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(i) the uptake of the business premises renovation allowances (BPRA);
(ii) the number of BPRA schemes disclosed through DOTAS being investigated by HMRC; and
(iii) the value of BPRA schemes disclosed through DOTAS being investigated by HMRC.
(b) the Chancellor of the Exchequer must publish the report of the review and lay the report before the House.’.
The express purpose of the business premises renovation allowance is to provide an incentive to bring derelict or unused business properties back to use in the form of an initial allowance of 100% for expenditure on converting or renovating unused properties in disadvantaged areas and bringing them back into use. Clause 61 does two things: it provides for amendments to business premises renovation allowances in order to clarify the expenditure that qualifies for relief; and it reduces the balancing adjustment period from seven to five years.
In terms of the amendments to qualifying expenditure, the clause clarifies that expenditure is incurred on the conversion or renovation of a qualifying building into qualifying business premises. Expenditure is incurred on certain types of work: building works, architectural or design services, surveying or engineering services, planning applications, and statutory fees or permissions.
Expenditure on fixtures is defined at an extraordinary level of detail, with the clause clarifying that qualifying expenditure includes: automatic control systems for opening and closing doors, windows and vents; window cleaning installations; fitted cupboards and blinds; protective installations such as lightning protection, sprinklers and other equipment for containing or fighting fires; and much more.
The clause also clarifies that expenditure must be at market value on a building that has not been used in the past 12 months, and must be on works that are completed within 36 months. If a person who has submitted a tax return becomes aware that their return has become incorrect in that regard, they must tell HMRC. The clause also confirms that the allowance fully complies with state aid rules. In relation to the balancing, it says that where qualifying expenditure has been incurred on a qualifying building and a balancing event occurs within five years, a balancing adjustment must be made. That limit was previously seven years.
Let me give some background. In July 2013 it was reported that HMRC had recently received a number of DOTAS disclosures—disclosures of tax avoidance schemes—involving business premises renovation allowances that exhibited features that had been part of avoidance schemes that HMRC had challenged in the past. The technical note states that
“broadly the schemes contain a varying balance of genuine expenditure on actual regeneration and some features that have elements of artificiality, possibly aimed at ramping-up qualifying expenditure and accelerating tax relief in ways that could be regarded as inappropriate.”
HMRC launched a technical review in July 2013 and asked for comments by 30 September 2013. The main areas of concern were about what constituted qualifying expenditure, the use of limited-recourse, often circular borrowing arrangements designed to increase the amount of expenditure that is claimed, and timing issues.
The Government gave their response to the consultation and decided on the approach that would be taken. They concluded that a number of the problems identified by HMRC could be dealt with by clarifying the expenditure that qualifies for the allowances, as I detailed earlier. That would mean that there was no need, according to the Government, for a targeted anti-avoidance rule.
Broadly, we agree that this is the right way forward. It is important that action is taken to close down what appears to have become a significant loophole that, if not dealt with, could drain income away from the Exchequer. However, there are a number of matters that I would like to clarify.
Proposed new subsection (2C) states:
“Condition B is treated as met in respect of expenditure incurred on matters not mentioned in that Condition to the extent that that expenditure (in total) does not exceed 5% of the qualifying expenditure incurred on the matters mentioned in subsection (2B)(a) to (c).”
“is that the expenditure is incurred on—
(a) building works,
(b) architectural or design services,
(c) surveying or engineering services,
(d) planning applications, or
(e) statutory fees or statutory permissions.”
However, one of the key problems, it has been suggested, with the original legislation is a lack of precision. Indeed, the Government state in paragraph 3.8 of their response that they have
“decided to amend the existing legislation to make the scope of the relief more certain in its application.”
However, new subsection (2C) seems to fly in the face of that and I fear that it might open up the door again for abuse, so I should be grateful if the Minister would explain the thinking behind new subsection (2C) and how he can be sure that this will not be used for tax avoidance. I note that the Government, in their response, indicate that the 5% is for associated activities such as project management. The Minister will, I hope, see that, as the provision is drafted, there is scope for concern that it might lead to other avoidance measures.
