Section 43 Schedule 10 Plant and Machinery Allowances: Fixtures
Summary
1.Section 43 and Schedule 10 make the availability of capital allowances to a purchaser of fixtures conditional on: (i) previous business expenditure on qualifying fixtures being pooled before a subsequent transfer on to another person, (ii) the value of fixtures being fixed formally within two years of a transfer. However, in relation to the rule at (ii), there is an alternative method of fixing the value that applies only in some (narrowly defined) cases where an intermediate owner or lessee, who was not entitled to claim an allowance, had failed to determine a fixtures apportionment with the past owner. In addition, the new provisions make a technical adjustment in respect of the Business Premises Renovation Allowances (BPRA) scheme, to enable a new owner to claim plant and machinery capital allowances on any fixtures expenditure not already relieved by BPRA.
Details of the Schedule
2.Paragraph 1 is introductory and explains that the Capital Allowances Act 2001 (CAA) is to be amended.
3.Paragraph 2 introduces new sections 187A and 187B into CAA.
New Section 187A Effect of changes in ownership of a fixture
4.New subsection (1) of section 187A sets out the circumstances in which the section applies. It applies if :
a current owner incurs capital expenditure on acquiring a property containing fixtures from another person, for the purposes of his business;
that other person, or a previous owner, is treated as having been the owner of the fixtures at a relevant earlier time (see new subsection (2) and new section 187B (4) and (5)) as a result of incurring other expenditure (“historic expenditure”) on their provision, for the purposes of a business carried on by that past owner;
that past, business owner was entitled to claim plant and machinery allowances (PMAs) in respect of the historic expenditure; but -
The new section does not apply if the previous owner was only entitled to relief by virtue of the contributions legislation in section 538, CAA.
5.New subsection (2) explains what is meant by:
“the past owner”. In respect of an amount of historic expenditure, it is the person who was entitled to claim most recently in respect of that amount; and
“relevant earlier time.” This has the meaning given by new section 187B (4) and (5).
6.New subsection (3) provides that the qualifying expenditure incurred by the new owner is to be treated as nil if -
the “pooling requirement”(see new subsection (4)) is not satisfied;
“the fixed value requirement” (see new subsections (5),to (8)) applies but is not satisfied; or
“the disposal value statement requirement” (see new subsections (10) and (11)) applies but is not satisfied,
in relation to the past owner. So, in all cases to which this new section applies, the pooling requirement must be satisfied. In addition, one or other of the “value” requirements will apply and must be satisfied in every case to which this new section applies. (In practice, the “fixed value requirement” will apply in the vast majority of cases and the “disposal value statement requirement” is likely only to apply very infrequently.)
7.New subsection (4) explains “the pooling requirement”. It provides that the historic expenditure must have been allocated to a pool in a chargeable period beginning on or before the day on which the past owner ceased to own the fixture, or the past owner claimed a first-year allowance on the expenditure (or any part of it).
8.New subsection (5) explains when “the fixed value” requirement applies. It only applies where the past owner is or has been required to bring the disposal value of the plant or machinery into account in accordance with one of three particular disposal events described in the Table in section 196, CAA. (The relevant disposal events are items 1, 5 or 9 in that Table. Item 1 covers the case of a market value sale; item 5 covers the case of an incoming lessee paying a capital sum for the lease, which sum falls to be treated in whole or part as expenditure on the provision of the fixture; and item 9 covers the case of a past owner, who permanently discontinues his business, followed by a sale of the qualifying interest in the property, including its fixtures. This last case should be distinguished from the example given in relation to items 1, 5 or 9 in that Table. Item 1 covers the case of a market value sale; item 5 covers the case of an incoming lessee paying a capital sum for the lease, which sum falls to be treated in whole or part as expenditure on the provision of the fixture; and item 9 covers the case of a past owner, who permanently discontinues his business, followed by a sale of the qualifying interest in the property, including its fixtures. This last case should be distinguished from the example given in relation to items 1, 5 or 9 in that Table. Item 1 covers the case of a market value sale; item 5 covers the case of an incoming lessee paying a capital sum for the lease, which sum falls to be treated in whole or part as expenditure on the provision of the fixture; and item 9 covers the case of a past owner, who permanently discontinues his business, followed by a sale of the qualifying interest in the property, including its fixtures. This last case should be distinguished from the example given in relation to
9.New subsection (6) explains that the fixed value requirement is met when one of two outcomes occurs. That is, either:
‘a relevant apportionment of the apportionable sum has been made’ (see new subsection (7); or
the current owner has obtained certain statements where the property is acquired from someone other than “the past owner”, as defined in subsection (2) (see new subsection (8))
The overwhelming majority of commercial property transactions involving second-hand fixtures will fall within new subsection 6(a) (see new subsection (7) below for more information),
New subsection (6) (b) is a change from the draft legislation published for consultation on 6 December 2011 (see new subsection (8) below for more information).
