UK: What Is The Business Premises Renovation Allowance (BPRA)?

Last Updated: 20 November 2007
Article by Cathryn Vanderspar

The BPRA is a 100% capital allowance for the capital cost of renovation and conversion of business properties in disadvantaged areas that have been vacant for at least a year.

The aim of the allowance is to help bring buildings in these areas back into productive use.

Why is BPRA necessary from a tax perspective?

There are currently the following regimes for capital expenditure on buildings:

  • a 4% per annum "straight line" basis for expenditure on industrial buildings, hotels and agricultural buildings (this percentage will reduce over the next 4 years, with the allowance being phased out by 2011);
  • a 25% per annum reducing balance allowance for plant and machinery which are fixtures (to be reduced to 20% from April 2008);
  • a 6% per annum reducing balance allowance for long life plant and machinery (to be increased to 10% respectively from 2008); and
  • from April 2008 there will be a separate writing down allowance of 10% for fixtures which are integral to a building.

Other capital expenditure on commercial buildings such as offices or shops does not generally qualify for allowances.

In practice, this means that a landlord or tenant converting or renovating business premises will not get relief for capital expenditure until such time as it disposes of its interest. As recognised by the Government, this gives an economic deterrent, by lessening the present return.

How do the BPRA rules work?

The rules are very similar to industrial buildings allowances and enterprise zone allowances, but with some important distinctions.

The allowances give 100% relief to the expenditure in the period in which it is incurred. To the extent that a person cannot use the 100% first year allowances, the remainder will be subject to 25% writing down allowances on a reducing balance basis which may be claimed in later periods, provided that person still has a relevant interest and the other conditions are then met.

Duration of BPRA

It should be noted that BPRA has an initial life of five years only from the date of implementation (11 April 2007). Whilst this does not necessarily mean the scheme will cease at the five year period there is, potentially, only a limited window of opportunity.

Who will be entitled to the allowances*? (*Section 360A)

Allowances are made to the person who incurred the "qualifying expenditure" and has the "relevant interest" in the "qualifying building" (see below).

Notably a "person" could be either a company or an individual. The relief will apply potentially to:

  • a trader in respect of premises for own use;
  • a landlord incurring expenditure for the purposes of a letting of less than 50 years;
  • non-residents, as well as UK residents.

Those who cannot take advantage of BPRA will include:

  • developers, as the expenditure will not be capital (though they should get a deduction anyhow as a trading expense) and notably a clawback occurs if the developer (acting as investor) sells or lets the property on a long lease within 7 years (see further below); and
  • exempt institutions/local authorities.

There is no ability for a landlord to claim the allowances on making a contribution to a tenant's expenditure or to pass the allowances obtained on expenditure to any other person on sale or grant of a lease.

Meaning of relevant interest

To obtain the allowances, the person incurring the relevant expenditure must have the "relevant interest". The rules, broadly, follow the rules for industrial buildings allowances.

Importantly, a person with a contract to acquire the interest on or as a result of completion of the conversion is treated as having the qualifying interest at the time the expenditure was incurred. Although not expressed, this should enable expenditure under conditional contracts to qualify.

What is qualifying expenditure?

Qualifying expenditure is:

  • CAPITAL expenditure incurred before the end of the initial five year period;
  • on or in connection with the:
    • conversion of a qualifying building into qualifying business premises; or
    • renovation of a qualifying building if it is or will become qualifying business premises.

Incidental repairs in relation to the conversion or renovation will qualify, but otherwise only repairs not deductible under Schedule A or D. Irrecoverable VAT is eligible for the relief.

What is not qualifying expenditure?

The legislation expressly sets out what is not qualifying expenditure for BPRA purposes. These are:

  • the acquisition of land or rights in or over land (i.e the original cost of the building);
  • the extension of a qualifying building (except to the extent required for the purposes of entering and exit);
  • the development of adjoining land; and
  • the provision of plant and machinery which is not or does not become a fixture as defined (i.e. loose plant).

Loose plant and machinery may, of course, qualify for allowances, if appropriate, under the existing plant and machinery rules or be entitled to a 100% deduction if it qualifies as energy-saving plant.

