This is intended to encourage companies or individuals to bring qualifying business premises, whether freehold or let, back into business use.

Business premises renovation allowances provide a 100% initial allowance in the year the expenditure is incurred, or if it is preferred by the taxpayer, 25% per annum on a straight line basis. They are particularly valuable because all expenditure incurred qualifies, unlike commercial.

The Finance Act 2005 introduced a scheme enabling people or companies, who own or lease property that has been vacant for a year or more in designated disadvantaged areas of the UK, to claim full tax relief on their capital spending on the conversion or renovation of the property, in order to bring it back into business use. After protracted negotiations with the EU, implementation eventually took take place on 11 April 2007.

Expenditure must be incurred on the conversion, renovation, or incidental repairs of a ‘qualifying building’ into a ‘qualifying business premises’. The relief is not available for extensions (except to provide access to qualifying business premises), moveable plant and machinery, or property previously used, or to be used for certain trade sectors:

Qualifying Expenditure

Qualifying expenditure is capital expenditure on

• converting a qualifying building into qualifying business premises,
• the renovation of a qualifying building that is, or is to be, qualifying business premises, and
• repairs to a qualifying building.

The following is not qualifying expenditure. Expenditure on:

• acquiring land,
• extending a qualifying building, or
• developing land next to a qualifying building.

For example, adding another storey to a qualifying building or creating a basement for a qualifying building is not qualifying expenditure.

Qualifying Building

A qualifying building is an unused commercial building or structure or part of an unused commercial building or structure. The building must have been unused for a year immediately before the conversion or renovation began. This means that it must not have been used for anything for a year before conversion begins. The last use must not have been as a dwelling.

The purpose of ECAs is to encourage businesses to invest in environmentally friendly plant and machinery.

Enhanced Capital Allowances enable a business to claim 100% first-year capital allowances on their spending on qualifying plant and machinery.

There are three ECA schemes:

• Cars that emit low levels of carbon dioxide and natural gas and hydrogen refuelling infrastructure
• Energy-saving plant and machinery
• Water conservation plant and machinery

Businesses can write off the entire capital cost of their investment in these technologies against their taxable profits of the period during which they make the investment. This can deliver a helpful boost to cash flow.

Qualifying Plant and Machinery

Cars with low CO2 emissions

Enhanced Capital Allowances are available for capital spending from 17 April 2002 to 31 March 2008 on:

• New cars with carbon dioxide emissions of not more than 120gm per kilometre driven for use in their business
• Natural gas and hydrogen refuelling equipment at refuelling stations

Energy Saving Plant and Machinery

• Air to air energy recovery
• Automatic Monitoring and Targeting
• Boilers
• Combined Heat and Power
• Compact heat exchangers
• Compressed air equipment
• Heat pumps for space heating
• HVAC zone controls
• Lighting
• Motors
• Pipework insulation
• Refrigeration Equipment
• Solar thermal systems
• Thermal screens
• Variable Speed Drives
• Warm air and radiant heaters

Water Conservation Plan and Machinery

• Flow Controllers
• Meters
• Leakage detection
• Efficient toilets
• Efficient taps
• Rainwater harvesting equipment

The purpose of this allowance is to encourage owners to bring back into habitation the upper floors of commercial properties. Typically this means flats over shops.

Flat conversion allowances provide a 100% offset in the year the expenditure is incurred. The taxpayer can, however, choose to write down the costs on a 25% per annum straight-line basis. Unlike other allowances, they apply to residential property and all expenditure incurred qualifies.

Expenditure must be incurred on the conversion, renovation, or incidental repairs of a ‘qualifying building’ into a ‘qualifying flat’ after May 11th 2001.

Expenditure incurred in connection with the conversion or renovation of a flat may include costs outside the direct boundary of the new or renovated flat such as the creation of stairwells within the building or provision of extension, solely to provide access to the new flats. It may also include architects and surveyors fees.