10.New subsection (7) explains that a relevant apportionment is made if –
the Tribunal has determined the part of the sale price that constitutes the disposal value of the fixtures, on an application made by one of the affected parties within two years of the purchaser’s acquisition; or
there has been a joint election, under either section 198 or section 199 of CAA, as appropriate, between the past owner and the purchaser within two years of the acquisition (or, if an application to the tribunal is made within two years, and not determined or withdrawn, before the end of that period before that application is determined or withdrawn).
11.The overwhelming majority of commercial property transactions involving second-hand fixtures will involve a relevant apportionment, so that there will be the requirement for a reference to the tribunal, or for a joint election to be made, within two years of a sale. In fact, it is to be expected that a joint election (option (b) above), under section 198 or 199 of CAA, will be the preferred course in the vast majority of cases. This is because it will clearly not be in the interests of either side to incur the trouble and any cost of going to a tribunal unnecessarily, in any case where it would have been possible to agree an apportioned value voluntarily.
12.New subsection (8) introduces a relaxation to the draft legislation published for consultation on 6 December 2011 to help ensure that it applies fairly. Under the consultation draft of the legislation, an immediate purchaser, who was not entitled to claim an allowance (for example, a charity) should have ensured that the “fixed value requirement” was satisfied (either by entering into a joint section 198 or 199 of CAA election with the past owner, or by applying to the tribunal to determine the apportionment) if that purchaser wanted to be able to pass on an entitlement to claim allowances on those fixtures to a new owner in the future.
13.Persons who are not entitled to claim an allowance (such as charities that are not chargeable to tax) buying property from ‘past owners’ are entitled to make a section 198 or 199 of CAA election, or to apply to the tribunal for a determination of the fixtures value, if they wish to do so. They may wish to do so, in order to enable a future business purchaser to claim in respect of those fixtures, thereby potentially enhancing or protecting the value of their property investment. If they duly elect or apply to the tribunal, they will then be able to provide the election notice or tribunal determination to a new owner, on a later sale, thereby establishing the new owner’s entitlement to allowances on those fixtures.
14.However, it is possible that non-taxpayers, such as charities, may have scant knowledge or awareness of the capital allowances legislation and may therefore inadvertently omit to follow either of the election or tribunal procedures for making a fixtures' apportionment. Of course, it may be that the non-taxpayer had informally agreed with the seller that the seller could return a nil disposal value for the fixtures, precisely because the non-taxpayer was uninterested in the capital allowances. Indeed, it could even be that the non-taxpayer obtained the property for a somewhat lower price in consequence of allowing this. In such a situation, the expenditure on the fixtures would have been written off in full in the hands of the seller and it would be in accordance with the underlying policy for those fixtures to have a nil value in the hands the current owner, purchasing the property from the non-taxpayer. However, in a case where it can be formally demonstrated by the past owner that he returned a specific disposal value for those fixtures, and that it is too late for the non-business purchaser to fix an apportionment with him, a narrowly defined exception from the normal rule appears to be justified.
