Industrial Buildings Allowance

The phasing out of Industrial Buildings Allowance by 2010/11

Capital allowances for the construction costs of industrial buildings or structures fall under several different headings, but collectively they are known as industrial buildings allowances (IBAs). They are normally available to the building owner, but there are certain circumstances where a tenant may claim for additional capital expenditure on an existing qualifying building.

Buildings in use for a qualifying trade

Qualifying trades include among others the manufacturing or processing of goods or materials, the storage of goods or materials which are to be used in the manufacture of other goods or materials, some agricultural contracting activities, catching fish or shell fish and mineral extraction. There is no statutory definition and so various processes have been tested in the courts, sometimes with surprising results. For instance breeding rodents for experimental purposes qualifies, but accelerating the growth of tropical fish in heated tanks does not! Landlords may therefore need to carry out considerable detailed research to establish whether it is possible that their tenants are carrying out qualifying trades.

This type of IBA is given as an annual writing-down allowance of 3% of the original construction cost (i.e. excluding the cost of the land), starting in the period when the building is first brought into use. This will be reduced to 2% in 2009/10, 1% in 2010/11 and cease in 2011/12.

If you buy a used building you may be entitled to claim IBA on the vendor's tax written down value after the sale, divided by the length of time between the date of sale and the end of the 25 year period.

Qualifying hotels and sports pavilions

The qualification is more clearly defined, but the relief works in the same way as for industrial buildings, outlined above.

Commercial buildings in enterprise zones

Where an area has been designated as an Enterprise Zone, allowances on the construction costs of commercial buildings are much more generous. An initial allowance of 100% is available on any buildings other than dwelling houses. Even if part of the building is used as a dwelling, the whole expenditure still qualifies so long as the expenditure on that part does not exceed 25% of the total building cost. A lower amount than the full 100% may be claimed, in which case the residual expenditure qualifies for a writing down allowance of 25% on cost (straight line method).

This is quite a complex area of legislation and you would be well advised to seek professional assistance.

Business premises renovations allowance (BPRA)

The BPRA is operative from 11 April 2007 and is a 100% initial allowance for capital expenditure on the renovation or conversion of business properties that have been vacant for more than 1 year in a designated disadvantaged area.

Industrial buildings allowances (IBA)

These are to be phased out by 2010/11. The value of the writing down allowances (either 3 per cent of the original expenditure, or the recalculated annual allowance after a sale or acquisition) will be reduced as follows:

• in 2009/10 or financial year 2009 a business will be entitled to a 2% allowance; and
• in 2010/11 or financial year 2010 a business will be entitled to a 1% allowance.

Thereafter there will be no allowances on industrial or agricultural buildings.