Integral Features – What Are They?

The Bourne Agenda is a fortnightly blog brought to you by Bourne Business Consulting LLP, an independent tax and business consultancy with offices in London and Farnham.

On 29 December 2008, HMRC issued draft guidance on the changes to the Capital Allowances legislation introduced in Finance Act 2008, on which comments were invited by 10 February 2009.

Within this guidance were details on the changes in the meaning of ‘dwelling house’ for capital allowances purposes and the eligibility of slurry storage facilities for the annual investment allowance (AIA), together with the long-awaited guidance on integral features.

Background to Integral Features

The introduction of integral features was part of a wider package of Business Tax reforms, introduced by Finance Act 2008. It included changes intended to simplify and reduce the distortive impact of capital allowances. In order to write down the cost of features that are normally integral to a modern building (such as electrical, cold and hot water systems etc), which have a longer average economic life than other plant & machinery, at a more appropriate rate, a new pool was introduced for these integral features which would attract writing down allowances at a ‘special rate’ of 10% per annum.

The assets which are now classed as integral features are:

* Electrical systems (including lighting systems);

* Cold water systems;

* Space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems;

* Lifts, escalators and moving walkways;

* External solar shading

What is an Integral Feature – Does the Draft Guidance Help?

In the preparation of claims for capital allowances incorporating integral features, the main area of uncertainty has been in respect of where HMRC will draw the line at "electrical systems" or "cold water systems".

The draft guidance describes an electrical system as:

“A system for taking electrical power (including lighting) from the point of entry to the building or structure, or generation within the building or structure, and distributing it through the building or structure, as required.”

But

“Does not include other building systems intended for other purposes, which may include wiring and other electrical components. For example, communication, telecommunication and surveillance systems, fire alarm systems or burglar alarm systems.”

The draft guidance confirms HMRC’s view that cable ducting for electrical systems would qualify as an integral feature, but ducting for television, data and telecommunications as general pool plant & machinery.

A cold water system, meanwhile, is described as:

“A system for taking water from the point of entry to the building or structure and distributing it through the building or structure, as required.”

This refers to water from the point of entry to delivery only. Therefore, this does not include waste water, which will either qualify as general pool plant & machinery, or be non qualifying expenditure, as classified under the general pool plant & machinery rules.

Thermal insulation is described as:

“Adding insulation against loss of heat to a building … occupied by a person for the purposes of a qualifying activity.”

This will include expenditure on such items as roof-lining, double glazing, draft exclusion and cavity wall filling. This provision on thermal insulation is welcomed. Being widely drawn, it is likely to be a helpful change.

Replacement of an Integral Feature

One of the aspects of the new legislation that is anticipated to be more difficult to administer is the replacement of an integral feature.

Where 50% or more of an integral feature is replaced within a 12 month period, then that cost will be disallowed in the computation of taxable profits, and capital allowances at 10% per annum will be given instead. There is a risk that this disallowance will disproportionally impact on smaller businesses without the resources to track individual assets for the purposes of this piece of legislation.

The draft guidance in the capital allowances manuals does little to provide certainty on where HMRC may draw the line as to what constitutes an 'asset' for these purposes – a ‘light touch’ approach will be adopted.

Acquisition of a Building

The introduction of the new rules will also have an impact on the calculation of allowances available on the acquisition of a building on or after 1 April 2008 (or 6 April 2008 for IT payers) which contains integral features.

Non connected parties

Where an entity purchases a building after 1 April 2008 (or 6 April 2008 for IT payers) from an unconnected party, the original rules apply to the plant & machinery within the building. However, with the lack of any grandfathering provisions in the new legislation, an exercise will be necessary to identify the proportion that should enter the special rate pool as integral features.

It is also possible that additional expenditure on assets such as cold water systems and general lighting will qualify as integral features, as, depending on the particular property, they are unlikely to have been the subject of a prior capital allowances claim.

A CAA 2001 s.198 election is still possible to fix the allocation to plant & machinery, although whether a separate election would be required for general pool and special rate pool assets remains unclear.

Intra-group transfers

FA2008 also introduced a provision to enable companies that are members of the same group to transfer, on or after 1 April 2008, property containing a ‘pre-commencement integral feature or features’ between themselves and elect for the integral features not to be treated as special rate expenditure in the buyers hands.

There are also anti-avoidance provisions introduced for a sale between connected parties.

In General

In general, the draft guidance provides a beneficial indication of where HMRC may draw the line at the application of the new integral features, and is useful in outlining the workings of the new legislation. Hopefully, the details will be resolved as HMRC receive more returns incorporating the new rules.

Emily Winfield
Bourne Business Consulting LLP