Structure of Part 2
97.One way in which CAA 1990 copes with the extensions to the scope of plant and machinery allowances is by treating activities such as professions, vocations and property businesses as if they were trades.
98.Separate pools for expenditure are achieved in CAA 1990 by a similar device. Expenditure incurred for the purposes of a trade (or an activity treated as a trade) is treated as incurred for a separate notional trade.
99.This works. But it means that what appear to be simple references to a trade may mean something more. For example Part II of CAA 1990 starts with the simple statement in section 22:
Subject to the provisions of this Part, where—
a person carrying on a trade incurs capital expenditure to which this section applies on the provision of machinery or plant wholly and exclusively for the purposes of the trade, and
in consequence of his incurring the expenditure, the machinery or plant belongs to him at some time during the chargeable period related to the incurring of the expenditure,
there shall be made to him for that period an allowance (“a first-year allowance”) …
100.This might lead readers not carrying on a trade to conclude they are not entitled to first-year allowances. But later sections in CAA 1990 mean that the “trade” in paragraph (a) does not have to be a trade. It may be another activity treated as a trade.
101.Similarly readers might take section 24 of CAA 1990 to mean they are not entitled to writing-down allowances if they are not carrying on a trade:
Subject to the provisions of this Part, where—
a person carrying on a trade has incurred capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of the trade, and
in consequence of his incurring that expenditure, the machinery or plant belongs or has belonged to him,
allowances and charges shall be made to and on him in accordance with the following provisions of this section.
102.In fact the “trade” can again be another activity treated as a trade. It may also be a notional trade set up so as to create a separate pool of expenditure. In addition, expenditure which is not on plant or machinery may be treated as if it were under later provisions; or people may be treated as incurring expenditure on plant or machinery they have as a result of a gift.
103.A different approach is taken to these points in this Act. It:
deals explicitly with the various activities which CAA 1990 treats as or deems to be trades. The term “qualifying activity” is used to refer to these. See section 15.
deals explicitly with “pools” in place of notional trades (or notional qualifying activities as they would have become); and
makes clear to readers coming to Part 2 (possibly for the first time) what is required for entitlement to allowances.
104.The structure of Part 2 of this Act is accordingly different from Part II of CAA 1990. There are three main blocks of sections:
Chapters 1 to 3 deal with qualifying activities and qualifying expenditure. A person who has a qualifying activity and qualifying expenditure is normally entitled to allowances of some kind;
Chapters 4 to 18 deal with the entitlement to allowances (or liability to charges). The order of this material is a balance between several criteria: for example how often the legislation applies in practice; the benefits of putting similar provisions together; introducing concepts in a logical order; and readers’ expectations. There is no one right answer as a different mix of provisions is relevant to different taxpayers, and to different transactions by one taxpayer; and
Chapter 19 then sets out how allowances are given effect.
105.Another difference in approach in this Act from CAA 1990 is in the use of the term “qualifying expenditure”.
106.Part II of CAA 1990 uses this term to mean the sum of expenditure added to a pool for a chargeable period plus the balance (if any) of expenditure added in earlier chargeable periods. The expenditure added to a pool may be the same amount as the capital expenditure incurred on plant or machinery. But it may also be less. A simple example is if a first-year allowance is claimed. Then the amount which counts as qualifying expenditure in CAA 1990 is the balance left after the first-year allowances.
107.There is no term in CAA 1990 for the amount of expenditure on which someone can get allowances of one kind or another – first-year allowances and/or writing-down allowances. It is not the capital expenditure incurred as not all capital expenditure qualifies. So Part II of CAA 1990 has repeatedly to refer to expenditure by its characteristics. An example is section 37(1) of CAA 1990.
This section applies where—
a person carrying on a trade (“the trader”) incurs capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of the trade;
108.In this Act qualifying expenditure means expenditure on which a person may get first-year allowances or writing-down allowances (or both). This is broadly in line with other Parts of this Act which also use the term qualifying expenditure (although what is and is not qualifying expenditure differs from Part to Part). Using the term qualifying expenditure in this way allows simpler references. An example is in section 83.
Plant or machinery in respect of which qualifying expenditure has been incurred is a short-life asset if—
109.Other terms then follow from this use of qualifying expenditure. The table below is a simplified summary.
| in this Act | in CAA 1990 |
| qualifying expenditure (see section 11) | no equivalent term: broadly capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of a trade which belongs to the person incurring it (see section 25(1)(a)) |
| available qualifying expenditure (see section 57) | qualifying expenditure |
| unrelieved qualifying expenditure (see section 59) | no equivalent term: section 25(1)(b) provides that qualifying expenditure includes “if for the chargeable period immediately preceding the chargeable period in question there was an excess of qualifying expenditure over disposal value, the balance of that excess after deducting any writing-down allowance made by reference thereto”. |
Chapter 1: Introduction
Overview
110.This Chapter introduces Part 2 by giving the general conditions for plant and machinery allowances and dealing with some common additional cases.
111.Section 11 identifies the general requirement for plant and machinery allowances: a person must carry on a qualifying activity for which they incur qualifying expenditure. If a person carries on more than one qualifying activity each is looked at separately to decide entitlement to allowances. These general rules are subject to other provisions which amend or replace them in various circumstances.
112.Sections 12 to 14 provide for plant and machinery allowances if a person does not meet the general conditions because:
expenditure was incurred before the start of the qualifying activity in question;
expenditure was incurred for another purpose before the plant or machinery starts to be used for the qualifying activity; or
plant or machinery used for a qualifying activity was a gift.