15.New subsection (8) therefore provides that, in these circumstances, if the current owner obtains a written statement made by the ‘purchaser from the past owner’ (in our example, say, a charity) that new subsection (6) (a) has not been met and is no longer capable of being met, and also a written statement made by the past owner of the actual amount of the disposal value that the past owner, in fact, brought into account, then the “fixed value requirement” would be regarded as met in that way. The expression ‘purchaser from the past owner’ in subsection (6)(b) means, in effect, an intermediate owner or lessee who was not entitled to claim an allowance, and who acquired an interest in the fixtures from a “past owner”, who was so entitled to claim.
16.New subsection (9) defines various expression used in new subsections (6) to (8), and gives the statutory meaning of “election” for the three affected disposal events. That is, if the disposal event falls within item 1 or 9 of the Table in section 196, the election will be under section 198 of CAA, whereas if the disposal event falls within item 5 of that Table, the election will be under section 199 of CAA.
17.New subsection (10) explains when “the disposal value statement requirement” applies. This provision is designed to cater for a very small subset of disposal events that may have occurred, other than by virtue of an immediate sale of, or grant of a lease of, the fixtures by a person carrying on a qualifying activity. The requirement would apply if, for example, a past owner had previously permanently ceased his business activity, finalising his cessation accounts and tax return, in which he would have been required to bring the market value of the fixtures, at that time, into account, in accordance with item 7 of the Table in section 61 of CAA. If, some years later, he then decided to sell his former business premises with its fixtures to a purchaser, “the disposal value statement requirement” would apply.
18.New subsection (11) explains how “the disposal value statement requirement” is satisfied. This is done by the past owner making a written statement of the amount of the disposal value of the fixtures that he is, or has been, required to bring into account, within two years of the date when he ceased to own them. The current owner must obtain this statement, or a copy of it, either directly or indirectly from the past owner.
Thus if, for example, the immediate purchaser is not a business, but a later purchaser is a business, the later purchaser may obtain the required statement either directly from the past owner, or indirectly from the intermediate owner, who sold the property to the current owner. As with the “fixed value requirement”, an intermediate purchaser, who is not a business should ensure that he obtains this written statement from the past owner, if he wants to make sure that he is able to pass on an entitlement to claim on those fixtures to a future owner. However, the later owner is free to try to obtain the statement, or a copy of it, directly from the past owner, if the past owner is still contactable and willing to oblige.
New Section 187B Supplementary provision
19.New subsection (1) of section 187B provides that it is for the current owner seeking to claim allowances to demonstrate whether:
the fixed value requirement applies and, if so, is satisfied, and
the disposal value statement requirement applies and, if so, is satisfied
and, for this purpose, to provide a copy of any relevant tribunal decision, election or statement, satisfying the relevant requirement, to HM Revenue and Customs (HMRC) on request. (Although it is considered that it is for the taxpayer to substantiate a claim to capital allowances, so that, from this perspective, and to this extent, this new subsection could be viewed as somewhat superfluous, one of the main policy purposes of the new provisions is to increase the operational clarity and certainty of the fixtures regime. This new subsection is, therefore, intended to put beyond doubt what a current owner will need to obtain and retain in order substantiate a fixtures claim under the new provisions.)
As previously indicated, if a non-business purchases fixtures from a past owner who was entitled to claim allowances on those fixtures, the non-business –
should make the required election, or obtain a tribunal determination if it wishes to ensure that a known entitlement to claim can be passed on to a future owner;
or, exceptionally, it may be possible to retrieve the situation if -
that non-business owner makes a written statement, in accordance with section 187A(9)(a), at the time when it sells on the fixtures to a current owner who wishes to claim allowances, if the current owner is also able to obtain (whether directly or indirectly) from the past owner a written statement of the disposal value which the past owner, in fact, brought into account, in accordance with section 187A(9)(b). .
In general, current owners will require to hold on to the appropriate paperwork to demonstrate their entitlement to claim in respect of historic expenditure on fixtures.
