881.This Chapter provides how plant and machinery allowances and charges are given effect for income tax and corporation tax. There are specific rules for separate qualifying activities. There are additional rules for life assurance businesses.
882.The general rule in section 2 is applied in detail by:
section 247 for trades;
section 248 for ordinary Schedule A businesses;
section 249 for furnished holiday lettings businesses;
section 250 for overseas property businesses;
section 251 for professions and vocations; and
section 252 for mines, transport undertakings and other “section 55 concerns” (which give effect to allowances as expenses and charges as receipts of the trade or business or concern).
883.In addition:
section 253 provides for investment companies to give effect so far as possible to allowances as a deduction from income of the business and charges as income of the business;
sections 254 to 257 give effect to plant and machinery allowances and charges for management assets of a company carrying on life assurance business;
sections 258 to 261 give effect to allowances and charges for special leasing of plant or machinery as a deduction from income from special leasing or a charge under Case VI of Schedule D respectively; and
sections 262 gives effect to allowances and charges for employees and office-holders as deductions from emoluments or emoluments respectively.
884.These sections make very similar provision for giving effect to plant and machinery allowances for trades, property businesses, professions, vocations and section 55 concerns. These are all activities which Part II of CAA 1990 treats as trades for plant and machinery allowances – apart from section 55 concerns – which this Act treats as a qualifying activity. See Change 1 in Annex 1. The sections are based mainly on section 73(1) of CAA 1990 which provides that allowances and charges are to be given effect in taxing a trade and the bits of Part VIII of CAA 1990 which explain what that means.
885.This section is based on section 28 of CAA 1990. It provides for plant and machinery allowances and charges for the management of an investment company to be treated as expenses or income of the business. These are subject then to the provisions in section 75 of ICTA.
886.Subsections (2) and (6) refer to section 75(4) of ICTA. That provides (after the amendment made by paragraph 15 of Schedule 2 to the Act):
“(4)For the purposes of this section there shall be added to a company’s expenses of management in any accounting period the amount of any allowances falling to be made to the company for that period by virtue of section 15(1)(g) of the Capital Allowances Act (plant and machinery allowances) so far as effect cannot be given to them under section 253(2) of that Act.”
887.Subsection (7) points readers to provisions in ICTA which deal with a change in ownership of an investment company by providing for an apportionment of allowances between accounting periods if necessary.
888.These four sections give effect to allowances for management assets of companies carrying on life assurance business. They are based mainly on section 434D of ICTA. “Management assets” are defined by section 544.
889.The background to the sections is, in summary, that the taxation of life assurance business is complex. It is a trade the profits of which could, and in certain cases must, be charged to tax under Case I of Schedule D. But a company carrying on life assurance business can also be taxed on the investment income of the company, plus capital gains on the investments, with relief given for the company’s management expenses. This latter method is known as the “income less expenses” (I‑E) basis of assessment.
890.If the I‑E basis is chosen, a separate computation must be prepared for each category of life assurance business. The I‑E basis itself applies to the income and gains of a company that are referable to its basic life assurance and general annuity business (BLAGAB). Where a company also carries on other categories of life assurance business, it is taxed on the profits of those categories, calculated in the same way as the profits of a trade are calculated, but charged under Case VI of Schedule D. This requirement for separate computations means that allowances have to be identified with each category of business. Section 255 does this. It provides for allowances and charges to be apportioned between categories of business:
subsection (1) sets out the basic apportionment formula to be applied, subject to the special rule for overseas life assurance business in subsection (3);
subsection (2) modifies the application of the formula to an overseas life insurance company; and
subsection (3) provides that allowances on assets provided outside the United Kingdom for use in the management of an overseas life assurance business must be allocated to that business.
891.Section 256 then gives effect to allowances and charges:
for BLAGAB, subsections (2) and (3) treat allowances as management expenses and charges as income taxable under Case VI of Schedule D;
for pension, ISA, life reinsurance and overseas life assurance business, subsections (3) and (4) treat allowances and charges as expenses or receipts of that business.
892.Section 257 deals with various supplementary matters:
subsection (1) ensures that allowances on “management assets” are only given effect in accordance with the special rules in the preceding sections;
subsection (2) preserves the availability of allowances in “notional” computations under Case I of Schedule D, which may have to be prepared even if I-E is chosen as the basis on which tax is charged; and
subsection (3) ensures that the various expressions used in the preceding sections continue to have the same meaning as in the main body of legislation dealing with the taxation of life assurance companies in Chapter I of Part XII of ICTA.
893.These four sections give effect to plant and machinery allowances for special leasing. They are based mainly on sections 73, 141 and 145 of CAA 1990. The treatment of special leasing is different partly because there is, by definition, no trade or business (see section 19) and partly because of additional provisions in CAA 1990 for these allowances and charges.
894.Section 258 for income tax deducts allowances from income from special leasing and taxes charges under Case VI of Schedule D. But this is subject to the restriction in subsection (3). That limits allowances to income from the particular special leasing if the lessee(s) did not use the plant or machinery for a qualifying activity for the whole tax year. Subsection (5) provides for excess allowances to be carried forward and set against future income from special leasing or (if subsection (3) applied) the particular special leasing. But, unlike CAA 1990, the section does not go on to say that tax “shall be discharged or repaid accordingly” as that is unnecessary. See Note 40 in Annex 2. Subsection (6) is based on section 83(1) of CAA 1990. It treats a balancing charge on a special leasing as income so allowances can be set against it. See again Note 40 in Annex 2.
895.Sections 259 and 260 make similar provision for corporation tax. The main difference is that the rules for excess allowances are somewhat more complex and so given separately in section 260. The main difference from income tax is that a company has the option to deduct excess allowances from any profits in the same accounting period or carry back them to a previous accounting period (subject to the exception in subsection (7)).
896.Subsection (8) gives “profits” the meaning in section 6 of ICTA direct – like section 2(4).
897.Section 261 is based on section 434E(6) of ICTA. It provides that a company carrying on any life assurance business cannot carry back excess allowances from special leasing or set them against other profits of the period or use them for group relief.
898.This section is based on section 27(1) and 140(4) of CAA 1990. It gives effect to allowances and charges in terms of deductions from emoluments and emoluments. This is in place of the terms “receipt” and “expense” in section 140 of CAA 1990. Those terms do not fit employees and office-holders. See Note 41 in Annex 2.