Section 11: General conditions as to availability of plant and machinery allowances
113.This section is based in part on sections 22(1)(a) and 24(1)(a) and (b) of CAA 1990. It gives the general conditions for plant and machinery allowances. It uses the terms “qualifying activity” and “qualifying expenditure” which are central to entitlement to allowances under this Part.
114.Subsection (1) sets out the preliminary requirement for the whole of Part 2. Allowances are available if a person carries on a qualifying activity and incurs qualifying expenditure.
115.Subsection (2) is a signpost to Chapter 2 of Part 2 which gives the meaning of “qualifying activity”.
116.Subsection (3) sets up separate calculations for each qualifying activity.
117.Subsection (4) gives the general rule for qualifying expenditure. Subsection (4)(a) uses “wholly or partly” for the purposes of the qualifying activity instead of “wholly and exclusively” used by sections 22(1)(a) and 24(1)(b) of CAA 1990. The use of that term at the start of Part II is potentially misleading. Readers may conclude they are not entitled to plant and machinery allowances if they use an asset partly for other purposes. Yet section 79 of CAA 1990 makes explicit provision for allowances for plant or machinery provided or used partly for a qualifying activity and partly for other purposes. This subsection flags this at the start.
118.Subsection (4)(b) uses “owns”. CAA 1990 refers to plant or machinery which “belongs” to a person in sections 22(1)(b) and 24(1)(b) (and elsewhere). This is a change in the language only. See Note 7 in Annex 2.
119.Subsection (5) is a signpost to Chapter 3 of Part 2 which contains detailed provisions about plant and machinery and qualifying expenditure.
Section 12: Expenditure incurred before qualifying activity carried on
120.This section is based on section 83(2) of CAA 1990. It provides for expenditure incurred before the qualifying activity is carried on to be treated as incurred when the activity is started. Without this the expenditure could not be qualifying expenditure. It complements the trading income rule in section 401 of ICTA.
Section 13: Use for qualifying activity of plant or machinery provided for other purposes
121.This section is based on section 81(1) to (2AB) of CAA 1990. It provides for a person to be treated as having incurred qualifying expenditure if they start to use in a qualifying activity plant or machinery they provided for some other purpose. Without this section such plant or machinery would give no entitlement to allowances.
122.Section 81 of CAA 1990 also deals with gifts. In this Act they are dealt with in section 14. Dividing the material in this way brings out for readers the distinct ways they may be entitled to allowances.
Section 14: Use for qualifying activity of plant or machinery which is a gift
123.This section is based on section 81 of CAA 1990. It contains rules for plant or machinery that was gifted to the person carrying on the qualifying activity.
124.The section is similar to section 13. The plant or machinery received as a gift comes in at market value.
125.There is no equivalent of the anti-avoidance rules in section 13(4) and (5).
126.The anti-avoidance rule in section 81(3) of CAA 1990 has been moved to Chapter 17 of Part 2 – see section 213(3).
Chapter 2: Qualifying activities
Overview
127.This Chapter determines whether or not a person is carrying on a qualifying activity. This is a necessary condition of entitlement to plant and machinery allowances (see Chapter 1 of Part 2).
128.Section 15 lists the qualifying activities. It also points to provisions in Chapters 3 and 8 of Part 2 which affect particular qualifying activities.
129.The rest of this Chapter contains definitions of, and further provisions about, particular qualifying activities.
Section 15: Qualifying activities
130.This section is based on various sections of CAA 1990 which deem the activities listed to be trades. It also makes a minor change.
131.Subsection (1)(f) makes concerns listed in section 55 of ICTA a type of qualifying activity. The profits of these concerns are charged to tax under Case I of Schedule D by section 55(1) of ICTA but are not trades. As they are taxed under Schedule D they cannot be Schedule A businesses. That means Part II of CAA 1990 does not cater for them. This Act does so by making them qualifying activities. See Change 1 in Annex 1.
132.Subsection (1)(g) provides for the management of an investment company to be a qualifying activity. It derives from section 28(1) of CAA 1990 which refers to “the management of the business of an investment company”. This is new wording but is not a change. See Note 8 in Annex 2.
133.The final words provide that an activity is only a qualifying activity to the extent that the profits or gains from it are chargeable to tax. They are based on section 83(2A) of CAA 1990. Exceptions to this rule can be found in Chapters 16, 17 and 20 of Part 2.
Section 16: Ordinary Schedule A businesses
134.This section defines “ordinary Schedule A business” for the purposes of this Part. This term is not used in CAA 1990. It is used in this Act to distinguish Schedule A businesses which are not furnished holiday lettings businesses from those which are.
Section 17: Furnished holiday lettings businesses
135.This section is based on section 29 of CAA 1990. It defines furnished holiday lettings businesses.
136.Subsection (3) applies the definition in section 504 of ICTA. This approach is taken here (and in some other places in the Act) in order to:
make clear that precisely the same definition is used; and
avoid duplication of legislation (with the risk that the definitions may diverge if one is amended but not the other by accident rather than design).
137.The vast majority of readers have access to that legislation. Increasingly they have electronic access (with hyperlinks to such cross-references). But for ease of reference in these notes:
Section 504 of ICTA (Supplementary provisions)
A letting—
is a commercial letting if it is let on a commercial basis and with a view to the realisation of profits; and
is of furnished accommodation if the tenant is entitled to the use of furniture.