Examples of associated costs that may qualify are:

• Inserting or removing walls, windows or doors
• Installing and upgrading plumbing, gas, electricity or central heating
• Re- roofing incidental to the conversion / renovation
• Providing access to the flats(s) separate from the commercial premises, including extensions to the building to contain this access, if required
• Providing external fire escapes where regulations require
• As well as P&M items

A qualifying building is one:

• In which all or most of the ground floor is authorised for business use,
• Where it appears that, when the building was constructed, the storeys above the ground floor were for use primarily as one or more dwellings,
• Which has no more than 4 storeys above the ground floor, and
• Whose construction was completed before 1 January 1980

A qualifying flat is a flat that:

• Is in a qualifying building (see above)
• Is suitable for letting as a dwelling;
• Is held for short-term letting;
• is accessible without using the business premises;
• has no more than 4 rooms ignoring kitchens and bathrooms and closets, cloakrooms and hallways that are not more than 5 square metres in area;
• is not a high value flat;
• was not created as part of a scheme involving the creation or renovation of one or more high value flats; and
• is not let to a person connected with the person who incurred the conversion or renovation expenditure.

For these purposes ‘high value’ is defined as:

Ignore kitchens and bathrooms, and closets, cloakrooms and hallways not exceeding 5 square metres when determining the number of rooms in a flat.

A flat does not become a high-value flat if, at some time after the conversion or renovation expenditure is first incurred, the rent it could achieve exceeds these limits. The test operates independently of any future movements in the property letting market.

This valuable relief is available to companies subject to Corporation Tax (but no other classes of taxpayer) for money spent cleaning-up contaminated or long-term derelict land or buildings. It is especially beneficial to claimants as it is allowed at a rate of 150% of the expenditure in the year the money is spent including all associated professional costs in identifying the problem. This means that if a company spends £10,000 on decontamination, it can claim £15,000 in tax relief the same year.

Unlike other capital allowances, it can be claimed for residential development land and buildings, and is available either when the expenditure is classed as being for investment or for trading purposes.

Where a company has insufficient taxable profits (or none at all) against which to offset the allowance, they can surrender the tax loss to HMRC in return for an immediate cash payment worth 16% of the loss surrendered – equivalent to 24% of the sum expended on land remediation.

Land Remediation Relief (LRR) is available to companies who acquire a ‘Major’ interest in land in a contaminated state. The use of ‘Major’ is a change to the legislation from April 2009, effectively meaning that only land acquired as a freehold or a lease for 7 years or more qualifies.

What Qualifies as Land Remediation?

Clean-up expenditure qualifies if all of the following are true:

• The land is in the UK and was acquired by the business to carry out its trade or property letting business
• The land was already derelict or contaminated at the time it was acquired
• The dereliction or contamination was not caused by action or inaction of the business or a person connected to the business

Relief extends to buildings on the land as well as to the land itself. Land is contaminated if contamination is present that is causing or has the real potential to cause significant harm. The cost of dealing with natural contaminants (other than Japanese Knotweed, arsenic or radon) does not qualify for relief.

Contamination refers to most commonly found substances including hydrocarbons. Japanese Knotweed is also included from April 2009, but HMRC have proposed that claims still ‘in time’ may qualify. This means that any removal, on which you may have incurred expenditure in the last two years, may also qualify.

Remediation is also not confined to removal costs. Sites where removal has occurred that are still ‘in time’ prior to April 2009 may still be able be able to claim as previously mentioned. Other methods of remediation such as capping and encapsulation, clean air blankets, membranes and venting may also qualify.

Land Remediation Relief operates either by giving a six-year window to make a claim, or two years to elect to treat capital expenditure on Land Remediation as a deduction in computing profits or to claim a payable Tax Credit. An investor may claim 150% of the remediation costs, and developers may claim 50% when disposal occurs, and as all such expenditure is trading expenditure then developers have six years to do so.

