Capital allowances and sustainability

Environment, social and governance (ESG) is now high on the agenda of many businesses. Other regulations can also dictate a minimum requirement for property sustainability. Rented commercial properties currently need to have a minimum EPC (energy performance certificate) of E but this is expected to increase to C by 2027 and then B by 2030.

Making sustainable improvements tax-efficient

When incurring expenditure on sustainable improvements, businesses and landlords of commercial properties should consider any tax reliefs available to reduce their tax bills.

Firstly, thought should be given as to whether any works may be viewed as a repair to a property. For example, if replacing single glazed windows with double glazed windows (a modern-day equivalent), this can be treated as a repair to the property and 100% tax relief achieved as a revenue expense.

Where expenditure is on plant and machinery, then up to 100% tax relief may be available under the capital allowance regime. This can include expenditure on efficient heating/ventilation systems or adding thermal insulation to an existing commercial building (this could include roof lining, draught exclusion and cavity wall filling).

Works in relation to the installation of plant (including alterations necessary to the building), certain survey costs and transportation all qualify for capital allowances as they are seen as being on the provision of plant.

Where there is significant (> £1m) qualifying capital expenditure incurred then the allowances which can be claimed for companies are more beneficial than for individuals and partnerships. However, for these first year allowances the expenditure must be on new and unused assets. Any second-hand assets can still qualify for the 100% annual investment allowance (subject to the £1m cap).

When building, refurbishing or improving property it is worthwhile ensuring that any items qualifying for tax reliefs are identified at an early stage and appropriate information obtained to maximise the deductions available. It is often helpful to obtain itemised quotes from contractors that can be analysed to identify relevant expenditure.

Electric vehicles and charging points

As part of the government’s initiative to encourage the adoption of electric vehicles and the development of supporting infrastructure, special tax reliefs are available. Electric car charging points qualify for 100% first year allowances. The relief is currently available up to the 2025/26 tax year, but this relief has been extended a number of times.

Land remediation

Land remediation relief provides an enhanced 150% allowance for companies incurring qualifying expenditure. The relief may be available were expenditure is incurred on decontaminating land or bringing derelict land back into use.

Impact of recent capital allowance case

A recent capital allowance case may have a significant impact on the capital allowances that can be claimed on preliminary studies for large infrastructure or renewables projects. This specific capital allowance case (Orsted West at the Court of Appeal) related to preliminary studies required for offshore windfarm projects.

The stages of the case were as follows:

The First Tier Tribunal (FTT) ruled that some of the costs qualified for capital allowances. This was because they were necessary for the design and installation of the wind turbines
The Upper Tribunal disagreed with the FTT’s interpretation. They found, along with HMRC, that the expenditure on studies did not qualify for capital allowances
The Court of Appeal broadened the interpretation of what qualifies as capital allowance expenditure. They held that costs related to the design and installation of plant or machinery, including most studies, qualified for capital allowances
This case has been appealed to the Supreme Court

The case discusses several types of studies in detail. The court held that all the studies, except socio-economic, tourism, and desktop metocean studies, qualify for capital allowances. Furthermore, the court decided that the provision of plant includes costs necessary for the design and installation of plant.

Reviewing projects and how we can help

Businesses that have recently undertaken large infrastructure or renewables projects should review the tax treatment adopted. If previously treated as non-qualifying, a capital allowances claim could now be made. It’s important to understand the type of survey and its impact, ensuring any change in treatment aligns with the Court of Appeal’s reasoning.

Additionally, any businesses planning any such significant projects should take advice at an early stage to ensure the evidence is collected and retained to back up any claim for survey or design costs.

Our capital allowance team has significant experience in this area.

We can add value in identifying expenditure qualifying for capital allowances
We will seek to maximise your tax relief and advise on the most efficient way to use your allowances.