Accommodation shall not be treated as holiday accommodation for the purposes of this section unless—
it is available for commercial letting to the public generally as holiday accommodation for periods which amount, in the aggregate, to not less than 140 days;
the periods for which it is so let amount in the aggregate to at least 70 days; and
for a period comprising at least seven months (which need not be continuous but includes any months in which it is let as mentioned in paragraph (b) above) it is not normally in the same occupation for a continuous period exceeding 31 days.
Any question whether accommodation let by any person other than a company is, at any time in a year of assessment, holiday accommodation shall be determined—
if the accommodation was not let by him as furnished accommodation in the preceding year of assessment but is so let in the following year of assessment, by reference to the 12 months beginning with the date on which he first so let it in the year of assessment;
if the accommodation was let by him as furnished accommodation in the preceding year of assessment but is not so let in the following year of assessment, by reference to the 12 months ending with the date on which he ceased so to let it in the year of assessment; and
in any other case, by reference to the year of assessment.
Any question whether accommodation let by a company is at any time in an accounting period holiday accommodation shall be determined—
if the accommodation was not let by it as furnished accommodation in the period of 12 months immediately preceding the accounting period but is so let in the period of 12 months immediately following the accounting period, by reference to the 12 months beginning with the date in the accounting period on which it first so let it;
if the accommodation was let by it as furnished accommodation in the period of 12 months immediately preceding the accounting period but is not so let by it in the period of 12 months immediately following the accounting period, by reference to the 12 months ending with the date in the accounting period on which it ceased so to let it;
in any other case, by reference to the period of 12 months ending with the last day of the accounting period.
Where, in any year of assessment or accounting period, a person lets furnished accommodation which is treated as holiday accommodation for the purposes of this section in that year or period (“the qualifying accommodation”), he may make a claim under this subsection, within the time specified in subsection (6A) below, for averaging treatment to apply for that year or period to that and any other accommodation specified in the claim which was let by him as furnished accommodation during that year or period and would fall to be treated as holiday accommodation in that year or period if subsection (3)(b) above were satisfied in relation to it.
The time mentioned in subsection (6) above is—
in the case of a claim for the purposes of income tax, the period ending with the first anniversary of the 31st January next following the year of assessment in which the accommodation was let;
in the case of a claim for the purposes of corporation tax, the period of two years beginning at the end of the accounting period in which the accommodation was let.
Where a claim is made under subsection (6) above in respect of any year of assessment or accounting period, any such other accommodation shall be treated as being holiday accommodation in that year or period if the number of days for which the qualifying accommodation and any other such accommodation was let by the claimant as mentioned in subsection (3)(a) above during the year or period amounts on average to at least 70.
Qualifying accommodation may not be specified in more than one claim in respect of any one year of assessment or accounting period.
For the purposes of this section a person lets accommodation if he permits another person to occupy it, whether or not in pursuance of a lease; and “letting” and “tenant” shall be construed accordingly.
138.Subsection (4) provides for all necessary apportionments under this Part if only part of accommodation is holiday accommodation.
Section 18: Management of investment companies
139.This section is based on section 28 of CAA 1990. It defines the qualifying activity of “management of an investment company”.
140.Subsection (1) applies the definition of an investment company in ICTA. An investment company may carry on a trade or other qualifying activity. But subsection (2) provides that it is only a limited range of activities which are the “management of an investment company”. These are activities expenditure on which would fall within “expenses of management” in section 75 of ICTA. This defines the qualifying activity for capital allowances in line with the treatment of expenses.
141.Section 28(1) of CAA 1990 refers to “the management of the business of an investment company”. This has been shortened in this section and section 15(1)(g) to “management of an investment company”. This does not change the effect of the legislation. See Note 8 in Annex 2.
Section 19: Special leasing of plant or machinery
142.This section is based on section 61(1) of CAA 1990 and section 434E(2) of ICTA. It defines the qualifying activity of “special leasing” for plant or machinery which is hired out otherwise than in the course of any other qualifying activity.
143.Subsection (1) introduces and defines the term “special leasing”. This term is not used in CAA 1990. That provides for such an activity to be treated as a trade separate from any other trade the person carries on. Other provisions then have to refer to such activities in terms of the legislation which define them. For example in section 31(1)(c) of CAA 1990:
the actual trade is not a separate trade which the shipowner is treated as carrying on by virtue of section 61(1).
144.The term “special leasing” allows more direct references – see for example section 128(2).
145.The section refers to “hiring out” plant or machinery. CAA 1990 refers to plant or machinery “let”. The use of the more colloquial phrase makes no practical difference. The section also omits the words in section 61(1) of CAA 1990 which provide that it does not matter whether the lessee does or does not carry on a qualifying activity. These are no longer needed. See Note 9 in Annex 2.
146.Subsection (3) is based on section 61(1)(b) of CAA 1990. It states when the separate qualifying activity is permanently discontinued. This is not clear in CAA 1990. Section 61(1)(b) of CAA 1990 provides for the plant or machinery to be treated as being used wholly for purposes other than those of the deemed trade when the lessor permanently ceases to let the plant or machinery otherwise than in the course of a trade. This requires the lessor to bring a disposal event into account. But it does not explicitly provide for the deemed trade to be permanently discontinued. However, any other interpretation would leave the lessor with:
no entitlement to a balancing allowance;
entitlement only to writing-down allowances for an indefinite period, in ever decreasing amounts; and
possibly allowances which are stranded because the lessor could only use them against income from letting the plant or machinery in question.