Meaning of qualifying business premises

A qualifying business premises is:

  • a "qualifying building" (see below);
  • used, or available and suitable for, letting use (the notes say this means "suitable, ready and held out for letting for business purposes");
  • for the purposes of a trade, profession or vocation;
  • or as an office (whether or not for a trade, profession or vocation)

but not for use as or as part of a dwelling.

Premises means building or structures. Relief may therefore be available for shops and offices, which have not previously been eligible for allowances.

What is a qualifying building?

A building (or part) which:

  • is in a "disadvantaged area" (see below);
  • was unused throughout the period of one year ending immediately before the date on which the conversion or renovation work began;
  • had last been used for the purposes of a trade, profession or vocation or as an office;
  • had not been last used as or as part of a dwelling;
  • in respect of part of a building, had not been last occupied and used in common with any other part or structure other than a part which was also unused through a year or which has last been used as a dwelling. For example:
    • if renovation is of part of a warehouse in common use and the other part is used, relief will not be available;
    • if a unit in a shopping centre is unoccupied and others are separately used and occupied then the conversion of the unit may qualify, assuming there is no common use.

There is an exception for dwellings so that continued use as a dwelling will not debar the relief on the commercial side. This could be relevant to pub conversions.

What are disadvantaged areas?

Disadvantaged areas for the purposes of the BPRA are Northern Ireland and the areas specified in the Assisted Areas Order (SI 2007/107). These areas are spread over Great Britain but, in particular, cover large areas of Scotland, Wales and Northeast England.

The usual apportionment rules will apply if a building is partly in and partly outside a disadvantaged area.

What type of premises will not qualify?

It would not, for example, appear to encompass a building for use by the public sector. It is not yet clear what will happen if buildings are used for a dual purpose (e.g. serviced offices).

Premises that are used by the following trades are excluded from the scheme: fisheries and aquaculture, shipbuilding, the coal industry, the steel industry, synthetic fibres, the primary production of certain agriculture products, and the manufacture and marketing of milk products and substitute milk products.

Other situations when BPRA will not be available

The allowances will not be available if:

  • the building is not in fact used as business premises; or
  • the relevant interest is sold before it is used or "first suitable for letting".

Balancing events

If any of the following occurs with seven years of first qualifying use of the premises being first suitable for letting there will be a potential clawback of the relief:

  • sale;
  • grant of long lease (i.e. a lease for more than 50 years) for a capital sum;
  • lease ends otherwise than through acquiring the reversion;
  • death;
  • demolition or destruction;
  • cesser of qualifying use;

The basis for clawback on a sale or the grant of a long lease is the net proceeds of sale less the residue of qualifying expenditure. The amount of clawback cannot exceed the amount of allowances claimed. Where a lease is granted for less than market value, a commercial premium will be imputed.

While the new provisions are similar to, they are not identical to those, under the industrial buildings regime.

Notably:

  • the grant of a long lease for a capital sum will trigger a balancing event automatically. There is no ability to pass BPRA allowances on to a purchaser;
  • a lease ending and reverting to a connected person will trigger a disposal event, deemed to be at market value;
  • there is no clawback after 7 years; and
  • a landlord cannot get allowances by contribution.

Planning points

Quite clearly, there is scope for planning. For example:

  • Use of an SPV - The landlord could establish an SPV to own the land and renovate. The SPV would claim the allowances, preserving the ability to claim them in the future. The landlord could sell the SPV with benefit of the relief. This structure offers potential to pass the reliefs to a purchaser, unfettered by the existing "change of ownership" rules.
  • Consider the economics of buying land, and instead of demolishing and rebuilding, leave it empty one year and renovate.
  • An exempt landlord could make an inducement payment to the tenant (not expressed as contribution to fitting out or specifically referable to the work) and the tenant could do the works. Tenant would be taxable under schedule A on the amount received over the period of the lease or up to first rent review, but provided that the payment is not so connected with the works that the tenant is treated as not having incurred the expenditure it could claim the allowances upfront - this could give cashflow benefits and more than offset the cost of the inducement payment.

Of course, losses could be generated and this offers opportunities in a fund or other planning context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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