Article by Adrian Rudd of PricewaterhouseCoopers and Tax Adviser’s representative on the Technical Committee. Published in the December 2001 issue of Tax Adviser. This article summarises three separate matters which the Technical Committee has recently raised with the Inland Revenue. The first concerned the application of the rules in Finance Act 2002
(FA 2002) on contaminated land, and their application to corporate partnerships. The second concerned the Revenue’s views about the meaning of ‘security’ for taper relief purposes which were recently published in the Tax Bulletin. The third concerned proposals for simplifying the computation of industrial buildings allowances.
Clean up of contaminated land – FA 2001 Schedule 22
The Chartered Institute of Taxation (CIOT) asked the Revenue to issue a Statement of Practice similar to SP 4/98, relating to the case where land is acquired, and qualifying clean-up expenditure incurred, by a partnership including one or more corporate partners. This is an important point, because property development is often carried out by limited partnerships and joint ventures which are regarded as partnerships for tax purposes.
The Institute thought that a corporate partner has an interest in the land (Finance Act 2001, (FA 2001), Sch. 22 para. 31) and carries on a trade through the partnership, assuming that the partnership carries on a trade. Income and Corporation Taxes Act 1988, (ICTA 1988) s. 114 requires the tax computations for the partnership to be done on the basis that the partnership is a company.
It would follow that a corporate partner can claim the new relief in respect of its share of the qualifying expenditure.
The Revenue replied as follows:
‘We are not intending to issue a Statement of Practice on the contaminated land legislation, but are working on instructions to our inspectors on the detail of the legislation. These will be published in the usual way. We are also working on a short guide to the legislation for non tax specialists which we intend to put on the Revenue web site. Both should be available in the near future.
You also ask about corporate partnerships and whether they can benefit from the legislation. As you will no doubt know a partnership in England, Wales and Northern Ireland does not have a legal personality, although it does in Scotland, and we accept that where legislation refers to an individual, or a com an it applies equally to those same bodies in partnership. Therefore I can confirm that the provisions of Section 70 FA 2001 will apply to companies carrying on business in partnerships to which the law of England, Wales and Northern Ireland applies. Should there be an actual case of a Scottish partnership seeking relief then we would have to look further at the position in Scotland.’
Capital Gains Tax taper relief: meaning of security
The Institute was disappointed with the Revenue’s interpretation of ‘security’ for the purposes of taper relief in the Taxation of Chargeable Gains Act 1992 (TCGA 1992) Sch. A1 para. 22, as published in the June 2001 Tax Bulletin. Since March 2000, when the increased rates of business asset taper relief were introduced, much has hinged on whether a particular security would qualify as a business asset. The Institute feels that this area of the taper relief rules is anomalous and has no discernible policy reason. It appears to be an accident of the interaction of many complex rules, introduced and amended frequently over a long period of time, many having no direct connection with the new regime for capital gains tax first introduced in 1998.
The Institute believes that the Revenue’s interpretation of ‘security’ for taper relief purposes is artificial because, in reality, the marketability of a loan note or debenture will not be one of the prime concerns for those seeking to generate capital for a new enterprise. The CGT rules should recognise this and give business asset taper relief where companies choose to raise genuine business capital in this way.
The Institute pointed out that the Revenue took a pragmatic attitude when they published their first guidance on taper relief in November 1998. This explained that in a take-over situation the anti-avoidance rules in TCGA 1992, Sch. A1 para. 10 would not be applied to the commercial issue of loan notes, albeit that these loan notes ‘will typically not bear the same degree of exposure to fluctuations in value as the shares for which they were exchanged’. The commerciality of the use of loan notes was recognised and the consequences of para. 10 overruled by concession.
The Institute proposed that a similar sensible interpretation of the word ‘security’ should be applied for the purposes of taper relief, but that this should be done by law, not by concession. If such legislation cannot be backdated then concessionary relief should be available to those who did not realise that such a strict interpretation of the meaning of the word ‘security’ would be published some three years after the original legislation.
Industrial buildings allowances – simplification of the computations
The Institute has written to the government, identifying areas of unnecessary complexity in industrial building allowance (IBA) computations and suggesting an alternative simpler basis for calculating IBAs. In addition to these point the Institute has written separately to propose that capital allowances should be given on all commercial buildings.
The computation of IBAs
At present, it is necessary to compute IBAs separately for each item of qualifying expenditure – or at least for the expenditure incurred on each industrial building in each accounting period. This can lead to enormously detailed computations in cases where a company has many industrial buildings and incurs expenditure on extensions and alterations from time to time.
On the purchase of a building second-hand, the purchaser has to ascertain the history of qualifying expenditure on the building and the residue of each item after the sale to him/her. This can present considerable practical difficulties.
These complications are largely a consequence of the straight-line basis on which qualifying expenditure is written off under the IBA rules.
A further complication is that the purchaser’s qualifying expenditure cannot exceed the original qualifying expenditure on construction, alteration, etc.
A pooling basis for IBAs
The IBA computations would be simplified considerably if all expenditure on a building was pooled, and the whole of the purchase price of a second-hand building (excluding any amount attributable to the value of the land on which it stands) qualified for IBAs.
If the expenditure on a particular building was pooled, then it seems inevitable that the reducing balance basis will have to apply. It then becomes necessary to determine the appropriate rate of writing down allowances. This can be chosen so as to preserve:
- the current 25 year writing off period, which implies a rate of approximately ten per cent; or
- the same net present value of the present four per cent straight line allowances, which implies a rate of approximately six per cent, which is the rate applicable to long-life assets under the plant and machinery rules.
The Institute proposed that industrial buildings should be dealt with on the same basis as long-life assets. Indeed, there seems no reason why industrial buildings expenditure and long-life assets should not be included in the same pool.
The change to a reducing balance basis would, however, mean that allowances on a second hand building acquired within the present 25 year period would be given at the same rate as applies for expenditure on the construction of a new building. Also, balancing charges, and corresponding allowances to a purchaser, could arise after the end of the present 25-year period.
Ascertaining the purchase price of a second hand building
In practice, there is usually a single purchase price for the land and the building standing upon it, which has to be apportioned for tax purposes between land and building. A similar problem arises in relation to fixtures. The general rule is that the apportionment is to be made on a just and reasonable basis even if the contract specifies an apportionment, under Capital Allowances Act 2001, (CAA 2001) s. 562.
The Institute proposed that the parties should be able to make an election determining the amount to be apportioned to an industrial building. The parties would, in practice, be able to ensure that the vendor’s disposal value does not exceed his qualifying expenditure if that was thought appropriate. The requirement to make an election, and the agreed value, could be specified in the purchase and sale contract and would apply without restriction. Where necessary, the purchase consideration as a whole could be adjusted accordingly.
Periods of non-qualifying use
The Institute proposed that taxpayers should simply not compute allowances for a period of non-qualifying use. This would mean that allowances covering the whole of the qualifying expenditure might eventually be given despite the period of non-qualifying use, but only if the building was in qualifying use at some future time. This would be simpler than the current rules, and there would not be a significant impact on the tax yield.
The Institute proposed that the new rules should apply to buildings constructed or acquired on or after the start date, with existing buildings being left on the old basis. However, there should be an election to bring the written down value of an existing building into the new system. It is for consideration whether the election should be on a building by building basis or whether only one election should be available for all buildings held by the taxpayer or the group of which a taxpayer company is a member.
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December 2001 by