147.Subsection (3) accordingly reflects the alternative view that section 61(1) of CAA 1990 also provides for the deemed trade to end. See Change 15 in Annex 1.
148.Subsection (5) is based on section 434E(2) ICTA. That (and section 434D ICTA) were introduced by section 51 of, and Schedule 8 to, FA 1995. As the legislation relates directly to capital allowances it is incorporated in this Act.
149.Section 61(8) of CAA 1990 is omitted from this section. It provides for a “lease” to mean also an agreement for a lease. It is now unnecessary except in relation to section 61(4) of CAA 1990 (see section 70 and paragraph 353 below).
Section 20: Employments and offices
150.This section is based on sections 198(2) and 314 of ICTA. It provides that some employments and offices are not qualifying activities as such.
151.Subsection (1) is based on section 314 of ICTA (divers and diving supervisors). Divers and diving supervisors operating in the North Sea normally have contracts of employment as a matter of general law. They would then be employees for tax purposes. But section 314 of ICTA provides that “the Income Tax Acts shall have effect as if” they were carrying on a trade. CAA 1990 is part of the “the Income Tax Acts” as defined in section 831(1)(b) of ICTA. So for the purposes of the capital allowances legislation North Sea divers have trades rather than employments. Subsection (1) puts this explicitly in terms of qualifying activities.
152.Subsections (2) and (3) are based on section 198(2) of ICTA. They exclude from plant and machinery allowances employments and offices which are taxed on the “remittance basis” – that is, where only income remitted to the United Kingdom is taxed. Such remittances will already be net of any capital expenditure incurred out of that income.
Chapter 3: Qualifying Expenditure
Overview
153.This Chapter supplements the general rules in section 11 with further provisions about qualifying expenditure.
154.Sections 21 to 25 exclude expenditure on the provision of buildings, structures, land and certain other assets from being expenditure on plant or machinery. They define what is and is not a building for this purpose.
155.Section 26 provides for certain costs of demolishing plant or machinery to be treated as expenditure on the provision of plant or machinery.
156.Sections 27 to 33 allow some special types of expenditure to be qualifying expenditure. These are, broadly, expenditure on:
thermal insulation of industrial buildings;
fire safety if required by a notice under the relevant legislation;
safety at sports grounds if required to comply with a certificate under the relevant legislation; and
personal security if there is a special threat to an individual’s security arising from their work.
157.Sections 34 to 38 exclude or restrict some special types of expenditure. These are, broadly, expenditure on:
accommodation by MPs and some others;
plant or machinery for a dwelling-house for certain qualifying activities;
plant or machinery by employees which is not necessary for the performance of their duties;
plant or machinery if the depreciation is met in full by subsidies; and
production animals subject to a “herd basis” election (see Schedule 5 to ICTA).
158.Other provisions in this Part also treat expenditure as being expenditure on plant or machinery. See in particular Chapter 7 (computer software) and Chapter 18 (additional VAT liabilities and rebates).
Section 21: Buildings
159.This section is based on paragraphs 1(1), (2) and 5(1) of Schedule AA1 to CAA 1990. It brings together the material excluding buildings from being plant or machinery.
160.Subsection (1) sets out the general rule that buildings are not plant or machinery.
161.Subsection (2) is based on paragraph 5(2) of Schedule AA1 to CAA 1990. It provides that references to the provision of a building include the construction or acquisition of a building.
162.Subsection (3)(a), (b) and (c) treats assets incorporated in or connected with a building as part of the building and list A provides a list of assets treated as buildings, whether or not they would otherwise be so.
163.Subsection (4) provides a cross-reference to the list of expenditure unaffected by this section in section 23.
164.Chapter 14 provides rules under which allowances can be claimed for fixtures which are assets incorporated in buildings and which in law become part of the building. An asset cannot qualify under Chapter 14 as a fixture unless it is plant or machinery in the first place (see section 172). As the fixture is part of a building, section 25 means that it cannot be plant or machinery unless it comes within the exceptions in section 23.
Section 22: Structures, assets and works
165.This section is based on paragraphs 2 and 5 of Schedule AA1 to CAA 1990. It brings together material excluding structures from the meaning of plant or machinery.
166.Subsection (1) sets out the general exclusion of structures, and incorporates list B. The assets in list B are excluded as structures whether or not they are structures in an ordinary sense.
167.Subsection (2) incorporates the rule in paragraph 5(1) of Schedule AA1 to CAA 1990 that the cost of construction or acquisition is part of the cost of the structure.
168.Subsection (3)(a) is based on paragraph 5(1)(a) and defines “structure”. Subsection 3(b) brings in the definition of land from paragraph 5(3). This is needed in subsection (1)(b).
Section 23: Expenditure unaffected by sections 21 and 22
169.This section is based on column 2 of Table 1 in paragraph 1, column 2 of Table 2 in paragraph 2 and paragraph 1(3) of Schedule AA1 together with ESC B50. It also makes two minor changes.
170.The various types of expenditure detailed in this section may be plant or machinery even if they are buildings or structures covered by sections 21 and 22 (which stop buildings and structures being plant).
171.Subsection (1) says that sections 21 and 22 do not apply to expenditure in subsection (2).
172.Subsection (2) gives a list of other provisions which treat particular items of expenditure as plant.
173.Subsection (3) says that the items in list C are unaffected by sections 21 and 22.
