Reclassifying prior claims on industrial building allowances

The purpose of this guide is to clarify the position where a prior claim for Industrial Building Allowances (IBA’s), or Hotel Building Allowances, has been made by a taxpayer on assets that could otherwise have been claimed as qualifying expenditure on plant and machinery fixtures.

Prior to the Government’s announcement at Budget 2007 that IBA’s would be gradually withdrawn, the choice of claiming an asset under the heading of IBA’s rather than Plant & Machinery Allowances (PMA’s) was considered by many advisers as being simply one of timing.

Treating all expenditure as IBA’s removed the need to identify and value the qualifying fixtures separately, something many general tax advisers readily admit they are not adequately qualified to do.

The gradual reduction of IBA’s from 2008 until their complete withdrawal in April 2011 means this decision has become a potentially very costly one for many taxpayers, as generally there is no ability to now reclassify this expenditure and claim it under another heading.


It has always been the case that expenditure on certain buildings, or parts of that building, could qualify under more than one Part of The Capital Allowances Act 2001 (CAA).

For example, expenditure on the fixtures incorporated in an industrial building or hotel may, if the building or structure qualified, be included in a taxpayer’s claim for IBA’s on the building as a whole (under Part 3 of CAA), or alternatively the taxpayer may distinguish their expenditure on those fixtures that could qualify for PMA’s (under Part 2 of CAA) from their expenditure on the rest of the building in order to maximise their entitlements to the often more advantageous claim rate provided by PMA’s.

In such situations the legislation is clear that double allowances, under more than one Part of CAA in respect of the same expenditure, are expressly prohibited.

As a result, the taxpayer needed to decide at the outset which heading they wished to claim their expenditure under.

Fortunately there are two occasions where prior IBA claims on fixtures or integral features can be reclassified.

These are either where the original IBA claim was made in a return for a year that remains open, or where the relevant interest in the property has been sold after April 2011.

Whilst it is HMRC’s view that the “error or mistake” provisions do not permit a taxpayer to reverse a choice made for an earlier closed year, a taxpayer is still able to amend a return in respect of qualifying expenditure incurred in a year for which the return is still open.

This ability arises under the normal self-assessment provisions, which typically provides a 12 month window to amend a return after it has been filed.

As IBAs were completely withdrawn from April 2011, this window of opportunity is however closing fast.

In addition to the IBA rule changes brought in by FA2008, the Act also introduced a change to s186(1) of CAA that became effective from April 2011.

This important change meant that where the relevant interest in a qualifying Industrial Building or Structure was disposed of after April 2011, then at that point in time a notional balancing event occurred meaning a notional residue of qualifying expenditure (RQE) at that point in time can be reclassified to the extent it covered either qualifying fixtures or post 2008 qualifying integral features.

The reclassification being undertaken on the normal just and reasonable apportionment basis.

When ascertaining the RQE it is important to remember that for each year after 2011 where the expenditure is not reclassified, the original IBA claim continues to be notionally written down meaning an element of allowances will be lost – essentially to represent the same way those allowances would have otherwise been claimed had the IBA provisions remained.

Taking the example of a qualifying Industrial Building that was acquired on 1st April 2005 when it was 10 years old and the RQE inherited by the owner was £900,000. This would have given rise to an Annual Writing Down Allowance (WDA) of £60,000 for the remaining 15 years of the building’s then IBA life.


Now that the safety net of IBA’s has, however, been withdrawn, many taxpayers, and those who originally advised them, have been reviewing every possibility to revisit their original choice.

Whilst error and mistake provisions do exist - in section 33 and 33A of the Taxes Management Act 1970 (TMA), for income tax cases and paragraph 51 of Schedule 18 Finance Act 1998 for Corporation Tax cases - these provisions deny relief in respect of any claim for capital allowances included in a return.

Prior claims for IBAs made in a return by an individual or company are therefore expressly excluded from the error or mistake provisions.

HMRC’s stated position with regard to the re-classification of prior IBA claims is clear and can be found in their Revenue & Customs Brief 12/09 issued back in March 2009. (See also HMRC Capital Allowances Manual at 31800.)

This Brief clarifies that once a taxpayer has exercised its choice to claim one type of capital allowance rather than another, that choice may not be revisited and effectively reversed in respect of expenditure incurred in a closed year, under the “error or mistake” provisions.

Despite this Brief we are aware that a number of “so called specialists” have been advising clients it is possible to reclassify prior IBAs on fixtures  - even on post 2008 qualifying integral features when the original expenditure was incurred before that date.

The strength of their argument apparently relies on the belief that they feel it “morally unfair for the taxpayer to be penalised due to a change in the legislation” and the fact that they have never had any of the reclassification claims submitted to date queried by HMRC!

Despite these “specialists” views, it is the taxpayer who remains exposed to a claw back of the reclassified allowances and this claw back could be anything up to 20 years after the claim is made if HMRC identify it as a result of a discovery assessment.

Furthermore, any such revised assessment is likely to be accompanied by substantial interest and penalty charges on top, since the claim was clearly made contrary to the legislation and HMRC published guidance.

Assuming the taxpayer has a 31st March year end, then at March 2011 the RQE would have been £540,000.

If the building was now sold to a new owner on 1st April 2012 the new owner could make a reclassification claim based on a RQE of £480,000 as another full year of WDA’s would have been written off had Part 3 of CAA not been repealed.

If the building was sold to a new owner on 1st April 2016 then the new owner could make a reclassification claim based on a notional RQE of £240,000.

Ultimately, if the building was sold to a new owner on or after 1st April 2020 then the new owner cannot make a reclassification claim as the notional RQE will have been written down to £Nil.

The reclassification of prior IBA claims has been further complicated by the introduction of the pooling requirement.

This means if the first purchaser after April 2014 who is entitled to reclassify a  prior IBA claim on any fixtures fails to do so, then they will not have meet the pooling requirement meaning the qualifying expenditure on those same fixtures by any subsequent purchaser will be treated as nil.

Despite many advisers claiming it is morally fair to allow taxpayers to reclassify IBA claims that were previously made on qualifying fixtures or integral features, the legislation is clear that tax is dictated by a strict set of rules where fairness does not unfortunately play a part.

Any taxpayer who does not follow these rules to the letter, regardless of who advises them to the contrary, does so at their own peril and ultimate cost - potentially anything up to 20 years after the erroneous claim is made.

There are a couple of instances where a prior IBA claim can be reclassified, but these are limited to either where the original claim is within the time limits that permit it to be amended; or where the relevant interest in the property to which the IBA claim was made has been sold after April 2011 and there remains a notional RQE of that IBA claim.

Finally, if the first purchaser after April 2014 does not take the opportunity to reclassify any IBA claims made on fixtures in the property, then not only will a subsequent purchaser not be able to do so but their qualifying expenditure on those fixtures will be treated as nil.

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