The Landlord’s Energy Saving Allowance is intended to reduce energy consumption and carbon emissions. It gives private landlords (and, since the 2007 budget, includes corporate landlords paying corporation tax) a tax deduction of up to £1,500 per property for installing ‘energy efficiency measures’ (insulation) into existing residential properties.

The relief is available for the installation of cavity wall and loft insulation, solid wall insulation (from 7 April 2005), hot water system insulation and draught proofing (from 6 April 2006), and floor insulation (from 6 April 2007).

Research and Development (R&D) Relief is a Corporation Tax relief that may reduce your company or organisation’s tax bill by more than your actual expenditure on allowable R&D costs.

The Research and Development Tax Relief scheme was introduced in 2000 for small-to-medium enterprises (SMEs), and a further scheme for larger companies in 2002. Its objective is to encourage investment in technology R&D with tax incentives.

These incentives take the form of tax credits or tax relief against eligible R&D investment where the expenditure is taken as a revenue item in the Profit and Loss account. Where the expenditure is capitalised on the balance sheet, then capital allowances are the appropriate tax claiming route.

There is a substantial shortfall in claims made compared with the amount of R&D being carried out in industry. A great many companies have still not claimed their entitlement, mostly because they are unaware that they even qualify though in some cases it is because they consider the claim process unduly tortuous.

Small & Medium Enterprises’ (SME) scheme

This scheme allows the SME to deduct an additional 75% of its qualifying R&D costs from taxable income. If the company has made a loss, the scheme allows the alternative of a cash payment of up to 24.5% of the eligible R&D investment in exchange for surrendering the potential tax loss. For this reason, the scheme is often regarded by early-stage start-up companies as a valuable source of funding rather than necessarily a tax incentive.

To qualify for the SME scheme, companies must meet a modified version of the EC definition of SME. This is broadly: fewer than 500 employees and either a turnover below €100m or total assets of less than €86m. Since related companies are taken into account, this can sometimes make the assessment complex, although there are certain exemptions for holdings by venture capital funds or universities.

Large Company Scheme

A large company (i.e. one which exceeds the EC SME criteria) is able to deduct an additional 30% (rather than the 75% allowed to SMEs) of its qualifying R&D spend. Unlike SMEs, large companies making losses do not have the option of surrendering tax losses in exchange for a cash payment. The R&D tax relief therefore only provides an immediate financial benefit if there are taxable profits available in the company or group against which to set it.

What Counts as R&D?

The definition of R&D for tax purposes has recently been updated – but not simplified. The most important consideration is whether there is an appreciable element of innovation and that is assessed and defined by Government inspectors. It is important to ensure that commercial exploitation of the technology has not yet started. That can prove difficult to determine in practice.

For tax purposes, R&D is defined in guidelines published by the DTI. Claims are possible from any field of science or technology including engineering and software, not just the more obvious areas.

Whatever the area involved, understanding the boundaries between the eligible R&D parts of a project and the ineligible activities is crucial. This is where specialist help is needed most.

Qualifying R&D Costs

The R&D expenditure included in a tax relief claim must fall into certain specified categories such as staff costs, consumables, computer software and payments to external contract staff. General overheads (for example rent and rates) do not qualify. There are also differences in the range of claimable costs between the SME and large companies’ schemes.

Claims can now only be made within two years of the company’s year end, whereas previously a six-year limit applied for claiming the higher level deduction.

Research and Development Capital Allowances (RDAs)

Where R&D capital expenditure is shown on the balance sheet, rather than revenue items which are accounted for on the Profit and Loss account, RDAs are a valuable deduction for tax purposes. Such capital items could include laboratories, research facilities and equipment as well as company cars for people dedicated to the project.

A Misunderstood Pair Of Schemes

The SME and large company R&D schemes are widely misunderstood. Where they are not misunderstood, it is quite likely because they are not even known about.

This is an area where specialist help can make a vital difference, particularly to young and start-up companies that have not yet reached profitability.