174.Subsection (4) includes list C. This is made up from column 2 from both Table 1 and Table 2 of Schedule AA1 to CAA 1990. It also includes the items in paragraph 1(3).
175.The merger of the columns involves a minor change. In Schedule AA1 the columns apply differently:
whether a building is plant is unaffected by the Schedule for assets in column 2 of Table 1; and
whether a structure is plant is unaffected by the Schedule for assets which are within either column 2 of Table 1 or column 2 of Table 2 (paragraph 2(3) of Schedule AA1 provides this rule).
176.Merging the Tables in this Act in principle increases the range of expenditure on buildings which is unaffected by the exclusion of buildings from the definition of plant. See Change 2 in Annex 1.
177.Item 17 of list C is based on paragraph 5(2) of Schedule AA1 to CAA 1990. It adds expenditure on glasshouses to the list of unaffected expenditure instead of having it as a separate exclusion at the end of the Chapter.
178.Subsection (5) incorporates the extended meaning of “caravan” from ESC B50. This allows certain things that might not be thought of as caravans to be included as caravans if they are treated as such by section 29(1) of the Caravan Sites and Control of Development Act 1960 or (in Northern Ireland) section 25(1) of the Caravans Act (Northern Ireland) 1963. See Change 3 in Annex 1.
Section 24: Interests in land
179.This section is based on paragraph 5 of Schedule AA1 to CAA 1990. It provides that expenditure on the acquisition of an interest in land is not expenditure on plant or machinery.
180.Subsection (1)states the exclusion and subsection (2) qualifies the meaning of “land”.
181.Subsection (3) links the meaning of “interest in land” with that in section 175.
Section 25: Building alterations connected with installation of plant or machinery
182.This section is based on section 66 of CAA 1990. It allows expenditure on alterations to an existing building to qualify as expenditure on plant or machinery if those alterations are incidental to the installation of plant or machinery.
Section 26: Demolition costs
183.This section is based on section 62 of CAA 1990. It also makes a minor change. It provides that if the plant or machinery is replaced, then the net cost of demolition is added to the expenditure incurred on the new plant or machinery. If it is not replaced, then the net cost of demolition is added to the pool of qualifying expenditure for the chargeable period in which the demolition takes place.
184.The minor change is in the circumstances in which the section applies. Section 62 of CAA 1990 applies only if plant or machinery “is in use” for the qualifying activity when demolished. This section provides relief if “the last use” of the plant or machinery was for the qualifying activity. See Change 4 in Annex 1.
185.The net cost of demolition is the cost less any money received for the remains.
Section 27: Application of Part to thermal insulation, safety measures, etc.
186.This section is based on parts of sections 69 to 71 of CAA 1990. It provides for expenditure of the types defined in sections 28 to 33 to be qualifying expenditure. It does so by treating the expenditure as meeting the general conditions for plant and machinery allowances. Then the subsequent provisions of this Part apply without additional provisions to cater only for these relatively rare types of expenditure.
187.Subsection (1)(b) means these provisions do not apply if an allowance under this Part or a deduction in respect of the expenditure could be made. This differs from CAA 1990 in two respects:
in section 67 of CAA 1990 there is no such exclusion for thermal insulation; and
in sections 69 and 70 of CAA 1990 (fire safety and safety at sports grounds) the exclusion goes wider so as to deny plant and machinery allowances if capital allowances can be claimed under any other Part.
188.These differences are largely due to the way the legislation has been revised over the past 25 years with some consequential changes missed. This Act provides a consistent basis for all these types of expenditure by making minor changes. See Change 5 in Annex 1.
189.Subsection (1) incorporates the effect of section 161(3) of CAA 1990 in this section. See Note 74 in Annex 2.
Section 28: Thermal insulation of industrial buildings
190.This section is based on section 67 of CAA 1990. It deals with expenditure incurred on thermal insulation of industrial buildings.
Section 29: Fire safety
191.This section is based mainly on section 69 of CAA 1990. It deals with expenditure on fire safety.
192.Subsection (4) uses somewhat different language from CAA 1990. Since this relief was first introduced, the relevant fire safety legislation has been amended. This section adopts the language from the amended legislation. See Note 10 in Annex 2.
193.Subsections (5) and (6) are based on ESC B16 which extends the scope of section 69 to include fire precautions taken under Northern Ireland legislation. See Change 6 in Annex 1.
Section 30: Safety at designated sports grounds
194.This section is based on section 70 of CAA 1990. It deals with expenditure to meet required safety precautions under the Safety of Sports Grounds Act 1975.
Section 31: Safety at regulated stands at sports grounds
195.This section is based on section 70 of CAA 1990. It deals with safety precautions taken under Part III of the Fire Safety and Safety of Places of Sport Act 1987.
Section 32: Safety at other sports grounds
196.This section is based on section 70 of CAA 1990. It deals with safety precautions taken to comply with the Safety of Sports Grounds Act 1975 if a designation order (under section 1 of that Act) is not made but a local authority certifies that the expenditure would fall within a designation order.
Section 33: Personal security
197.This section is based on sections 71 and 72 of CAA 1990. It deals with expenditure to meet a special threat to a person’s physical security.
198.The list of relevant qualifying activities for this purpose reflects the extension of the meaning of “trade, profession or vocation” in section 71 of CAA 1990 by sections 28A, 29 and 161(2A) of CAA 1990. See Note 11 in Annex 2.
