The Minimum Energy Efficiency Standards (MEES) took effect for private commercial properties at the start of the month. Basically, the changes to legislation will make it unlawful for landlords to agree a new lease (as well as lease renewals) for a commercial property with an Energy Performance Certificate (EPC) rating below an E.
These legislative changes form part of the government’s wider initiative to ensure that the energy efficiency of all properties is improved in both the domestic and non-domestic sector. In time, this is probably likely to rise to D or above to ensure the Government’s goal of increasing energy efficiency. So, our advice would be to future proof your building, not just reach the minimum pass required. Failure to comply with the regulations will result in landlords facing a financial penalty and a publication of non-compliance.
If you are on the back foot with ensuring compliance, there are short-term fixes to get a property up to the minimum E standard, such as installing controllers and timers to equipment along with effective facilities management and increased occupier awareness. In the medium term, work should focus on zoning measures, thermal and draught insulation, high efficiency equipment replacements (lighting and heating) as well as space utilisation.
As you can see substantial expenditure may need to be incurred to meet an E rating, and more to achieve higher ratings. However, the tax system can be used to alleviate this burden, through various allowances and reliefs. The first question to answer is whether this will be capital or revenue expenditure. Only once you have answered that this is understood can you assess the tax relief position. We look at revenue v capital in our article “Expenditure – Capital or Revenue”. Typically, expenditure on restoring or repairing a property will be allowed as revenue expenditure. However, as with all things tax-related, there are exceptions, such as the 50% rule within CAA 2001, s 33A.
With the introduction of CAA 2001, s 33A and s 33B, expenditure incurred on an existing integral feature is treated as capital expenditure if the sum is more than 50% of the cost of replacing the integral feature at the time it is incurred. Further, if the expenditure does not exceed the 50%, but does so when taken together with additional expenditure in the next 12 months, this will also be deemed as capital expenditure eligible for capital allowances. However, the 50% rule is not activated in relation to a ‘dwelling house’, where typically there will be no capital allowances (CAA 2001, s 35). But by careful planning, an entire integral feature could be replaced over time to allow a revenue deduction rather than an 8% annual writing-down allowance.
As we are talking about existing buildings, thermal insulation can be eligible for the special rate pool (CAA 2001, s 28) and HMRC’s Capital Allowances Manual at CA22220 confirms that taxpayers can treat capital expenditure on ‘roof lining, double glazing, draught exclusion and cavity wall filling as expenditure on thermal insulation’.
In addition, Enhanced capital allowances (ECAs) which provide 100% tax relief (or 19% payable credit in certain circumstances) for capital expenditure incurred on eligible energy and water-saving technologies. See our article on the scheme here.
So, although you may be incurring extensive expenditure, this can be mitigated by substantial tax relief. Ćavetta Consulting would recommend early consultation with your advisers at the feasibility stage of a project, to ensure the maximum tax allowances can be gained on a project involving energy improvements works. Ćavetta Consulting can work with your legal and construction teams to ensure all compliance is covered within leases and construction documentation are installed as well as managing the works on site.