It would be good to know more detail about how many DOTAS disclosures were made involving business premises renovation allowances with features that were part of avoidance schemes that HMRC had challenged in the past. How many were there and what features did they display? It would be useful to know that, so that we can assess when the loophole has been successfully tackled.
As I said at the outset, given the lengthy clauses tabled by the Government on these issues and the level of abuse that HMRC surmises has occurred, we have tabled a probing amendment, seeking a review, to try to get greater clarification. We want to be clear that this clause deals with what is a very real problem and that those claiming the allowance are doing so within the spirit of the legislation and the intention of Parliament in enacting it. Just a short internet search on my part suggested that the construction of some of the schemes means that the allowance can be worth many millions of pounds. If it is abused, that is clearly a very real risk to the Exchequer. We all want to ensure that derelict buildings are brought back into use in deprived areas and that it is not used as a tool by those who are just bent on avoiding tax.
I should be grateful for the Minister’s clarification on those points.
As we have heard, the clause makes various changes to the business premises renovation allowance that ensure that only the actual direct costs of bringing unused business premises back into business use are relieved and that where tax relief has been claimed up front, the related works are completed within a reasonable time. BPRA is designed to aid the regeneration of the UK’s most economically disadvantaged areas. It provides a 100% tax relief for the direct costs incurred by a business in converting or renovating premises left empty for at least a year, in order to bring such premises back into productive use. The property must be located in an assisted area of the UK.
Many areas have benefited from BPRA to date, improving both the properties involved and local job prospects. However, the existing BPRA rules do not clearly define the expenditure that qualifies for relief, nor do they require future renovation works on which tax relief has been claimed up front to be completed within a set period. That has led to the development of tax avoidance schemes that seek to exploit those weaknesses: for example, tax relief has been claimed for indirect costs such as financing or promoter’s fees, or for works that will not be started for many years—furniture has even been screwed to the floor to qualify for relief. That situation cannot continue. To ensure protection for the Exchequer and to maintain fairness for taxpayers, last July a review set out the Government’s concerns and proposed counter-measures. The changes introduced by the clause flow from that review and consultation.
The main changes made by the clause clarify that relief is available only for the actual building works and certain listed fixtures. Certain specified activities, such as architectural and surveying services, will also qualify for relief. In addition, unspecified activities directly connected to the works, such as project management services, can also qualify for relief limited to 5% of the costs. The existing rule that prevents tax relief from being claimed before a building has been unused for a year will also be clarified, as some parties have said that that is ambiguous. That will prevent BPRA claims on properties that have only recently become unused that are then left empty for a year before renovation works commence simply to qualify for relief.
Where expenditure is paid and tax relief claimed in advance of the works being carried out, a new condition requires the works to be completed within 36 months. Any relief claimed on works not completed within that period must be repaid. That provides an incentive, taking account of reasonable building schedules, for works to be completed as soon as possible rather than for the funds to lie idle, which will ensure that local areas benefit from BPRA as soon as possible.
The period for which the completed building must be owned once available for letting will be reduced from seven to five years. That acknowledges concerns expressed during the consultation that the present seven- year period can make it difficult to attract bank finance. Finally, to ensure that BPRA complies with state aid rules that limit the total value of aid that can be ordered to an individual project, we are introducing a condition that ensures that BPRA cannot be claimed where another form of state aid has been received.
The Government held useful consultations with representative bodies, advisers and other interested parties about the proposals. I thank them for their valuable input in that process, which led to some of the original proposals being modified to meet concerns expressed. For example, where tax relief has already been claimed, the time limit in which the works must be completed was extended from the proposed 12 months to 36 months. That recognises the challenges encountered in refurbishing old properties, and listed buildings in particular. The legislation also allows for a wider range of fixtures to qualify for relief than was originally proposed.
On the question whether the definition used in proposed new section 2C is exact enough, BPRA aims to offer relief on the cost of project management services provided to co-ordinate building works. In some BPRA schemes, the project management role can be much wider and include attracting tenants or marketing the property to investors, which are not allowed expenditure. To focus the relief on managing the building works, allowable costs have been limited to 5% of the total costs of those works, which is considered to be in line with commercial rates for such activities.
The legislation does not prevent more than 5% being charged, but only a sum that relates to direct building works can be relieved. HMRC will also examine claims to see whether they are realistic.