Glossary
Part 9: Dredging allowances
Overview
1713.This Part is based on Part VI of CAA 1990. It provides for dredging allowances. These are writing-down allowances or, for the chargeable period in which the qualifying trade is discontinued or sold, a balancing allowance. Entitlement to, and the amount of, dredging allowances depend on qualifying expenditure.
1714.The rules for allowances made for previous chargeable periods in section 134(3) of CAA 1990 are in paragraph 104 of Schedule 3.
1715.The rules for contributions to dredging expenditure in section 134(8) of CAA 1990 are contained in sections 533 and 543.
Background
1716.Dredging allowances are only available for capital expenditure on dredging. Dredging does not include normal maintenance work on an existing channel. Much of the expenditure on dredging by harbour boards (for example) will be revenue expenditure and will have no capital element. Industrial Buildings Allowances (IBA) are available for the construction of docks and canals in suitable trades, see Part 3 and section 274 (in which docks and inland navigation undertakings are listed as qualifying trades). So dredging allowances can supplement the IBA relief. Similarly the equipment used for dredging will normally qualify for plant and machinery allowances. And routine dredging to keep a waterway open will be allowable as a revenue expense under Case I of Schedule D. The dredging allowances code supplements these other reliefs by providing relief for expenditure which would otherwise not enjoy tax relief.
1717.The code also provides for expenditure paid to a third party carrying on a dredging trade to qualify for relief. A typical situation would be if an industrial trader pays a harbour board a fee to improve, by way of dredging, access to industrial facilities.
History
1718.The 1952 Royal Commission on the Taxation of Profits and Income recommended that allowances should be available for the capital cost of cutting or tunnelling land.
1719.In response to this recommendation FA 1956 extended allowances for industrial buildings in respect of expenditure on preparing, cutting, tunnelling or levelling land for the purpose of constructing an industrial building or structure, and introduced a new system of allowances for capital expenditure on dredging.
1720.When the legislation relating to capital allowances was consolidated in CAA 1990 the provisions on dredging became Part VI of that Act (sections 134 and 135).
1721.Under FA 1956, allowances for dredging were given at the same rates as allowances for industrial buildings. There was an initial allowance of 10% and an annual writing-down allowance of 2%. The writing-down period was 50 years. Dredging allowances differed from industrial buildings allowance in that there were no balancing charges or balancing allowances. There was an additional allowance, equivalent to a balancing allowance, if the relevant trade was permanently discontinued.
1722.The 2% rate and the 50-year period are still relevant for expenditure incurred before 5 November 1962. The legislation for this is in paragraphs 103 and 105 of Schedule 3 to this Act.
1723.FA 1963 increased the annual rate of writing-down allowances for both industrial buildings and dredging from 2% to 4% for expenditure incurred after 5 November 1962. As part of a wider reform of business taxation, FA 1985 abolished initial allowances, including those for dredging.
1724.Paragraph 105 of Schedule 3 deals with the writing-down period if allowances were made under paragraph 27(2) of Schedule 14 to FA 1965.
Section 484: Dredging allowances
1725.This section provides for dredging allowances for qualifying trades.
1726.Subsection (1) sets out the general rule. Dredging allowances are available if a person carries on a qualifying trade and incurs expenditure on dredging.
1727.Subsection (2) defines “qualifying trade”. This is either a trade like a dock or harbour authority or a qualifying trade for the purposes of industrial buildings allowances in Part 3.
1728.Subsection (3) provides that dredging does not include anything done otherwise than in the interests of navigation.
1729.Subsection (4) expands the natural meaning of “dredging” to include such things as river and canal widening as well as the removal of things projecting from the bed of a waterway even if they are above the surface.
Section 485: Qualifying expenditure
1730.This section is based on sections 134(1), (6) and 135(1) of CAA 1990. It deals with “qualifying expenditure”, a term which is not itself in CAA 1990. Its use here gives this Part likeness with the rest of the Act.
1731.Subsection (1) sets out the basic condition for qualifying expenditure.
1732.Subsection (2) deals with expenditure partly incurred for the purposes of the trade and partly for other purposes and provides a just and reasonable apportionment. Use of “just and reasonable apportionment” in place of “just apportionment” is a minor change. See Change 40 in Annex 1.
