Business Property Renovation Allowance shares a number of similarities with Enterprise Zone reliefs and has been utilised by a number of promoters of tax-efficient investment schemes
BUSINESS PROPERTY RENOVATION ALLOWANCE (BPRA) represents an accelerated form of capital allowance. Tax relief for BPRA is available for certain expenditure on the renovation of business property and is fully allowable in the year it is incurred.
Further losses in a property rental business may be set against a taxpayer’s general income and income tax relief for BPRA is not subject to the cap on income tax reliefs introduced in this year’s Finance Act.
As such, BPRA shares a number of similarities with Enterprise Zone reliefs and has been utilised by a number of promoters of tax-efficient investment schemes to establish investment funds most commonly involved in the conversion of office buildings to hotels.
HMRC has become concerned that a number of BPRA investment opportunities contain features that they consider seek to exploit BPRA and make allowances available in circumstances the government did not intend.
In particular, HMRC are concerned that:
(i) Schemes have been designed to inflate the level of expenditure beyond that which should properly qualify for BPRA, including sums that effectively pay for rental guarantees or developers’ “super profits”.
(ii) The use of limited recourse finance may result in an investor being entitled to tax relief on an amount greater than his financial exposure to a project.
(iii) The construction arrangements enable allowances to be accelerated so that BPRA may be claimed on building works before the works are carried out or before the building becomes a qualifying building.
(iv) Partnerships or limited liability partnerships have been used as investment vehicles in a way which might allow the “streaming” of tax reliefs to one group of partners and taxable income to another.
HMRC has stated that it considers many of these tax-planning techniques do not achieve its intended results.
If you have invested in a scheme previously it is quite likely that your scheme will be reviewed by HMRC and the relief claimed will be restricted. Scheme promoters will, we would anticipate, be challenging the HMRC’s stance.
What should you do as an investor? There is very little you can do other than to make sure, probably through your IFA, that the scheme promoter is totally on top of the situation and that you are kept informed of progress. It would be prudent, however, to assume that some of your claim will be disallowed and to plan accordingly.
What about new investors looking at schemes offered in the period running up to the end of the 2013/14 tax year? Should you steer well clear of them or are they still worth considering? In our opinion, well-structured schemes that are based on a sound property investment and take account of the concerns raised by HMRC remain worthy of consideration for tax payers who wish to find suitable shelters.
The key will be to select a scheme or schemes from well-regarded providers and to satisfy yourself (if necessary, by taking independent advice) that they have been structured to take account of the issues raised in the HMRC Technical Note issued on 18 July 2013.
Julian Lewis, corporate partner, and Huw Witty, tax partner, Fladgate LLP