20.New subsection (2) provides that amounts stated in either the disposal value statement or a statement provided by a past owner (where a relevant apportionment should have been made, but a non-business owner acquiring the fixtures from a past owner, omitted to do this) have effect in place of any apportionment that could have been made under sections 562, 563 and 564(1).
21.New subsection (3) provides that for the purposes of section 187A the current owner and the past owner may be the same person.
22.New subsection (4) explains what is meant by ‘relevant earlier time’ in new section 187A (2). It is any time that falls before the earliest time when the current owner is treated as owning the fixtures, but that time must be on or after 1 April 2012 for corporation tax purposes or 6 April 2012 for income tax purposes because of the commencement provisions in Paragraph 13 of the Schedule.
23.New subsection (5) ensures that the legislation does not apply where there has been a sale of an asset that is no longer a fixture at the time of sale, unless that sale is to a connected person. For example: company A owns a building, containing an antique copper water heater, which it strips out and sells to an architectural salvage dealer. Company B, not connected with company A, buys the copper water heater from the dealer and installs it in a property it owns. Company B is not required to establish the disposal value brought into account by Company A and is not precluded from claiming allowances based on what it paid for the asset.
24.New subsection (6) makes it clear that none of the conditions in section 187A (3) in relation to the current owner, affects the disposal value that the past owner must bring into account. So, for example, in a sale and purchase between two businesses, if the fixed value requirement is not satisfied because no election has been made, and neither has the tribunal been asked to determine the part of the sales proceeds that relates to the fixtures, so that the current owner’s qualifying expenditure is deemed to be nil, the past owner is still required to bring in a disposal value, in accordance with section 196 CAA.
25.New subsection (7) provides that expressions used in this section have the same meaning as expressions used in section 187A.
26.Paragraph 3 makes certain consequential amendments to section 198, CAA.
27.Paragraph 4 introduces changes to section 201 CAA.
28.Paragraph 4(3) introduces a new subsection 1A into section 201. The new subsection provides that where new subsection (7)(a) of new section 187A applies, and an application is made to the tribunal, then the time limit in section 201(1) does not apply, but is modified to run to the time the tribunal determines the application or the application is withdrawn.
29.Paragraph 5(1) makes a change to section 563, CAA, so that a question concerning the amount to be fixed in relation to the fixed value requirement can be referred to the tribunal, even if it only affects the liability to tax of one person, rather than of two or more persons. For example, where a taxpayer sells a fixture to a non taxpayer and agreement cannot be reached but the non taxpayer wishes for certainty in relation to the ability of a potential future business owner to be able to claim on those fixtures, then, absent the change to section 563, that matter could not have been referred to the tribunal, but in future it may be referred. Paragraph 5(2) makes a consequential change to the heading of section 563, CAA.
30.Paragraph 6 introduces new section 186A into CAA
186A Fixtures on which a business premises renovation allowance has been made
31.There is a general rule in section 9 of CAA that if any person has claimed an allowance under any Part other than Part 2, then no other person is able to claim a fixture allowance under Part 2. The general rule is relaxed in the case of fixtures on which industrial buildings allowances, or research and development allowances, have been claimed. New section 186A introduces a similar relaxation in relation to business premises renovation allowances (BPRA), ensuring that where a property which has qualified for BPRA, under Part 3A, is sold then the new owner can claim allowances under Part 2, to the extent that the original BPRA qualifying expenditure was not relieved but only to that extent. In all other cases no allowances are available to the new owner. The drafting of new section 186A follows section 186 in most material respects. The only significant change from the consultation draft of the legislation published on 6 December 2011 is that the definition of ‘R’ has been changed as, unlike the IBA code, Part 3A does not reset ‘RQE’ following a balancing event (because there is no need to do so). ‘R’ is now defined as the qualifying expenditure incurred by the past owner on the fixture less the ‘net Part 3A allowances’ in respect of that asset. ‘net Part 3A allowances’ are defined as the total of any allowances made under Part 3A (that is, any initial allowance and any writing-down allowance) less the total of any balancing charges made under Part 3A in relation to that expenditure.