Section 34: Expenditure by MPs and others on accommodation
199.This section is based on section 74 of CAA 1990. It deals with certain expenditure by Members of Parliament (and other similar representatives) on accommodation.
Section 35: Expenditure on plant or machinery for use in dwelling-house not qualifying expenditure in certain cases
200.This section is based on sections 28A and 61(2) of CAA 1990. It prevents expenditure incurred in providing plant or machinery in a dwelling house being qualifying expenditure. It applies to Schedule A businesses, overseas property businesses and special leasing.
201.Section 28A(4) of CAA 1990 provides for apportionment if expenditure is incurred on plant or machinery partly for use in a dwelling-house and partly for other purposes. There is no such rule for section 61 (which deals with activities known in this Act as “special leasing”). But section 79 of CAA 1990 provides an equivalent rule for reducing allowances. That has the same effect. See Note 12 in Annex 2.
Section 36: Restriction on qualifying expenditure in case of employment or office
202.This section is based on section 27(2) of CAA 1990. It adds the “necessarily” condition to the general conditions for plant and machinery allowances in the case of qualifying activities which are employments and offices. This brings the capital allowances requirements into line with other Schedule E reliefs.
Section 37: Exclusion where sums payable in respect of depreciation
203.This section is based on section 80(1) of CAA 1990. It deals with the general exclusion if sums are received to cover all the depreciation of the plant or machinery.
204.The use of “depreciation” is different from CAA 1990 (which refers instead to “wear and tear”). Depreciation is preferred as more familiar. It is also on the face of it a wider term. But in context it is thought to make no difference to entitlement to allowances. See Note 13 in Annex 2.
Section 38: Production animals etc.
205.This section is based on section 82(2) of CAA 1990. It stops capital allowances being claimed on animals which are subject to the special rules for production animals in Schedule 5 to ICTA (the “herd basis”).
Chapter 4: First-year qualifying expenditure
Overview
206.This Chapter defines qualifying expenditure which gives entitlement to first-year allowances (subject to the person owning the plant or machinery in question in the chargeable period the expenditure is incurred – see section 52).
207.Section 39 introduces the three categories of expenditure in chargeable periods covered by the Act which may give rise to first-year allowances.
208.Sections 40 to 43 deal with expenditure which qualifies as incurred for Northern Ireland purposes by small or medium-sized enterprises. The expenditure must be incurred on or before 11 May 2002. They also provide for allowances to be withdrawn in some circumstances if plant or machinery is subsequently used outside Northern Ireland.
209.Section 44 provides for first-year allowances for qualifying expenditure incurred by a small or medium-sized enterprise which is not expenditure on a long-life asset (see Chapter 10).
210.Section 45 provides for first-year allowances for qualifying expenditure incurred on or before 31 March 2003 by a small enterprise on information and communications technology.
211.Section 46 defines expenditure which is excluded from all three categories of first-year qualifying expenditure.
212.Sections 47 to 49 decide whether or not an enterprise is small or medium-sized.
213.Section 50 provides that section 12 does not affect when expenditure is treated as incurred for the purposes of deciding what is and is not first-year qualifying expenditure.
214.Section 51 provides for exchange of information in connection with section 40.
215.Provisions relating to first-year allowances for earlier years are preserved in paragraphs 46 to 51 of Schedule 3 for the purposes of the legislation for additional VAT liabilities.
Section 39: First-year allowances available for certain types of qualifying expenditure only
216.This section is based in part on section 22(1) of CAA 1990. But it is mainly drafted to introduce this Chapter. It sets out the different kinds of first-year qualifying expenditure so readers can see quickly if they are likely to have expenditure which qualifies.
217.The three types of expenditure in this section cover the overwhelming majority of practical circumstances. But a very small minority may also have first-year qualifying expenditure as a result of additional VAT liabilities. See section 236. It is also possible for entitlement to first-year allowances to arise in respect of additional VAT liabilities:
in a chargeable period to which the Act applies; but
under the provisions for first-year allowances for expenditure between 1992 and 1993 or between 1997 and 1998.
218.Additional VAT for those periods is likely to be a practical issue for very few people indeed in the chargeable periods covered by the Act. The provisions are only capable of having effect until the end of the period for VAT adjustments (5 or 10 years). So the necessary provisions are in paragraphs 46 to 51 of Schedule 3 to the Act.
Section 40: Expenditure incurred for Northern Ireland purposes by small or medium-sized enterprises
219.This section is based on parts of section 22(3CA) and (3CB) of CAA 1990. It gives the conditions which must be met for first-year qualifying expenditure under this heading.
220.Sections 47 to 49 decide whether or not expenditure is incurred by a small or medium-sized enterprise.
Sections 41 and 42: Exclusions from section 40
221.These sections are based mainly on section 22(3CC), (3CE), (6D) and (6E) of CAA 1990. They exclude some expenditure from being first-year qualifying expenditure under section 40.
222.Section 41 gives exclusions according to the nature of the expenditure.
223.Section 42 excludes plant and machinery intended for use partly outside Northern Ireland if first-year allowances could be a main benefit of the expenditure qualifying.
Section 43: Effect of plant or machinery subsequently being primarily for use outside Northern Ireland
224.This section is based on section 22B of CAA 1990. It stops expenditure being first-year qualifying expenditure under section 40 if there is a change in the use of the plant or machinery and withdraws any first-year allowances which have been made.
