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| Irish people in general are not keen taxpayers. But it can be fairly confidently stated that many taxpayers who own buildings used in a trade, or rented out for residential purposes, fail to fully claim capital allowances to which they are entitled. In consequence they overpay tax. This can arise from failure to identify the components of a building that constitute plant and machinery for capital allowance purposes. |
Most business people who invest in a building appreciate that buildings can attract capital allowances. They would be aware that industrial buildings allowance is available on a range of buildings, including factories, hotels, commercial buildings in urban renewal areas, residential buildings in urban renewal areas, certain hospitals and nursing homes etc. Over the years there is a pattern of property investors focusing their attention on industrial buildings allowances or urban renewal allowances in respect of buildings.
The budget of December 4 has significantly changed the scene for these allowances. The rate of allowances on hotel buildings has been knocked back from 15 per cent per annum to 4 per cent per annum. Urban and rural renewal schemes have all been given a phase out date of 31 December 2004. Basic industrial buildings remain at a very unexciting 4 per cent per annum rate of allowances.
Of course, most commercial buildings (other than factories and similar) outside urban and rural renewal areas never did attract capital allowances and their owners typically regarded the expenditure in them as being ‘dead money’ from the viewpoint of taxes on income.
Buildings or plant?
What has been overlooked by many is that a large part of the cost of a building (as loosely understood) represents expenditure on plant and machinery. Where that plant and machinery is in use for the purpose of a trade, whether by a lessor, or by a lessee, or is part of residential letting, it attracts capital allowances. Prior to the budget it did so at a rate of 20 per cent per annum on cost. Post budget it does so at a rate of 12.5 per cent per annum on cost.
Even owners of buildings who are aware that they include items which are plant and machinery and attracting capital allowances as such typically underestimate the extent of plant and machinery included in their building cost. The extent to which expenditure on a building represents expenditure on plant and machinery will vary depending on the building. In an absolutely basic warehouse it may be as low as 5 per cent to 10 per cent. In a high spec air-conditioned office building or luxury hotel it could range from 20 per cent to 30 per cent or more.
What is plant and machinery?
One of the reasons why capital allowances on plant and machinery in a building are under claimed is that the identification of expenditure as being on plant, rather than on a building per se, is a most complex matter. It has been the topic of litigation since the famous Yarmouth v France case in 1887. Very broadly, a distinction is made between the setting in which a trade is carried on (which does not attract allowances as plant) and the tools with which it is carried on (which do attract allowances as plant). That distinction is sometimes seen as a distinction between buildings, and equipment. Confusingly, in some cases a building or structure can itself be plant. Both a dry dock and a swimming pool have been held, in particular circumstances, to be plant. There is now a considerable volume of case law as to what constitutes plant, as distinct from what constitutes a building, which is not plant. As a result the area requires attention from an expert tax adviser in order to maximise claims for allowances.
Amongst the obvious items in a building which may constitute plant are canteen equipment, lifts, escalators, some floor coverings, air conditioning, boilers, toilets, heating, signage, dedicated and specialised wiring, to name but a few of the more obvious items.
Almost any building, when carefully examined, would be seen to contain elements of plant and machinery. The building may be a full shopping centre, or an individual shop, a restaurant, or a petrol filling station, an office, a warehouse, or a factory.
How to find the plant
Even when a property owner is alert to the opportunities presented by plant in a building, he may be stumped by the question ‘where do I start’. The problem facing the property owner is that much of the plant and machinery is hidden from sight behind walls, false ceilings and so forth. More importantly, the cost of that plant and machinery, even when physically identified, is often lost in a mass of construction costs the documentation for which was never designed to accurately yield the cost of the plant elements.
Even if careful analysis of invoices identifies the cost of supply of specific items of equipment, there remains the problem of properly attributing to the plant the part of professional fees (that of architects, quantity surveyors, engineers etc) which related to the acquisition and installation of that item of plant. Consideration also has to be given to elements of the building that were specifically designed to make the plant usable eg a reinforced base in the case of heavy boilers, and so forth.
It soon becomes obvious that the task requires a specialist with a knowledge of tax, property, construction and surveying matters. Even where a quantity surveyor takes on the job, it will often be the case that he does not have the requisite tax knowledge to maximise the owner’s tax advantages from the exercise.
KPMG’s response to this problem has been to create a specialist team to tackle the area of capital allowances. The team has specialised knowledge of the tax law relating to capital allowances, and also of quantity surveying, property and the construction industry. In a large project the results can best be obtained by a team that can combine these specialisations.
Start early
The maximisation of capital allowances in a building is not simply a matter of identifying the cost of the elements of plant, after the building has been built. Decisions made in the design of the building can influence the extent to which costs will be attributable to plant, or to non-plant elements of the building. If an office is divided up using fixed partitions (such as are used to divide rooms in many modern domestic houses) the cost of that partitioning is not plant. If on the other hand a decision is made to use partitions that are capable of being dismounted and remounted in other areas, those partitions could constitute plant. The choice of floor covering (whether fixed to the floor or not) can also affect whether or not the cost will relate to plant. There are many such critical choices which arise in the design of a building.
The owner of a building will have the best chance of maximising his claims for capital allowances on the building cost if he uses a capital allowance specialist to work with the architects in the design.
For purchasers only?
A person disposing of a building is usually also disposing of the elements of plant within the building. He may therefore suffer a claw back of the capital allowances on that plant previously granted to him. This is an area where his interests and that of a purchaser of the building may be opposed. The purchaser might wish to maximise the part of the purchase price attributable to plant, whereas the vendor (if he has been properly advised and fully claimed capital allowances in the past) might not want that result. The services of a specialist in the area are important in such cases.
The distinction between a building and plant can also impact on stamp duty planning. At the new 9 per cent rate that will generally apply to commercial buildings, stamp duty planning becomes more important than it has been.
Capital allowances on plant in buildings is an issue for almost every businessman – whether he at present owns buildings, is proposing to purchase a building, is proposing to build a building, or may be about to sell a building. Literally, there is much more to plant in buildings than meets the eye. |
Ken Hardy is a Tax Partner at KPMG and heads up KPMG’s Tax Depreciation Division which specialises in this area.
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| Article appeared in the January 2003 issue.
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