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your tax by R. H. Grimsley Bcom,FiAc
II. Industrial building allowances
ALL road hauliers should be able to claim capital allowances on their buildings other than offices because they will qualify under the wording of the Capital Allowances Act 1968: "Industrial building means a building in use for the purposes of a transport, dock, etc, undertaking."
The buildings used for own-account fleets operated by industrial manufacturers will also qualify, which means the managers of these fleets may take the allowances into reckoning when justifying requests for improvements to their buildings.
Two important sections of the commercial fleet-using world fail to qualify and so they enjoy no kind of tax relief on any of their buildings. These are trading firms such as wholesalers or retailers, and service garages. In the circumstances where a service garage starts running lorries and needs to use some buildings primarily for the housing and maintenance of these vehicles, they need to sort out carefully whether they have started a separate trade as road hauliers or merely extended their garage business by offering a few trucks for hire. The distinction is not easily drawn but it is important because the industrial building allowances will be given to an embryo road haulage business but not to a garage.
The effect of these allowances is to take 40 per cent (or whatever is the average rate of corporation tax) off the cost of the building during its lifetime. The relief is spread more thinly over a longer period than now applies to machinery but it is none the less valuable in proportion to the original cost of the buildings.
Initial 30 per cent The allowance falls into two main stages. For the year in which the building is first brought into use there is an initial allowance of 30 per cent at the present time, but this is to revert to only 15 per cent in April 1973. Here is some encouragement to decide on new buildings and place the contracts as soon as possible for completion before April 1973. This leaves little time to spare for hesitation as it usually takes at least 18 months to put up a building, counting the time for approval of the plans.
In Development Areas and Northern Ireland the initial allowance is 40 per cent and is to continue at this higher level indefinitely. Firms could find this and other Government incentives combine to make quite an attractive scheme for some hauliers of moving to Development Areas, though there are obviously many firms to whom this would not be practical.
Besides the initial allowance there is a writing-down allowance of 4 per cent of the cost price given in each year including the first until the entire cost has been written off. This takes roughly 20 years (depending on the exact amount of the initial allowance).
If the building is sold before it is 25 years old, there will be a balancing adjustment which is either a charge or an allowance, bringing the total allowances into line with the actual net cost of the building. If it is sold for more than its original cost the balancing charge is restricted to the amount needed to cancel all the allowances already given. The excess would then be caught for capital gains tax, but this could be deferred if the sale money was used for buying fresh buildings.
Balancing charges If the building is not sold until after it is 25 years old it then escapes any balancing charge, so the benefit of the capital allowances is retained permanently.
The remarks about 4 per cent and 25 years refer to buildings bought new since November 1962. For older buildings the figures are 2 per cent and 50 years. Here is a warning for companies now using buildings older than about 35 years, but not yet 50 years of age. Watch those balancing charges if you decide to sell. It could be better to wait a few years so as to avoid the backlash of the balancing charge which could be considerable if the old building fetches a very good price. The example shows how this would operate but the firm would obviously need to consider other factors, such as that it was urgently needing to make a move to a fresh address or had received a most attractive offer for the sale of its old building.
The allowances in this article relate only to buildings purchased new. Secondhand buildings are subject to a different scale.
Putting up a building is a long-winded process and it should be noted that the allowances for the first year depend on the date of payment; delay might mean the allowances would not begin until a whole financial year later. Obviously the earlier they start the better.