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• Business premises renovation allowance (BPRA) is a capital allowances incentive designed to encourage regeneration of certain deprived areas.
• 100% capital allowances are available for the costs incurred in converting or renovating empty business premises.
• HMRC are conducting a technical review of the scheme to address areas of potential tax avoidance.
Business premises renovation allowance (BPRA) was introduced with effect from 11 April 2007 to provide an incentive for businesses to tackle derelict shops and empty business premises and to bring them back into productive use. Under the scheme, 100% initial capital allowances are available for qualifying renovation expenditure, meaning businesses can obtain a deduction against profits for the full costs of renovation in the year in which that expenditure is incurred.
The allowance was initially introduced for a period of five years. However, in 2012 it was extended for a further five years and is currently due to end on 31 March 2017.
In July 2013, HMRC launched a technical review into BPRA in the light of disclosures made under the disclosure of tax avoidance schemes (DOTAS) rules indicating the involvement of BPRA in tax avoidance schemes. The technical review aims to highlight those areas of BPRA that are giving cause for concern, while protecting the role of the scheme in providing an incentive for reinvestment and regeneration.
For the purpose of BPRA, expenditure is qualifying expenditure if it is incurred on or in connection with the conversion or renovation of a `qualifying building’ into `qualifying business premises’. For these purposes, a `qualifying building’ is an unused commercial building or structure or part of an unused commercial building or structure. Further, the building must have been unused for at least a year before the conversion work began and the last use of the building must not have been as a dwelling and is situated in an area which at the time that the conversion of renovation work began was designated as a disadvantaged area. A disadvantaged area is one designated as such by regulations (SI 2007/945) made for this purpose.
A building or part of a building is a qualifying business premise if it is a qualifying building that is used or available and suitable for letting for use as a commercial building other than as a dwelling. A commercial building is one that is used for the purposes of a trade, profession or vocation. Businesses used or available for use as a dwelling do not qualify, nor do premises used for trades in the following sectors:
• fisheries and aquaculture;
• the coal or steel industries;
• synthetic fibres;
• primary production of certain agricultural products; or
• manufacture or marketing of products that imitate or substitute for milk and milk products.
When the BPRA rules were originally drafted it was envisaged it would provide relief for expenditure on such things as:
• the actual costs of the building works incurred on renovation or conversion within the fabric of the existing `qualifying building’ and,
if necessary, the costs of providing access to separate floors or parts of the conversion;
• the costs of inserting or removing walls, windows and doors;
• the costs associated with the installation or upgrading of integral features such as plumbing, gas, electricity and central heating systems;
• costs of re-roofing the converted property, if required; and
• costs directly incurred in connection with the renovation or conversion such as the fees of architects, civil engineers and structural engineers.
However, BPRA was never intended to provide 100% capital allowances for all types of expenditure that may be incurred in completing the development. Rather it was designed as a targeted incentive to encourage investment in disadvantaged areas.
BPRA is only available for qualifying renovation expenditure. It is not available in respect of the costs of the land and buildings, nor in respect of others forms on non-qualifying expenditure.
Example – Expenditure qualifying for BPRA
Jack buys a disused warehouse in a disadvantaged area and converts it into retail units. The warehouse has been unused for the last five years. Jack is able to claim BPRA for the costs of conversion and in this way is able to deduct the costs in full against his profits for the year in which the expenditure is incurred.
BPRA is a valuable relief as it allows the costs of converting unused commercial buildings to be written off in full against profits in the year in which the costs are incurred.
As a result of disclosures made under the DOTAS, HMRC have become aware that many recently disclosed BPRA schemes claim allowances for costs which are more associated with marketing a completed and successful income producing property investment, rather than the costs of regenerating an unused commercial property in a disadvantaged area. Costs have been claimed under BPRA which HMRC do not regard as falling within the definition of `qualifying expenditure’, such as:
• the attribution of a disproportionate amount of the overall investment to renovation costs rather than to the non-qualifying cost of the site
and the building;
• the costs of a tenant fit-out to include non-qualifying chattels;
• the cost of incentives given to the tenant by the developer to secure rent at a certain level;
• the costs of specific trade machinery;
• expenditure on a building that is to be used as a dwelling (such as student accommodation) which does not qualify as business premises.
Claims have also been made for other costs which do not count as qualifying expenditure under BPRA, such as a license fee to guarantee a certain level of rental income or the costs of promoting BPRA to potential investors.
Non-qualifying costs are often included as part of the total package and it is claimed that at least 90% of the investment is eligible for BPRA. HMRC does not accept that the cost listed above qualify for BPRA and will continue to challenge claims that purport to include them. The government is now of the view that new legislation is needed to provide certainty to claimants and to reduce the risks to the Exchequer.
HMRC are also challenging circular borrowing arrangements which seek to enhance the expenditure in respect of which BPRA is claimed.
As part of a technical review the government has identified a range of possible legislative changes to target artificial features of the scheme which have come to light as a result of disclosures made under DOTAS. These could take the form of specific measures to clarify the policy purposes underlying the BPRA whilst preventing manipulation where investors are effectively acquiring a completed building, and/or a targeted anti-avoidance rule (TAAR).
Under the heading of a specific measure, it is proposed that legislation is introduced to clarify the meaning of `qualifying expenditure’ for BPRA purposes. The government is also considering introducing a TAAR which would prevent property business loss relief from arising from losses attributable to capital allowances where tax avoidance arrangements are in existence. Comments are sought on the effectiveness of these proposals.
The technical review was announced by the Exchequer Secretary to the Treasury on 18 July 2013 and launched in a technical note which is available on the HMRC website at www.hmrc.gov.uk/drafts/bus-premises-renovation-allowances.pdf. Comments on the technical note are welcomed and should be made by 30 September 2013.
Practical Tip :
BPRA is designed to provide an incentive to develop unused buildings in disadvantaged areas. Businesses looking to renovate unused commercial buildings should consider any opportunities that are available in disadvantaged areas in order to accelerate relief for renovation costs by claiming BPRA.
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