Tax Avoidance with an ethical twist!

A UK Income Tax Saving Scheme that could revitalise the amount of PAYE you pay to HMRC and also revitalise some building projects…

There is an under used tax relief scheme with HMRC blessing that can provide high rate tax payers with a boost and provide jobs in hard pressed areas.

The Business Property Renovation Allowance (BPRA) allows up to 100 percent tax relief on the costs of converting disused buildings for use as commercial premises.

But, as always, there are restrictions:

  • The relief does not apply to the cost of acquisition or extension. Only renovation.
  • A “qualifying” building must be in a disadvantaged area (currently parts of North and Central England, Scotland and Wales – and all of Northern Ireland)
  • The building must have been disused for at least a year
  • It must have last been used for a trade, profession or vocation or as offices

The BPRA scheme was due to end last year, but was extended for a further five years in 2011’s Budget. But take up so far has been surprisingly low. At the time of the Budget, Treasury figures showed that in 2009-10 only 300 companies and unincorporated businesses claimed the allowance, amounting to around £90m total.

The opportunity is significant. Were the government to actively promote the BPRA scheme, and were it to remove some of the current restrictions, then this could really give areas of high unemployment the boost they desperately need.

Background

Business Premises Renovation Allowance (BPRA) was introduced by the Finance Act 2005. It is intended to be an incentive to bring derelict or unused properties back into use, with an initial allowance of 100 percent for expenditure on converting or renovating unused business premises in disadvantaged areas. Its start date was 11 April 2007, so expenditure must be incurred on or after 11 April 2007 to qualify for BPRA.

Conditions of qualifying for the BPRA

1. Buildings must be in disadvantaged areas specified as development areas by the Assisted Areas Order 2007(SI 2007/107) or in Northern Ireland. They must also have been unused for a year immediately before work begins. The last use must not have been as a dwelling.

2. A person must incur qualifying expenditure in order to claim BPRA, which is capital expenditure on converting, renovating or repairing a qualifying building into qualifying business premises. It does not cover expenditure on acquiring land, extending a building or developing land next to a qualifying building.

3. Qualifying business premises are premises used, or available for letting for use, for a relevant trade, profession or vocation or as offices. There are exceptions, however, as these types of premises don’t qualify:

  • Used or available for use as a dwelling
  • The relevant interest in which is held by a person carrying on a relevant trade
  • Used wholly or partly for the purposes of a relevant trade

A relevant trade is a trade in the following sectors:

  • Fisheries and aquaculture e.g. fish farming
  • Shipbuilding
  • The coal industry
  • The steel industry
  • Synthetic fibers
  • The primary production of certain agricultural products
  • The manufacture or marketing of products which imitate or substitute for milk and milk products

Allowances and charges

The initial allowance is equal to 100 percent of the qualifying expenditure. If this is not claimed, or not claimed in full, the person that incurred the qualifying expenditure (and holds the relevant interest in the qualifying building) may claim writing down allowances (WDAs). WDAs are given at an annual rate of 25 percent on the straight line basis to the person holding the relevant interest until all the qualifying expenditure has been allowed.

The relevant interest in the building is that to which the person incurring the qualifying expenditure was entitled to when the qualifying expenditure was incurred.

There is a balancing adjustment if there is a balancing event within 7 years of the first use of the building after conversion or renovation. A balancing adjustment is a balancing charge or a balancing allowance. The main balancing events are the sale of the relevant interest and the grant of a long lease for a premium out of the relevant interest.

How allowances are given and charges made

If the person entitled to BPRA has a trade, profession or vocation, the allowance is treated as an expense and a balancing charge is treated as income of that trade, profession or vocation.

If the person entitled to BPRA has a property business, that is if the person is the landlord, the allowance is treated as an expense and a balancing charge is treated as income of that property business.

Our View

We always take the moral high ground and use authorised (legal) tax avoidance for saving tax. This appears to fit the bill nicely: not only are you helping yourself by reducing your tax bill, but you are boosting the economy by providing the finance for building work.

Tax has hit the national headlines recently for all the wrong reasons; particularly the K2 scandal and the Eclipse Film partnership (see our previous blogs). The first thing we consider when we get details of a new scheme is whether it is safe to recommend to clients? The last thing we want is to promote schemes that become vilified in the national press.

The BPRA is safe to recommend because it is an ethical tax break sponsored by the government  and intended to entice businesses to move to derelict buildings in economically depressed areas.

Are there a variety of schemes? If so, is any one better than another?

It really depends on the structure of the scheme and how it is organized. Typically, a scheme will collect a number of investors to form a syndicate which will then buy and renovate a property qualifying for BPRA. Often they will also arrange borrowing to boost the funds invested. For example, if you put in £25,000, it may gear up £75,000 when your investment is combined with the loan and later used to renovate the property.

The scheme will get tax relief on 100 percent of the money it spends on renovation. If, for example, your share was £75,000, you’ll get relief on it at your highest tax rate; that could be 50 percent, producing a tax refund of £37,500.  However, depending on the timing of the scheme, you may have to wait some time for your tax relief.

Some schemes warn that your money must be invested for at least seven years after the property has been renovated or, if you attempt to withdraw funds early, some of your tax refund will be clawed back. So in reality you may have to wait eight years, although your investment will have already been recouped with the generous tax reliefs. In reality, therefore, you are waiting for money that ordinarily would have been paid to HMRC.

The property is rented out and the income it generates will be used to meet the syndicate loan repayments and usual property and administration overheads. Ultimately, the scheme sells the property and, assuming it’s increased in value, you should get your original investment back plus a small profit.

Unlike film funding and similar tax-saving schemes, this is not a loop hole or a manipulation of the tax rules. We’re confident you won’t have any trouble from the taxman provided the scheme is setup properly. That does not mean you can afford to be complacent. As always with tax planning, the devil is in the detail. So take professional advice with regard to your choice of scheme and remember not to put all of your eggs in one basket but instead spread your investments around different ones.

Ray Best can help you protect your financial future. To find out more, simply click here!

About Ray L Best

Ray Best has had over 30 years experience of advising on complex financial matters. A published author of a number of books including “Partnership and Shareholder Protection”, Inheritance Tax Simplified”. We provide an initial meeting at no cost and only engage with clients when we can add significant value.

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