Guest blogger Julian Lewis of Fladgate LLP asks the government to look at extending BPRA to the residential sector.
In the last couple of years I have become something of an "expert" in investment schemes involving BPRA. Contrary to what its name suggests, BPRA is not an alternative to BUPA or PPP. It's a fairly obscure tax relief that allows owners of commercial buildings that have been out of use for over a year to obtain 100% capital allowances in the year of expenditure for monies spent on bringing the building back into use.
It only applies to buildings in certain designated disadvantaged areas like Birmingham, Newcastle, Glasgow, Liverpool, Luton, Sheffield and the whole of Northern Ireland. It has a number of similarities to the old enterprise zone relief including a requirement that the owner must keep the building in use for seven years after it has been renovated.
Like enterprise zones it is intended to encourage urban renewal and investment. It's designed to deal with the plethora of empty business properties as businesses continue to go under, which can make whole regions look in the doldrums - exacerbating the lack of confidence in the market and hindering the speed of any recovery.
You would expect such a generous tax break to be widely used and trumpeted as a sign of the Government's commitment to urban renewal. But the opposite is, in fact, true. The relief has been sparingly used and was due to expire in April 2012.
The Treasury's Budget 2011 policy costings estimated that in 2009-10 around 300 companies and unincorporated businesses claimed the allowance in relation to expenditure of around £90 million. Thus, it came as something of a surprise when the relief was extended for five years in this year's budget. The total impact on tax revenues during the period of the extension was estimated by the Treasury to be only £90 million. So hardly a major tax cost.
Hotel developers in particular have been able to take advantage of BPRA. A typical investment scheme involves buying a dilapidated, unoccupied office building for a low capital value and spending a large sum of money converting it into a branded hotel, such as "Hampton by Hilton", "Hotel Indigo", "Holiday Inn Express" or similar, with a good dose of leverage. Investors then hold the hotel for seven years with a view to selling once the qualifying period has expired. The reason BPRA works so well for hotels is because the higher the cost of the works as a proportion of total costs the higher the tax relief, and converting an office building into a hotel is an expensive business.
I have been involved in a number of these projects in Birmingham, Liverpool and Newcastle with more coming on stream for 2012 but an emerging concern is continuing market capacity. I am aware of a number of schemes either in the market currently or just about to come to market with the aim of raising hotel investment before the end of the current tax year.
I don't think there will be a saturation issue this tax year for the better schemes. But I am less confident for future years, especially if the current economic climate does not improve.
So if the future for hotel development schemes is limited, what comes next? Traditional office refurbishment? Probably not. Refurbishment costs are not high enough to generate sufficient tax relief and bank and investor appetite for secondary locations is limited. Serviced office schemes have similar problems. Care homes look like a real possibility if developers can find buildings in the right locations, especially as local authority funding dries up.
An obvious question is "why not residential?"; the answer is simple. The one thing that buildings cannot be used for if the expenditure is to qualify for BPRA is a dwelling. I also hear you ask: didn't recent press reports confirm that housebuilding in the UK is at a record peacetime low? Hasn't the Government launched a number of new initiatives to encourage house building? Wouldn't private investors be attracted to help close the housing gap using this sort of tax break? Wouldn't it be great if more brownfield sites could be brought into residential use?
Perhaps the Government needs to join up its thinking and remove the restriction that expenditure on conversion to residential use does not qualify for BPRA. I'm sure that private investors will be only too willing to invest and stimulate growth in the construction sector and to deliver more affordable housing for rental. What is it waiting for?
Julian Lewis, Partner, Fladgate LLP (firstname.lastname@example.org)
Photo by austincameraguy via Flickr.