When improvements to an existing property are undertaken, or a new surgery premises is built - then some of the cost will qualify for tax relief known as Capital Allowances.
This will be the building systems such as heating, hot & cold water, electrical systems and lifts, together with all of the fitting-out items - which is a lengthy list including toilets, staff facilities, security systems, fire alarms, built-in furniture etc.
Typically in a new-build surgery around a third of the construction cost will qualify for tax relief. Thus in a £3m project there may be £1m in relief - which at the 40% tax rate means £400,000 in tax savings to the partners. Depending on the size of a partnership and the GPs’ incomes, it could mean they will have no income tax to pay for perhaps two or possibly three years, as the tax relief rolls forward in the accounts until it is used up.
Although refurbishment projects are typically less costly than new-builds, the proportion of expenditure qualifying as tax relief can be much higher as improvements to building systems and fitting-out often form a large proportion of the cost.
Where a project is partly funded by an NHS grant then this does reduce the availability of tax relief on a pro-rata basis. Nevertheless even taking this into account the benefit can still be very worthwhile.
For example, in a £1m refurbishment, perhaps £600,000 might qualify for relief. If there is a grant of 66% then the partnership will still have the remaining 34% of the tax relief - around £200,000 - all of which is claimed in the year of the expenditure.
It would be an unusual situation but if it is possible, it would be very advantageous to make an agreement with the grant-awarding body that their funds are specifically for works to the structure which do not attract tax relief e.g. the exterior shell of the building. If the partnership then separately pays for all the systems and fit-out from its contribution to the overall project cost, this could reduce or eliminate any loss of entitlement to Capital Allowances.
Adopting a pre-planned approach to Capital Allowances will ensure that the project is tax-friendly and the savings are optimized. Also, knowing how much this will reduce the actual cost of the project may mean some of the tax saved can be utilised to afford a better building.
So, to recap on the key point - building works will mean major tax savings for GP partnerships - savings that may be useful in a number of ways to the partners. Commercial lenders are also very aware of the value of the tax relief to GPs and see it as a financial safety net.
The most critical issue is timing as the £1m Annual Investment Allowance is available for each year from January 1st 2019 until December 31st 2020. Qualification is from the date of first use of the property - and so if a project will not complete until late in 2020 it will be important that the surgery is in use before that year ends. There is no certainty of an extension to this very welcome increase to the AIA, which it would appear has been introduced to help cushion any disruption resulting from Brexit. The AIA will no doubt be continued into 2021 but for the moment it is best to assume that it may be reduced back to its 2018 level of £200,000.
If you have a thought of surgery improvements, or have a project that has been on hold - then early action is required.
David Rees BSc FRICS has specialised in Capital Allowances consultancy for over twenty years with a particular focus on healthcare. In that time he has advised on around 100 GP surgery projects and been responsible for claims of around £25,000,000 in tax relief. He is a member of the UK Green Building Council and an advisor to the Primary Care Premises Forum.