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The Environmental Taxes Handbook by Ian Fleming FIIT

Ian Fleming FIIT highlights the tax incentives available in respect on expenditure which is potentially beneficial to disadvantaged areas and the environment.

Disadvantaged areas

This is a relatively new measure introduced in the 2005 Budget. The scheme allows people or companies, who own or lease property that has been vacant for a year or more in one of the designated disadvantaged areas of the UK, to claim immediate full tax relief on their capital spending on the conversion or renovation of the property, in order to bring it back into business use.

In broad terms, capital allowances enable the cost of capital assets to be written off against a business’s taxable profits. Generally, different classes of assets qualify for allowances at different rates. For example:

• 25% a year on a “reducing balance” basis for most plant and machinery expenditure (with a 40% first-year capital allowance for expenditure by small and medium-sized enterprises on most plant and machinery); and
• 4% a year on a “straight-line” basis for expenditure on industrial and agricultural buildings, and certain hotels.

The Business Premises Renovation Allowance (BPRA) scheme will provide 100% first-year capital allowances for capital expenditure on renovation, or converting vacant business properties, in the designated disadvantaged areas.

Thus, BPRA would provide an enhanced rate of allowance for expenditure that would currently only qualify for lower plant and machinery, industrial or agricultural buildings allowances, and a new relief for expenditure on commercial buildings (such as offices and shops), which do not otherwise qualify for any capital allowances.

Details of the disadvantaged areas can be found on HM Revenue and Customs’ website, http://www.hmrc.gov.uk/so/pcode_search.htm 

Law: Capital Allowances Act 2001

Designated energy saving plant and machinery

A scheme for 100% enhanced capital allowances for energy-saving investments was introduced in the Finance Act 2001.
Expenditure can qualify for 100% first-year allowances if it is:

• incurred on designated energy-saving plant and machinery. These are specified in lists published by the Department for Environment, Food and Rural Affairs (DEFRA).
• unused and not second-hand equipment will not cease to qualify due to the “unused and not second-hand” rule solely because it is held as trading stock, is in the course of construction, or is in operation only for commissioning,testing or training.
• incurred on or after 1 April 2001. Expenditure on the technologies added to the scheme in the lists issued on 15 July 2002 can qualify if it is incurred on or after 5 August 2002. Expenditure on the technologies added to the scheme in the lists issued on 11 July 2003 can qualify if it is incurred on or after 5 August 2003. Expenditure on the technologies added to the scheme in new lists issued on 16 July 2004 can qualify if it is incurred on or after 26 August 2004.
• not excluded by the general rules for first-year allowances in Section 46, for example because it is expenditure on cars, ships, railway assets and, for expenditure incurred after 17 April 2002, on assets for leasing or letting on hire.

Expenditure can qualify for the allowances if it is on the provision of the energy saving plant or machinery. Broadly speaking, “plant” is the apparatus used in a business, as distinct from the premises from which the business is carried on.

Expenditure on the provision of plant and machinery can include not only the actual costs of buying the equipment, but other direct costs such as the transport of the equipment to the site, and the direct costs of installation.

The list of plant and machinery qualifying under these provisions for 100% Capital Allowances is exhaustive and beyond the scope of this book, but detailed listings can be obtained from the website at http://www.eca.gov.uk/etl/search.asp/pagecode=0001000200010001

Law: Capital Allowances Act 2001, Section 45A(1)

Environmentally Beneficial Plant and Machinery

A scheme for 100% enhanced capital allowances for environmentally beneficial plant and machinery was introduced in the FA 2003.

The scheme, for 100% first-year enhanced capital allowances, enables a business to claim accelerated tax relief on its spending on designated water efficient technology. This cash flow benefit can encourage businesses to invest in
technologies that reduce water use and improve water quality.

The current qualifying technologies for the scheme are published in a list issued by the Secretary of State in July 2006 and include two new technologies – small scale slurry and sludge de-watering, efficient industrial washing machines, and three additional sub-technologies retrofit WC flushing devices, and low flow
screw-down/ lever taps.

The full lists are available on the web site http://www.eca-water.gov.uk

Contaminated land

Lord Rodgers chaired The Urban Task Force set up by the Government in 1998 and in response to his recommendations to introduce tax incentives for land remediation, Schedule 22 to the Finance Act 2001 was born.
The key points to the relief are that:

• the business must be a UK company, not an individual or partnership;
• that company, or an associated company, must not have caused the contamination;
• any grants or subsidies received have to be netted off from the claim; and
• the expenditure must not qualify for capital allowances.