32.Paragraphs 7 to 10 make minor consequential amendments to sections 9, 57, 198 and 199 of CAA to include references to the amendments in respect of BPRA and the new section 186A.
33.Paragraph 11 explains that the amendments made by paragraphs 1 to 5 have effect:
for income tax purposes, in relation to new expenditure incurred on or after 6 April 2012, and
for corporation tax purposes, in relation to new expenditure incurred on or after 1 April 2012
34.Paragraph 12 explains that the amendments made in relation to BPRA by paragraphs 6 to 10 have effect:
for income tax purposes, in relation to balancing events which occur on or after 6 April 2012, and
for corporation tax purposes, in relation to balancing events which occur on or after 1 April 2012
35.Paragraph 13(1) deals with expenditure of a past owner where the period of ownership was entirely before 1/6 April 2012 and provides that neither the pooling requirement nor requirements to fix formally the value of fixtures apply in relation to such a period of ownership.
36.Paragraph 13(2) disapplies the pooling requirement in relation to the new section 187A if the period for which the plant or machinery is treated as having been owned by the past owner ends no later than the end of the two years beginning with the commencement date, as defined in paragraph 13(3). This is a change from the consultation draft of the legislation to cater for the case of a sale in the transitional period to a non-business owner, who is not entitled to claim allowances, and who would, therefore, be unable to pool any hitherto un-pooled qualifying expenditure on fixtures. In effect, this change disapplies the pooling requirement for an extended period, where the period of ownership of a past owner (who was entitled to claim) ends no later than a period ending on 5 April 2014 (for income tax purposes) or 31 March 2014 (for corporation tax purposes).
37.Paragraph 13(3) gives the meaning of commencement date as used in paragraph 13(1) and the transitional period as used in paragraph 13(2).
The commencement date means
for income tax purposes, 6 April 2012, and
for corporation tax purposes, 1 April 2012
The transitional period means
for income tax purposes, the period beginning with the commencement date and ending with 5 April 2014, and
for corporation tax purposes, the period beginning with the commencement date and ending with 31 March 2014.
Background Note
38.At Budget 2011, the Government announced that it would consult on proposals to ensure that the capital allowances rules for fixtures secured their original policy purpose of limiting allowances overall to the fixture’s original cost. That is, that the cost of a fixture should be written-off once, and once only, during that fixture’s useful economic life.
39.The Government decided to act in order to protect the Exchequer from further tax leakage and to make the rules fairer and clearer for businesses to understand and operate - without giving rise to disproportionate administrative burdens.
40.A formal consultation was launched on 31 May and closed on 31 August 2011. The Government’s formal response to the consultation was published on 6 December 2011, together with a draft of the proposed legislative provisions, for a period of technical consultation, which closed on 10 February 2012. Following this technical consultation some changes have been made to the draft provisions to help ensure the fairer application of the new rules, and these changes are highlighted in the detail of this Explanatory Note.
41.The fixtures legislation is contained in Chapter 14 of Part 2 of the Capital Allowances Act 2001 (CAA). To deliver the policy purpose - that expenditure on a fixture should be written-off against taxable profits only once over its economic life - the current legislation contains rules to limit the allowances that can be given to the lower of original cost (section 62 CAA) or the last disposal value that has been brought into account by any previous owner of the fixture (section 185 CAA).
42.However, the current law does not prescribe when expenditure on fixtures should be pooled, and there is no time limit laid down to govern when a seller and purchaser should agree the part of the sale price of a property that should be attributed to the fixtures.
43.These gaps have given rise to uncertainties and difficult questions of proof. They have led to a large number of 'late' claims by current owners at a time when a single sale value for fixtures can no longer be agreed and brought into account by both parties.
44.This section and Schedule are designed to address these practical problems with the existing legislation, in order to ensure that the fixtures regime operates as originally intended in future.
45.An additional technical, fixtures issue, in relation to the Business Premises Allowances scheme (in Part 3A of CAA), emerged during the Government’s consideration of its proposed fixtures changes for Finance Act 2012. The Government decided to address this issue at the same time as the other changes.
