit are electrical systems and cold water systems taking either electrical power or cold water from the point of entry to the building or structure and distributing it through the building or structure as required. These systems may range from the very simplest to the most complex. The detailed guidance is laid out in CA22330 – PMA: Buildings & structures: integral features: the assets – further detail. Moveable concrete panels, unboltable cubicles, moveable side panels and internal gate systems in our opinion arguably all qualify as plant and AIA.
In addition 100% tax relief can also be claimed on expenditure on certain qualifying energy-saving or water conservation equipment over and above the normal £50,000 limit.
Eligible expenditure may include water efficient taps and meters, slurry separators, water harvesting equipment and energy efficient lighting amongst others. Rainwater systems including a storage tank, guttering and down pipes should qualify. To qualify, most expenditure must be on approved technology and product lists which can be found on www.eca.gov.uk.
When clients are having these buildings erected, often a contractor is engaged to complete the work from start to finish, all inclusive. However, in order to maximise the relief available it is now more important than ever to obtain invoices from the contractors for the separate elements of work.
Claims for allowances on integral features are more likely to succeed where one invoice is obtained for the installation of the electrical and cold water system and other integral fittings, and a separate invoice for the main structure itself. Where this is the case, there is less room for negotiation with the Revenue as to what proportion of the total relates to the structure, and what relates to these systems. Clients should therefore work with contractors to separate the work done and obtain separate costings.
Where clients are unable to obtain completely separate invoices, ask for the one invoice to have the separate components detailed individually on that invoice to support the allowance claim.
In addition to these integral features, where the floor of the shed forms part of a sealed slurry system, there may be scope to claim substantial additional relief. Our second article will expand on this.
CAN MOVEABLE SHEDS BE TREATED AS PLANT AND EQUIPMENT ?
There is also scope to obtain further tax relief on some types of shed and buildings for clients. List C in CA22030 details various items that, provided they pass the normal plant tests, plant and machinery allowances should be due, and we believe that item numbers 13 – ‘partition walls, where moveable and intended to be moved in the course of the qualifying activity’, and 21 – ‘moveable buildings intended to be moved in the course of the qualifying activity’, could benefit farming clients quite significantly provided various conditions are met.
CA22110 – PMA: Buildings & Structures: Shelters, huts etc. states:
‘Treat temporary hunts which are moved from one site to another and used by builders and contractors to provide canteen and toilet facilities or as storage sheds as site plant. They will then qualify for plant or machinery allowances.’
However within this same section of the legislation it states that chicken shacks/poultry houses are buildings or structures and so are excluded from plant and machinery allowances. Fixed chicken buildings even though purpose built structures do not qualify. They are not plant even if they are used in intensive poultry production and contain automated systems for ventilation. The legislation then goes on to state that:
‘claims for PMAs on a chicken shack/poultry house should be refused unless it is moveable and intended to be moved in the course of the trade. Mobility alone is not enough.'
This clearly states that farming clients purchasing mobile chicken sheds will not be able to treat the expenditure as plant based purely on the fact that the shed is mobile. However, where clients purchase a mobile chicken shed – and it is intended to be moved in the course of the trade – the claim will not necessarily be refused. Most mobile chicken sheds are either on wheels or on skids.
In these cases, we believe that the key is intention, and provided the farmer intends to move the shed from the outset, and the purpose of purchasing a mobile shed rather than a fixed shed is to do just this, the entire expenditure will qualify as plant and attract allowances accordingly. In practice farmers will have to move these sheds for hygiene purposes meaning that the majority of mobile chicken sheds purchased will qualify as plant. We have obtained clearance on moveable sheds from the Revenue in the past in these circumstances.
DO UNBOLTABLE SHEDS COUNT AS MOVEABLE AND QUALIFY ?
So far we have considered sheds that are specifically designed to be mobile, and provided it can be shown that the intention is to move the shed from site to site, it will qualify as plant. What however, is the position for sheds that are not built as ‘mobile’ sheds, but are unboltable and can be taken down and re erected elsewhere?
The legislation does not specifically comment on this type of expenditure. CAA01 S21 and S22 prevents most buildings and structures qualifying as plant, based on their fixed, permanent nature. However, the moveable aspect referred to in CA22110 hints that where structures are designed to be moved, and are intended to be moved in the course of the trade, they may qualify as plant.
As with mobile chicken sheds, the key is the intention. Provided the farmer (or indeed any client) intends to move the building from site to site, and the structure is designed so as to allow this, the expenditure may qualify as plant. We are finding that more and more shed builders are designing sheds that can be moved easily due to the change in the nature of farming businesses. This ensures there is a higher resale value on the building, rather than an immoveable structure than cannot be relocated as simply.
In order to maximise the chances of treating the expenditure on unboltable sheds as plant, there are a number of steps that should be taken.
Firstly the building must be erected in such a way that it is unboltable and can be taken down and re erected elsewhere. Many sheds are being designed with concrete moveable sides or they are being made in panelled form so they can be moved (such as those referred to in CA22030 item number 13).
Secondly, it could be important and helpful that clients establish their intention to move the building with the contractor prior to obtaining a quote. They should retain all correspondence demonstrating that they intend to move the building – this could be e mails, letters or notes of telephone calls. It is desirable that clients work closely with the contractor from the outset to ensure that the shed is designed in such a way that it can be moved as and when they wish.
Lastly, you should be able to show that you have good reason to want to move the building. To put up a structure with no reason to move it, and where the likelihood is that it is never moved is almost certainly not going to qualify.
Examples of where a client is likely to have an argument for intention to move an unboltable shed include:
- Tenant farmers with a short term Farm Business Tenancy (FBT) may wish to move the shed to another farm at the end of the tenancy – why else would you put up a shed on someone else’s land, particularly if there is no provision for compensation in respect of capital improvements within the tenancy agreement?
- Large farmers with various farms or blocks of land could buy sheds intending to move them from site to site.
- Small sheds for storing straw or crops.
Size and function of shed will also play a part – allowances are more likely to be allowed on smaller sheds that can be moved more easily. Where these points can be satisfied, and the expenditure treated as plant, farming clients will be able to benefit from the 100% AIA and significantly reduce their potential tax liabilities. With the changing nature of farming, we believe that many farm sheds will be more akin and arguably the same for tax purposes as the temporary huts moved from site to site by builders for storage!
Careful planning is required to ensure farming clients obtain maximum tax relief on expenditure that at a superficial glance, would not appear to qualify for any allowances.
Providing unboltable sheds are designed and intended to be moved, and are “small” the chances of successfully arguing that it is plant are increased. In order to maximise the opportunities, clients should do the following:
- obtain evidence to show they intend to move the building PRIOR to obtaining a quote
- ensure they work closely with the contractors at the design stage
Where there is uncertainty as to whether you are able to demonstrate that the shed is intended to be moved, and may not be able to claim relief on the shed itself, maximise the relief to which you are entitled by doing the following:
- ensure invoices are split between the core part of the building and the ancillary parts – this ensures that if relief is denied on the main structure, it is maximised on the integral fittings, energy and water related parts
- where commercially possible, design sheds where the floor system forms part of an integrated slurry system to maximise the chances of obtaining relief on the cost of the floor