1733.Subsection (3) deals with the situation if only part of a trade qualifies.
Section 486: Pre-trading expenditure of qualifying trades, etc.
1734.This section is based on sections 134(7) and 135(2) of CAA 1990. It deals with pre-trading expenditure.
1735.Subsection (1) deals with pre-trading expenditure and deems it to be incurred on the first day that the trade is carried on.
1736.Subsection (2) deals with expenditure if the premises in connection with which the expenditure was incurred are not yet occupied for the purposes of the trade. This could be if the expenditure is in connection with an existing trade but could also be if the expenditure is incurred before the trade is carried on. The expenditure is treated as incurred when the premises are occupied for the purposes of the trade.
1737.If expenditure is incurred before both:
the trade has begun; and
the premises are occupied,
then the expenditure is treated as incurred when both the premises are occupied and the trade carried on. See Change 57 in Annex 1.
Section 487: Writing-down allowances
1738.This section is based on section 134(1) of CAA 1990. It deals with writing-down allowances. Unlike CAA 1990 this Act makes explicit how writing-down allowances work.
1739.Subsections (1) and (2) deal with the writing-down period (25 years) and the consequent amount of allowance (4% a year).
1740.If expenditure was incurred before 6 November 1962 then the writing-down allowance is 2% and the period 50 years. See paragraphs 103 and 105 of Schedule 3.
1741.Subsections (4) and (5) deal with chargeable periods longer or shorter than a year and confirm that total allowances cannot exceed expenditure.
1742.Subsection (6) makes it explicit that the allowance can be reduced to a specified amount. This is a change. See Change 38 in Annex 1.
1743.Subsection (7) prevents a writing-down allowance in the same chargeable period as a balancing allowance. CAA 1990 allows a writing-down allowance for the chargeable period of a balancing allowance but this simply means that the amount of the balancing allowance is reduced by the amount of the writing-down allowance in that chargeable period. So this is not a change. See Note 64 in Annex 2.
Section 488: Balancing allowances
1744.This section is based on section 134(2) and (4) of CAA 1990. It deals with balancing allowances and the events that lead to them.
1745.Subsection (1) sets out the rules for determining whether there is a balancing allowance in any chargeable period.
1746.Subsection (1)(b) sets out the two disposal events for this Part: discontinuance and sale. Section 134(4) of CAA 1990 deals with a sale by deeming it to be a discontinuance. This Act deals with it as a separate circumstance that can lead to a balancing allowance.
1747.As a result this section does not need the reference in section 134(4) of CAA 1990 to section 343(2) of ICTA. There is no longer anything that might look as if it overrides section 343(2) (which provides that, on a company reconstruction in certain circumstances, a trade is not deemed to have been discontinued). See Note 64 in Annex 2.
1748.Subsection (2) deals with the amount of the balancing allowance. The allowance is the unrelieved expenditure. This differs from the approach in other Parts. In those, disposal proceeds are normally taken into account in working out the amount of a balancing adjustment. Doing so brings the net allowances into line with the actual depreciation of an asset. But with dredging there is generally no identifiable asset as a result of the expenditure. There is nothing to which one can point in order to apportion to it proceeds from the sale of a trade. And it would be difficult to put a value on the worth of the dredging. For these reasons this Part gives a balancing allowance equal to the whole of the expenditure. Balancing allowances are also subject to some anti-avoidance rules – see subsections (4), (5) and (6).
1749.Subsection (3) gives rules about permanent discontinuance. The discontinuance rules in sections 113(1) and 337(1) of ICTA do not apply. This means that a change in the persons carrying on a trade will not trigger a disposal event (and a balancing allowance) in this Part.
1750.Subsection (4) prevents the sale of a trade from being a disposal event if the sale is of a type described in either subsection (5) or (6).
1751.Subsection (5) is based on section 157(1)(a) of CAA 1990. It sets out various types of control and connected persons sales to which this subsection applies.
1752.Subsection (6) is based on section 157(1)(b) of CAA 1990. It describes types of sale in which the sole or main benefit is to obtain a tax advantage.
Section 489: Giving effect to allowances
1753.This section is based on section 134(5) of CAA 1990. It deals with giving effect to dredging allowances.