Enterprise Zones Allowances - When will they be abolished?
By Peter Reynolds
Finance Acts 2007 and 2008 introduced the phasing out and abolition of Industrial Building Allowances (IBAs) and Agricultural Buildings Allowances (ABAs) by 1 April 2011. With the rules for Enterprise Zones being encapsulated within the IBA legislation, are the rules for Enterprise Zone Allowances (EZAs) also being abolished?
Enterprise Zones were first introduced in 1980 with the intention of stimulating new building projects in identified areas of physical and economic decay, such as London's Docklands. The areas were designated by the Secretary of State for the Environment (or, where appropriate, by the Secretaries of State for Scotland and Wales or by the Department of Environment for Northern Ireland). An initial allowance of 100% is available for qualifying enterprise zone expenditure incurred on any commercial building, rather than IBAs at 4% for buildings or structures used for specific qualifying trades or undertakings.
To be eligible for a 100% initial allowance, a person must incur expenditure on a commercial building within a designated Enterprise Zone and it must be occupied for the purpose of a trade carried on by that person or a lessee or licensee of the person who incurred qualifying expenditure.
Although no new areas have been designated an Enterprise Zone since 1996, construction expenditure in certain situations can still qualify for the enhanced allowance. This is because any site identified as an Enterprise Zone remains one for a period of 10 years after designation but the 10 year period may be extended by an additional 10 years if construction expenditure is incurred under a contract entered into within the first period of designation.
For example, East Durham became a designated Enterprise Zone on 29 November 1995 for a period of 10 years, until 28 November 2005. However, where a construction contract had been entered into on this site before the end date, the site designation would be extended to an overall 20 year period, until 28 November 2015. Such a contract is often known as a 'Golden Contract'.
Finance Act 2008 s85 outlines the phasing out of IBAs and ABAs before they are abolished from 1 April 2011, with reducing percentages of writing down allowances being available from 1 April 2008. However, in respect of EZAs, the 100% initial allowance or alternative writing down allowance is not subject to the reducing percentages that are applied to IBAs and ABAs and continues to be available at the full rates until abolished on 1 April 2011. However, if a writing down allowance is claimed for EZAs rather than the initial allowance and the chargeable period begins before the abolition date (1 April 2011) and ends after, then the writing down allowance must be apportioned for the period up to the abolition date.
To pave the way for the phased abolition of IBAs, Finance Act 2007 also introduced a change that no balancing adjustments would arise in respect of IBAs or ABAs for balancing events taking place on or after 21 March 2007. However, there was an exception to this rule in respect of Enterprise Zone expenditure for which balance adjustments will still apply even after the IBA rules are withdrawn from April 2011. Therefore, where a balancing event occurs within seven years of the first use of a building, a balancing charge can still arise as if the IBA legislation had not been abolished.
Therefore, although there may not be many unclaimed Enterprise Zone Allowances still available, it is worth considering the impact of these changes in respect of any "Golden Contracts" or balancing events that may take place in respect of Enterprise Zones to ensure valuable allowances are not missed before they are phased out or an unexpected balancing charge arises after abolition of the IBA legislation.
[Note - A full list of designated Enterprise Zones can be found on the HMRC website at the following link: http://www.hmrc.gov.uk/manuals/camanual/CA37600.htm]
Peter is a senior manager at Bourne Business Consulting LLP, specialising in tax depreciation, with a background in construction. By combining his tax and construction experience of over 20 years, he is able to offer added quality of advice to clients in the property, construction and real estate industries.