225.Subsection (1) withdraws entitlement to first-year allowances if plant or machinery is used or held for use primarily outside Northern Ireland in the period defined by subsections (2) and (3). That is five years from the date of the expenditure if it is over £3.5 million and two years if not.
226.Subsection (4) allows first-year allowances already made to be withdrawn.
227.Subsections (5) and (6) require taxpayers to notify the Inland Revenue within three months if, as a result of this section, their tax return needs amendment.
Section 44: Expenditure incurred by small or medium-sized enterprises
228.This section is based on section 22(3D) of CAA 1990. It defines first-year qualifying expenditure for small or medium-sized enterprises.
229.Sections 47 to 49 decide whether or not expenditure is incurred by a small or medium-sized enterprise for the purpose of subsection (1)(b). Section 90 defines long-life asset expenditure.
Section 45: ICT expenditure incurred by small enterprises
230.This section is based mainly on section 22(3E) to (3H) of CAA 1990. It provides first-year qualifying expenditure for expenditure by small enterprises on information and communications technology (ICT).
231.Sections 47 to 49 decide whether or not expenditure is incurred by a small enterprise for the purpose of subsection (1)(b).
Section 46: General exclusions applying to sections 40, 44 and 45
232.This section brings together legislation in sections 22(6B) and (6C), 38, 50 and 81 of CAA 1990. These are general exclusions which stop expenditure being first-year qualifying expenditure.
233.The exclusions mostly relate to the type of plant or machinery bought or its use. Two which do not are worth noting:
General exclusion 1 excludes from first-year qualifying expenditure any qualifying expenditure in the chargeable period in which there is a permanent discontinuance of a qualifying activity. This expenditure is fully relieved by a balancing allowance (or reduction in balancing charge) for the appropriate pool. Cutting out first-year allowances simplifies the route to tax relief; and
General exclusion 8 excludes from first-year qualifying expenditure any qualifying expenditure a person is treated as incurring if they bring into use plant or machinery:
previously not used for that qualifying activity; or
received as a gift.
First-year allowances may already have been given for this plant or machinery when it was originally bought. But an exception to this is made for certain pre-trading expenditure on mineral exploration and access if a person is treated as having sold and bought plant or machinery.
234.It might be thought that the reference in general exclusion 7 to a “trade or business” should be to a “qualifying activity or business”. However, in the context of section 22(6C) of CAA 1990 from which this comes, the phrase “trade or business” translates into this Act so as to make neither wider nor narrower the scope of this exclusion. See Note 14 in Annex 2.
Sections 47 to 49: Expenditure of small or medium-sized enterprises
235.These three sections are based on sections 22A and 22AA of CAA 1990. They set out how to decide if a company or other business is a small or medium-sized enterprise for the purposes of the legislation for first-year qualifying expenditure.
236.Section 47 deals with expenditure by companies. As in other sections, the reference to the companies legislation avoids duplication in this Act and makes clear the tests are precisely the same. For ease of reference here the Companies Act 1985 provides:
Section 247: Qualification of company as small or medium-sized
A company qualifies as small or medium-sized in relation to a financial year if the qualifying conditions are met—
in the case of the company’s first financial year, in that year, and
in the case of any subsequent financial year, in that year and the preceding year.
A company shall be treated as qualifying as small or medium-sized in relation to a financial year—
if it so qualified in relation to the previous financial year under subsection (1) above or was treated as so qualifying under paragraph (b) below; or
if it was treated as so qualifying in relation to the previous year by virtue of paragraph (a) and the qualifying conditions are met in the year in question.
The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements—
| Small company | |
|---|---|
| 1 Turnover | Not more than £2.8 million |
| 2 Balance sheet total | Not more than £1.4 million |
| 3 Number of employees | Not more than 50 |
| Medium-sized company | |
| 1 Turnover | Not more than £11.2 million |
| 2 Balance sheet total | Not more than £5.6 million |
| 3 Number of employees | Not more than 250. |
237.These limits can be changed by statutory instrument. The last change was in 1992.
238.The same tests are used in the Companies (Northern Ireland) Order 1986.
239.Subsections (2)(b) and (3)(b) stop companies qualifying as small or medium-sized if they are members of a larger group. See section 49.
240.Section 48 deals with expenditure by businesses which are not companies. The test is broadly whether the business would be a small or medium-sized company if the qualifying activity were carried on by a company. This is done by looking at whether or not a hypothetical company would be small or medium-sized.
241.Subsection (2) applies the section to businesses carried on by individuals and to others that are not companies and so would otherwise not be able to have first-year qualifying expenditure.
242.Subsection (5) sets the assumptions for the hypothetical company which is used to decide if the business is small or medium-sized. These include the assumption that every trade, business, profession or vocation carried on by the business is carried on by the business as part of that activity. This is broadly equivalent to the requirement in section 47(2)(b) that a company is not a member of a large group.
243.Subsections (6) and (7) then use the relevant companies legislation to decide if the hypothetical company is small or medium-sized.
244.Subsections (8) and (9) decide the relevant companies legislation for this purpose. They make minor changes to make clear whether the Companies Act or the Northern Ireland legislation should be used for this purpose. The difference does not matter in practice as the legislation is very similar. See Change 7 in Annex 1.
245.Section 49 decides if a company is a member of a large or medium-sized group for the purposes of section 47.
246.Subsection (4) treats as large or medium-sized a company which is not but would be if arrangements which already exist would make it, or a successor to its trade, large or medium-sized.
247.Subsections (5) and (6) apply the relevant companies legislation.
