What are Fiscal Incentives?

Fiscal Incentives are government policy tools aimed at supporting business and promoting economic growth and investment in targeted markets and technologies such as those that promote manufacturing, regeneration and research & development activities. The three primary sources of direct tax relief for property and development expenditure in the UK are Land Remediation Relief and Capital Allowances for site preparation and build costs and Research & Development tax relief on the costs typically incurred by engineering and construction companies in delivering complex projects.

Capital Allowances

Capital Allowances provide an allowable deduction in calculating the taxable profits from business activities. The three primary allowances applicable to property owners, occupiers and developers are Plant & Machinery Allowances, Structures and Buildings Allowances and Research & Development Allowances. Capital allowances are not available on expenditure incurred on the acquisition of land or for assets used in dwellings.

+ SBA: Structures & Buildings Allowance

SBA: Structures & Buildings Allowance 

Rate of Allowance: 2% annual writing down allowance, on a straight-line basis. Adjustment is required to the capital gains tax base cost on disposal equal to the aggregate value of writing down allowances claimed prior to disposal.

Scope: Capital expenditure incurred on non-residential structures and buildings that is excluded from being on the provision of plant or machinery may qualify for SBA. For these purposes, structures takes its everyday meaning and so land is not considered a structure, even if it has been modified in some way. For example, a grass tennis court is not a structure but a tennis court with a hard surface is.

SBA was introduced for qualifying expenditure incurred on or after 29th October 2018.

+ PMA: Main Plant & Machinery Pool

PMA: Main Plant & Machinery Pool

Rate of Allowance: 18% annual writing down allowance, on a reducing balance basis.

Scope: Capital expenditure incurred on the provision of plant and machinery that is not an integral feature or long-life asset wholly or partly for the purposes of a qualifying activity. Plant and machinery is not clearly defined in the Act so it is necessary to rely on case law to determine eligibility in each case.

+ PMA: Special Rate Plant & Machinery Pool

PMA: Special Rate Plant & Machinery Pool

Rate of Allowance: 6% annual writing down allowance, on a reducing balance basis

Scope: Capital expenditure incurred on plant and machinery that is more integral to the building and is considered to have a longer life than main pool plant. The Act provides a specific list of integral features that includes assets such as electrical systems; cold water systems; space or water heating systems and lifts. These assets are deemed to satisfy the criteria to be considered qualifying without the need for additional support from case law.

+ PMA: Long Life Assets

PMA: Long Life Assets

Rate of Allowance: 6% annual writing down allowance, on a reducing balance basis.

Scope: Capital expenditure incurred on plant and machinery assets expected to have a useful economic life in excess of 25 years when new and, generally, where total annual expenditure on relevant assets is greater than £100,000. Long life assets do not apply to plant and machinery used in showrooms, hotels, offices or retail premises.

+ PMA: Short Life Assets

PMA: Short Life Assets

Rate of Allowance: 18% annual writing down allowance, on a reducing balance basis.

Scope: Capital expenditure on plant and machinery if the person incurring the qualifying expenditure elects to treat it as a short life asset (SLA) and it is not excluded from SLA treatment (e.g. items used for leasing and special rate items). Expenditure on a SLA item goes into a single asset pool and a balancing allowance is taken when the asset is deemed to be disposed of or scrapped. If the asset has not been disposed of or scrapped within eight years the balance of the single asset pool is transferred to the main pool.

+ PMA: Enhanced Capital Allowances: Energy & Water Saving Technologies

PMA: Enhanced Capital Allowances: Energy & Water Saving Technologies

Rate of Allowance: 100% first year allowance; 19% tax credit payable on allowable losses (capped at greater of £250k or value of PAYE and NI payments made in the year).

Scope: Capital expenditure incurred on installing new energy and water saving technologies that are either pre-registered on the Energy Technology Product List or Water Technology Product List or satisfy the energy-saving criteria for each of the technology classes as set out on the Energy Technology Criteria List. The relief is not available if a Feed-in-Tariff or Renewable Heat Incentive has been received.

This legislation is to be repealed and will no longer apply to expenditure incurred after 31st March 2020.

+ PMA: Plant & Machinery For Use In Designated Assisted Areas

PMA: Plant & Machinery For Use In Designated Assisted Areas

Rate of Allowance: 100% first year allowance.

Scope:Capital expenditure on plant and machinery installed by a company paying corporation tax as part of a project on a designated site within an Enterprise Zone up to a maximum of 125m Euros per project. The focus is on economic development in these areas but there are a number of restricted trades, most notably from 17th July 2014, projects in the transport sector or relating to energy generation, distribution or infrastructure; or relating to broadband installation.

This measure is due to expire on 31 March 2020.

+ AIA: Annual Investment Allowance

AIA: Annual Investment Allowance

Rate of Allowance: 100% first year allowance up to the annual limit. The annual limits that apply are shown below.

Scope: The AIA can be claimed on new expenditure incurred each year on any type of plant and machinery up to the annual limit set for that year. Its primary purpose is to give an accelerated rate of relief on all plant and machinery expenditure up to a maximum of the annual limit. Only one AIA is available for each company or group of companies.

