To renovate or not to renovate: Business Premises Renovation Allowances
By Denise Montes
Business Premises Renovation Allowances (BPRA) was introduced in Finance Act 2005 (Capital Allowances Act 2001 (CAA 2001) Part 3A) to encourage the redevelopment of unused and derelict premises within designated disadvantaged areas in the UK. As a result of EU State Aid issues, BPRA did not finally come into effect until 11 April 2007 and we are now over halfway through the allotted timeframe for expenditure to qualify. BPRA enables 100% of ‘qualifying capital expenditure’ on ‘qualifying buildings', either through one initial claim or as a staggered writing down allowance of 25% per annum, but the relief can often be overlooked or there can be some uncertainty as to what qualifies. This article highlights the main conditions for the relief and some of the key considerations.
What are qualifying buildings?
Under CAA 2001 s360C, a qualifying building is a building or structure, or part of a building or structure, situated in a disadvantaged area, which has been unused for 12 months immediately prior to the conversion or renovation works commencing and was not a dwelling in its last use.
A disadvantaged area is defined as a development area identified within the Assisted Areas Order 2007 (SI 2007/107) and Northern Ireland. The range of sizes of development areas varies from individual wards within cities to the entirety of Northern Ireland. The specified areas differ from the SDLT disadvantaged areas.
Although a building must remain unused for a year before being eligible for BRPAs, it is not a year from the purchase date. Instead, the property must remain unused for 12 months prior to the commencement of works to the building. Theoretically, some companies may deliberately delay the works until after a year has passed to allow them to claim the allowances, a strategy perhaps unforeseen when the policy was introduced.
Exactly what constitutes ‘the commencement of works’ may raise issues for some potential claimants of the relief. On a practical level, we might assume that it is the start of physical works on site. However, it is important to consider whether certain pre-commencement activities could prevent a claim being successful if they are within the 12 month period. In the case of Malvern Hills DC v Secretary of State and Robert Barnes Ltd  JPL 439, it was held that marking out the line and width of a road was sufficient to constitute development and activate planning consent. It would, therefore, be plausible for activities such as the application for planning permission, site surveys or indeed the marking out of the works to be classed as the ‘commencement of the works’ and may prevent a BPRA claim.
What is qualifying expenditure?
Expenditure must be incurred between 11 April 2007 and 11 April 2012. It must either be expenditure to convert a qualifying building to a qualifying business premises, renovation works to a qualifying building that is or will become a qualifying business premises, or repair works undertaken to a qualifying building.
For BPRA purposes, a qualifying business premise is one which is a qualifying building, is used or available for letting for the purposes of a trade, profession or vocation or as an office, and is not wholly or partly used as a dwelling. Use for certain trades, such as fisheries and aquaculture, shipbuilding, the coal industry, and the steel industry, etc, are specifically excluded.
Expenditure will not qualify if it relates to the acquisition of land, the development of land next to a qualifying building or is an extension to a current qualifying building.
In some cases, expenditure incurred on building an extension to a qualifying building may be taken as qualifying if it is ‘to the extent required for the purpose of providing a means of getting to or from qualifying business premises’. Again, CAA 2001 s360B leaves margin for interpretation as to what compromises ‘to the extent required’. This may cause issues with some BPRA applications.
Another area of discussion is the approach to adopt when only part of a building is qualifying. It is clear that any qualifying areas, for example an individual unused floor, would be treated independently, but if that floor was accessed through a lift or stairwell and the disuse of the floor resulted in them not operating to their full capacity, could any expenditure on these assets qualify? Possibly, the expenditure could be apportioned between any qualifying and non-qualifying areas, but alternatively, as the common areas are being used, albeit not to full capacity, the legislation may just not apply. This is another grey area of which claimant companies should be aware.
If a balancing event occurs within seven years of the first use of the building, then the BPRAs received will be subject to a balancing charge. Common balancing events include the sale of the relevant interest, a switch to a non-qualifying building use, the demolition of the building or the grant of a lease of more that 50 years. Companies should be aware of these events and the impact a balancing charge may have on any properties on which BPRAs have been claimed.
Perhaps the largest obstacle to the widespread success of the BPRA is the current economic climate. The current recession has led to many business failures and resulted in an increase in the number of vacant properties. We only have to look to our local high street to see the evidence of this, including the closure of over 800 Woolworths stores in 2008 and 2009.
Opinions vary on when the market will recover but when this does happen, there will be a greater demand for property, which should increase the number of vacant properties being brought back into use. At this point, it will be important for companies to consider the availability of BPRA relief for any unused properties located in disadvantaged areas, assuming that the BPRA has not expired by that point.
Denise Montes is a senior consultant Bourne Business Consulting LLP, specialising in asset taxation and advising clients in the retail, real estate, pharmaceuticals and financial services sectors.