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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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IBA: miscellaneous: arrangements having an artificial effect on pricing: meaning

Budget 2007 announced a business tax reform package including the gradual withdrawal of IBAs and ABAs over four years. Legislation was introduced in FA08 to give effect to those changes. The phased withdrawal of IBA writing down allowances had effect for chargeable periods ending on or after 1 April 2008 for businesses within the charge to CT and 6 April 2008 for businesses within the charge to IT. There are no IBA writing down allowances for the financial year beginning on 1 April 2011 and subsequent years.

Arrangements that have an artificial effect on pricing are arrangements that go beyond those that would be expected in a normal open market transaction at arm’s length, having regard to the prevailing market conditions.

Property developers may offer inducements to sell or let buildings in a depressed property market, especially if they are sited in less desirable locations, such as some enterprise zones. Some of the inducements may also increase the value of the building, but do not treat the uplift in value as caught by the legislation if the inducements are no more than those expected in a normal open market sale.

Here are examples of the sort of transactions caught by the legislation.

Reverse premiums

A prospective tenant may be paid an inducement to enter into a lease. This can be a normal commercial arrangement, for instance to attract any tenant, or in some cases a particular prime tenant who will enhance a development to make it more attractive to other tenants. However, if the rents payable under the lease are also set at above open market value, this can inflate the value of the relevant interest and a challenge under CAA01/S357 may be possible in respect of the inflated element of the value.

Leasebacks

A developer may sell the relevant interest to an investor and then lease the building back until a tenant is found. This is not objectionable if the rents paid by the developer are not more than those expected in the open market. However, a sale and leaseback at an inflated building price and rent would be objectionable.

Construction Leases

In some cases, particularly in enterprise zones, the developer may enter into the leaseback before the building has been completed. This is not objectionable if the arrangements are commercial, and do not inflate the value of the completed development, when looked at as a whole.

Rental Guarantees (1)

A third party (usually a clearing bank) will guarantee to pay rent for a limited period or until a tenant is found. The vendor may take a leaseback from the purchaser and places enough of the sale proceeds on deposit with the bank to cover the maximum pay out possible under the guarantee. The bank then pays the rents to the purchaser until the expiry of the guarantee, or a real tenant is found, in which case the balance of the sums on deposit are repaid to the vendor. This sort of arrangement will normally be acceptable if the rents are pitched at a commercial level.

Rental Guarantees (2)

A developer might secure a tenant who commits himself to occupy a building at an agreed rent once the building has been completed. A building with a guaranteed tenant will often be worth more than an empty building, especially where there is a glut of surplus property. This uplift in value is acceptable provided that the rental terms are at a normal commercial rate after the effect of other arrangements, such as reverse premiums, have been taken into account.