Sole traders and partnershipsLimited companiesAIA
1 Jan 2019 – 31 Dec 20201 Jan 2019 – 31 Dec 2020£1,000,000
1 Jan 2016 – 31 Dec 20181 Jan 2016 – 31 Dec 2018£200,000
6 Apr 2014 - 31 Dec 20151 Apr 2014 - 31 Dec 2015£500,000
1 Jan 2013 - 5 Apr 20141 Jan 2013 - 31 Mar 2014£250,000
6 Apr 2012 - 31 Dec 20121 Apr 2012 - 31 Dec 2012 £25,000
6 Apr 2010 - 5 Apr 20121 Apr 2010 - 31 Mar 2012 £100,000
6 Apr 2008 - 5 Apr 20101 Apr 2008 - 31 Mar 2010 £50,000

Data from www.gov.uk/capital-allowances/annual-investment-allowance

+ RDA: Research & Development Allowance

RDA: Research & Development Allowance

Rate of Allowance: 100% first year allowance.

Scope: Capital expenditure incurred typically on providing facilities for a trader to undertake research and development (R&D) as defined in the Act related to their trade either directly or on their behalf. A just and reasonable apportionment of capital expenditure can be made where only part of the facility is used in R&D. The capital expenditure could apply to the apportioned building cost of an acquisition as well as the provision of new facilities or extensions.

+ Capitalised Repairs

Capitalised Repairs

Rate: Follows the depreciation rate used in the accounts.

Scope: Repairs are typically taken as an expense of the trade and, consequently, are a direct deduction from profits. However, repairs undertaken within a capital project can be pooled separately and relief taken in proportion to the corresponding annual depreciation rate for the relevant asset in the accounts. Adopting a capitalised repairs treatment is only beneficial where the depreciable life of the asset is significantly shorter than the relief otherwise available through SBAs.

Land Remediation Relief

Land Remediation Relief (including derelict land) was introduced in 2001 and modified in 2009 to incentivise the development of brownfield sites blighted by contamination and dereliction. It is only available to companies paying UK corporation tax.

+ LRR: Land Remediation Relief

LRR: Land Remediation Relief

Rate of Allowance: 150% tax relief claimed in year of expenditure (capital) or year the expenditure is deducted for tax purposes (revenue); 16% tax credit payable on allowable losses.

Scope: Capital or Revenue expenditure incurred on the remediation of contaminated land and buildings provided the company is not the polluter or connected to the polluter and is not in receipt of a subsidy (purchase price reductions to reflect the remediation costs are not deemed to be a subsidy). Qualifying costs include costs incurred on works contracted on behalf of the company, staff costs and materials.

+ DLR: Derelict Land Relief

DLR: Derelict Land Relief

Rate of Allowance: 150% tax relief claimed in year of expenditure (capital) or year the expenditure is deducted for tax purposes (revenue); 16% tax credit payable on allowable losses.

Scope: Capital or revenue expenditure incurred in bringing long term derelict land back into use. The land needs to have been unused since 1st April 1998 to qualify for the relief. The expenditure that qualifies on derelict sites is determined by statute and includes the costs incurred on removing building foundations and machine bases; removing reinforced concrete pile caps and basements; removing post tensioned concrete and removal of redundant services.

Research & Development

Incentives for Research & Development were introduced in 2000 for SMEs and extended to large companies in 2002. The current UK R&D tax reliefs, with their core in CTA2009 Part 13, are now amongst the most generous in the world and yet many companies still fail to claim, particularly in the engineering and construction sector.

+ Research & Development tax relief for SMEs

Research & Development tax relief for SMEs

Rate of Allowance: 230% tax relief claimed on eligible costs currently generating a cash benefit of c.£25k for every £100k of qualifying spend for profitable companies; a 14.5% tax credit is available to loss making companies who want to surrender any in year R&D losses rather than carry forward to set off against future profits. This generates a cash benefit of £33k for every £100k of qualifying spend. Where the R&D was subcontracted to the SME by a large company or the R&D project being carried out by the SME has been funded by a grant received as a notified State Aid, then relief can only be claimed at large company rates.

Scope: R&D relief is available on the cost of activities that directly contribute to an advance in a field of science or technology through the resolution of scientific or technological uncertainty (The BEIS Guidelines). The BEIS Guidelines are not sector specific but set a very prescriptive set of conditions that need to be satisfied for the tax relief to be claimed.  Rather than taking an overarching purposive approach, each project must be assessed based on its ability to pass each of the threshold tests set out in the BEIS guidelines.

Eligible costs most commonly include (but with some exceptions) staff costs for directors and employees, externally provided workers, costs of computer software and materials that are used for the purposes of the R&D or any expenditure incurred on contracted out R&D provided none of those costs are subsidised through a State aid grant.

+ Research & Development Expenditure Credit (RDEC) for large companies

Research & Development Expenditure Credit (RDEC) for large companies

Rate of Allowance:12% expenditure credit claimed on eligible costs as an above the line taxable benefit generating a post-tax cash benefit of c.10k for every £100k of qualifying spend for profitable companies; loss making companies can claim the 12% tax credit even though no corporation tax is paid.

Scope: R&D relief is available on the cost of activities that directly contribute to an advance in a field of science or technology through the resolution of scientific or technological uncertainty (The BEIS Guidelines). The BEIS Guidelines are not sector specific but set a very prescriptive set of conditions that need to be satisfied for the tax credit to be claimed.  Rather than taking an overarching purposive approach each project must be assessed based on its ability to pass each of the threshold tests set out in the BEIS guidelines.

Eligible costs most commonly include (but with some exceptions) staff costs for directors and employees, externally provided workers, costs of computer software and materials that are used for the purposes of the R&D or any expenditure contracted out to an individual or firms comprising individuals, charities or education establishments.  Large companies cannot typically claim the cost of any R&D activities sub-contracted to other companies.