IR19 29 November 1994 CAPITAL ALLOWANCES FOR PRIVATELY-FINANCED ROADS The Chancellor proposes in his Budget: * to make Capital Allowances available on capital expenditure on public highways under the Design, Build, Finance and Operate (DBFO) initiative; * to make changes to the existing Capital Allowances legislation on toll roads so that relief can be given on the full amount of capital expenditure. The Chancellor's intention is to allow writing down allowances for privately-financed public roads, so that relief for capital expenditure on constructing, improving or repairing roads will now be available where that expenditure is incurred by the private sector, but where the road itself is not a toll road as defined by the Capital Allowances Act 1990. The proposals will also introduce balancing adjustments when a contract comes to an end in respect of privately-financed public roads, including toll roads. The new rules will start from 6 April 1995. DETAILS Writing Down Allowances. 1. The Chancellor announced last year that he was looking at ways to encourage private investment in the road system. This Summer the Department of Transport announced pre-qualification for DBFO schemes whereby private companies will take on responsibility for building or improving roads and then maintaining them for up to 25 years. The Government will pay fees for the management of the roads based on the level of use, but the construction or improvement costs will be borne entirely by the private sector. 2. Capital allowances for toll roads were introduced in 1991. The relief was designed to allow the cost of constructing a toll road to be written off over 25 years by bringing toll roads within the definition of an "industrial building or structure". 3. No Capital Allowances would be due on DBFO roads as they are not toll roads as defined in the Capital Allowances Act 1990. It is Government policy that capital allowances be available in respect of private investment in public roads, and this measure is designed to achieve that end by bringing DBFO roads within the definition of an "industrial building or structure". Balancing Adjustments. 4. When an industrial building or structure is sold within the first 25 years of its life, a balancing adjustment is made which brings the total tax relief into line with the actual depreciation. There is a charge when the proceeds exceed the tax written down value, and an allowance when they are less. 5. The occasions when a balancing adjustment is required are defined by section 4 of the Capital Allowances Act 1990 as including sale of the relevant interest, or the relevant interest coming to an end, if it is a leasehold. The coming to an end of the right to manage a road, whether a toll road or a DBFO road, is not an occasion for a balancing adjustment under present legislation. 6. This means that if a road management contract runs for less than 25 years from the time that any work is carried out, the taxpayer will not get relief for the whole of the cost of the work. The new measure is to rectify this position by making the coming to an end of a contract an occasion of balancing adjustment. NOTES FOR EDITORS 1. The capital allowances system provides tax relief in respect of the depreciation of most business assets, including machinery and plant (at the rate of 25 per cent per annum, reducing balance) and industrial and agricultural buildings (written off over the first 25 years of life, usually at 4 per cent per annum). 2. The measures will cost the Exchequer about pounds 5 million in the tax year 1997-98 rising to pounds 25-30 million per year between 2001-02 and 2019-20.