Section 249(3) Companies Act 1985
(3.The qualifying conditions are met by a group in a year in which it satisfies two or more of the following requirements—
| Small group | |
|---|---|
| 1.Aggregate turnover | Not more than £2.8 million net (or £3.36 million gross) |
| 2.Aggregate balance sheet total | Not more than £1.4 million net (or £1.68 million gross) |
| 3.Aggregate number of employees | Not more than 50 |
| Medium sized group | |
| 1.Aggregate turnover | Not more than £11.2 million net (or £13.44 million gross) |
| 2.Aggregate balance sheet total | Not more than £5.6 million net (or £6.72 million gross) |
| 3.Aggregate number of employees | Not more than 250. ” |
248.These limits can be changed by statutory instrument. The last change was in 1992.
Section 50: Time when expenditure is incurred
249.This section is based on parts of section 22 of CAA 1990. It disregards the legislation which treats expenditure incurred before a qualifying activity starts as incurred in its first chargeable period (see paragraph 120 above). It is the actual date expenditure is incurred which matters for entitlement to first-year allowances.
Section 51: Disclosure of information between UK tax authorities
250.This section is based on section 22C of CAA 1990. It allows information to be exchanged by the Inland Revenue and the Department of Agriculture and Rural Development in Northern Ireland in connection with the administration of first-year allowances for expenditure by small or medium-sized enterprises for Northern Ireland purposes.
Chapter 5: Allowances and charges
Overview
251.This Chapter makes general provision for the calculation of allowances and charges under this Part. Its provisions are subject to adaptations and modifications provided in the following Chapters. They make special provisions for particular types of asset.
252.Section 52 gives the amount of first-year allowance a person is entitled to in a chargeable period if they incur first-year qualifying expenditure and own the plant or machinery. The person may then claim first-year allowances for the whole or part of first-year qualifying expenditure.
253.Sections 53 and 54 require expenditure to be pooled to decide entitlement to allowances or liability to balancing charges. Allowances may be writing-down allowances or balancing allowances. There are single asset pools, class pools and a main pool. Later Chapters define which expenditure must be allocated to a class or single asset pool. Only expenditure which is not allocated to a class or single asset pool is allocated to the main pool. If a person carries on more than one qualifying activity, there are separate pools for each activity.
254.Sections 55 and 56 decide entitlement to an allowance or liability to a charge for each pool for a chargeable period. This depends on the difference between the available qualifying expenditure (AQE) for a pool for the chargeable period and the total of any disposal receipts to be brought into account (TDR):
if AQE exceeds TDR, the person is entitled to an allowance. The entitlement is to a writing-down allowance except in the final chargeable period of the pool when it is to a balancing allowance. The rate of writing-down allowances is 25% except for long-life assets (6%) and overseas leasing (10%);
if TDR exceeds AQE, the person is liable to a balancing charge equal to the difference.
255.Sections 57 to 59 give the general rules for AQE and pointers to other provisions which affect it. The general rule is that AQE for a pool is the qualifying expenditure allocated to the pool for the chargeable period (section 58) plus any unrelieved qualifying expenditure brought forward from the previous chargeable period (section 59).
256.Section 60 defines “disposal receipt” and “disposal event”:
a disposal receipt is the amount of any disposal value a person must bring into account;
a disposal event is an event of the type which requires a person to bring a disposal value into account.
257.General disposal events and disposal values are listed in section 61; there are others elsewhere.
258.Sections 63 to 65 restrict disposal values in some cases. There is a general limit equal to the qualifying expenditure incurred by the person (or in some cases a connected person). The disposal value is nil for some gifts. It is also nil if no first-year allowance is made and no qualifying expenditure is allocated to a pool (subject to additional conditions if the plant or machinery is acquired from a connected person).
259.Section 65 gives the general rules for when there is a final chargeable period for a pool.
260.Section 66 gives pointers to some other provisions dealing with disposal values.
Section 52: First-year allowances
261.This section is based mainly on section 22(1) of CAA 1990. It gives entitlement to first-year allowances.
262.Subsection (1) gives entitlement to first-year allowances if a person both incurs first-year qualifying expenditure in a chargeable period and owns the plant or machinery in that chargeable period.
263.Subsection (2) makes clear that any first-year allowance is made for the chargeable period in which the expenditure is incurred.
264.Subsection (3) gives the rates of first-year allowances.
265.Subsection (4) allows a person to claim first-year allowances for only some (including none) of their first-year qualifying expenditure. This is more direct than section 22(7) of CAA 1990. That permits a person to require that the amount of the allowance, or aggregate amount of the allowances, be reduced to an amount specified in that claim. The ability to do so helps people who might otherwise face a balancing charge in the same chargeable period. They can then add some or all of the first-year qualifying expenditure to their pool for the current chargeable period (see paragraph 295 below).
266.Section 22(7) of CAA 1990 deals with the aggregate of allowances to keep the sums simple. Section 52 gives people the option of doing that in practice by claiming for the same proportion of all first-year qualifying expenditure or of claiming for different proportions of different items of expenditure.
267.Section 22(7) does not permit a claim for reduced first-year allowances for ships. But section 30(1)(b) of CAA 1990 makes equivalent provision.
268.Section 22(7) and 30(1) require the claim to specify the reduced allowance required. Subsection (4) achieves this more directly by dealing with qualifying expenditure. See Note 15 in Annex 2.
269.Subsection (5) gives signposts to other provisions which may affect first-year allowances.