There are three elements to the relief in addition:

• first, capital expenditure can (by election) be treated as revenue expenditure. Any such costs are not then allowable as a deduction for capital gains tax purposes. However, relief is not available for expenditure that would have qualified for capital allowances (and this applies whether or not the allowances are actually claimed);
• secondly, the relief is given by way of a deduction amounting to 150% of the actual costs incurred – whether originally revenue or capital in nature, against Schedule D, Case I or Schedule A income;
• thirdly, there is also the possibility of a cash payment from HM Revenue & Customs in certain closely defined loss-making situations.

There are, therefore, three basic conditions that need to be satisfied to qualify for the land remediation relief:

1. land in the UK is acquired by a company for the purposes of its trade or Schedule A business;
2. at the time of acquisition the land was contaminated; and
3. the company incurs qualifying land remediation expenditure.

The Land

“Land” means any estate, interest in, or right over land including options to purchase and agreements to lease. It is also accepted by HM Revenue & Customs that land includes any buildings situated thereon.

The Contamination

The land must be contaminated at the time of acquisition. Land is contaminated if there are substances in, on, or under the surface of the land which are causing harm or have the potential to do so, including polluting controlled waters.

Substances can be either natural or artificial and may be in any physical state – gas, liquid or solid. It is interesting to note that it is specified that a nuclear site is not land in a contaminated state for the purposes of the relief.

The Expenditure

Qualifying expenditure is that which is incurred to prevent, reduce, repair or mitigate the effects of the pollutant in respect of either the land itself or that surrounding the site including any controlled waters affected by the land.

It should also be noted that there is no legal requirement to remove the contaminant from the site – simply mitigating the potential or actual harmful effect is sufficient.

Maximising the Claim

It should be remembered that the claiming of the relief is usually retrospective i.e. it takes place after the works have been completed. It is important therefore to keep accurate records to ensure that it is not just the key expenditure which is claimed, but the allowable associated costs. For example, the removal of asbestos could qualify for land remediation relief. Where a specialist contractor is engaged to perform this service, the invoiced costs incurred will form the major part of the claim but incidental costs such as those incurred in obtaining access to the pollutant should also be included.

In order to claim the highest amount of tax relief, the following points need to be taken into consideration:

• make sure the costs incurred are eligible - costs need to be differentiated between those that are part of the remediation process and those that would have had to be incurred in any event. If a roof has to be demolished in order to remove asbestos, then the cost of the new roof, it could be argued, is allowable. If the roof needed replacing irrespective of the asbestos, the new roof would not be allowable.
• Make sure that incidental costs are included. For example, if the foundations of a building have to be strengthened as a result of excavating the pollutant, then these costs should be allowable. It is quite possible for the associated costs to be higher than the direct costs of removing the offending material.
• Professional fees and other direct supervisory costs should also be included in the claim.
• As the claim may be subject to verification by officers from HM Revenue & Customs, detailed records should be maintained to support any claim for the relief.

Example of a Claim

Green Controls Ltd acquires a building contaminated with asbestos. It pays a contractor £400,000 to remove it. The building is to be used for the manufacture of electrical components for woodworking machinery. In this instance, the only available claim is the industrial buildings capital allowance of 4%, albeit for 25 years so long as ownership of the building is retained.

Had Green Controls Ltd leased the building to an insurance company, or used it for other purposes not attracting industrial building allowances, the tax benefit would be a not insubstantial amount as per the following table

Capital Expenditure    £400,000
Capital expenditure deemed to be revenue expenditure    £600,000
Consequent reduction in corporation tax @ 30%    £180,000

The above may be a very simplistic calculation, but the benefit of an immediate tax subsidy of £180,000 – 45% of the cost of the remedial work, is far more attractive than that provided by the industrial buildings allowance.

Unfortunately, there is no choice in the matter, if the building qualifies for capital allowances, land remediation relief is not available.

Law: FA 2001, Schedule 22

Ian Fleming FIIT is the author of 'The Environmental Taxes Handbook', published by Spiramus Press. For further information and to order a copy of this title, visit http://www.taxationweb.co.uk/spiramus/?p=book&isbn=1904905420

About the Author

Ian Fleming spent 26 years with Customs & Excise before joining the Armstrong Watson Group in 1989. He has experience of the full range of Customs & Excise work as well as VAT and the other indirect taxes. He spent five years with the National Investigation Division in Birmingham and six years with the local fraud units in Cardiff and Carlisle.

Ian is a director of The Institute of Indirect Taxation, as well as being Chairman of the North East Chapter of the VAT Practitioners Group. Armstrong Watson is one of the North’s leading independent chartered accountancy practices. The firm’s head office is in Carlisle and provides a wide range of accountancy and related services across the North of England and South West Scotland.