Example
V acquires from O the fee simple interest in a building on 1 March 2002. On 2 April 2003, V sells this interest to R.
V and R make an election under section 198 and apportion £10,000 to a fixture. Subsequently, but within the two-year limit imposed by section 201(1), V and O enter into an election and apportion £5,000 to the same fixture.
The election made by O and V fixes V’s expenditure on the provision of the fixture at £5,000 for all purposes of the rules for plant and machinery allowances. In particular, it means that on a subsequent transaction involving the fixture, any election under either section 198 or 199 may not apportion an amount more than £5,000 to the fixture. This therefore includes the transaction between V and R.
Even though an election had already been made in respect of the sale by V to R, section 200(4) provides that this election is treated as fixing £5,000 as the consideration in respect of the fixture.
As a result, V must bring a disposal value of £5,000 into account and R may claim allowances in respect of expenditure of only £5,000 and not £10,000. Section 203(4) provides for adjustments to be made (for example to any assessments) as necessary.
Section 201: Elections under sections 198 and 199: procedure
723.This section is based on part of sections 51(2) and 59C of CAA 1990. It contains the procedural rules that apply to elections under sections 198 and 199.
Section 202: Interpretation
724.This section is based on section 51(2), (5) and (5A) and part of section 147(2D) of CAA 1990. It makes provision as to when a person is entitled to an allowance in respect of expenditure on the provision of a fixture. It also defines when “a person makes a claim under this Chapter”.
725.As in section 8, this has been rewritten so as to refer to allocating expenditure to a pool. CAA 1990 refers to taking expenditure “into account” for the purposes of section 24 of CAA 1990.
726.Subsection (1) means “entitled to an allowance in respect of expenditure on the provision of a fixture” includes having a pool to which that expenditure has been allocated.
727.This ensures that the term picks up cases in which:
a balancing charge arises in a particular pool; and
the amount of the balancing charge is reduced because of the expenditure having been allocated to the pool.
728.Subsection (2) restricts this rule. It ensures that the term does not apply to a particular pool if, in a previous chargeable period, the taxpayer has been required to bring a disposal value into account in the pool in respect of the fixture.
729.Only disposal values brought into account by virtue of section 61(1) are affected by this. So, for example, a taxpayer is “entitled to an allowance” even if an additional VAT rebate has been made in respect of the fixture.
730.Furthermore, if a taxpayer starts to use a fixture partly for purposes other than that of the qualifying activity, a disposal value will be brought into account in respect of the pool to which the expenditure on the provision of the fixture was originally allocated. Subsection (2) means that the taxpayer will not be “entitled to an allowance in respect of the fixture” as far as that pool is concerned. However, the re-allocation of expenditure to a single asset pool under section 206(3) will mean that the taxpayer will be “entitled to an allowance in respect of the fixture” as far as the single asset pool is concerned. This is until there is a disposal event in respect of the single asset pool. The same applies if the taxpayer is in receipt of a partial depreciation subsidy.
731.Subsection (3) defines what is meant in the Chapter by “making a claim” in respect of expenditure.
Section 203: Amendment of returns and adjustment of assessments
732.This section is based on sections 51(6) and (6A) and 53(1H) and part of sections 51(2) and 53(1G) of CAA 1990. It puts an obligation on taxpayers to notify the Inland Revenue if a return has become incorrect for one of four specified reasons. It also provides that any necessary adjustments may be made to give effect to the various provisions of the Chapter.
733.Subsection (2) lists the four reasons that could give rise to an obligation on the taxpayer to notify the Inland Revenue of any return that has become incorrect.
734.Subsection (3) requires the notice to be given within three months of the taxpayer first becoming aware that the return had become incorrect because of such a reason. To deal with cases in which the taxpayer does not meet this obligation, there are penalty provisions within section 98 of TMA 1970.
735.Subsection (4) provides that any necessary adjustments may be made to give effect to the various provisions of the Chapter.
Section 204: Appeals etc.
736.This section is based on sections 51(7) and 59C(8) of CAA 1990. It provides for special rules in appeals cases involving fixtures.
737.Subsections (1) to (3) deal with cases in which:
there is a question as to whether any plant or machinery is a fixture; and
that question is material to the tax liability of two or more persons.
738.Subsections (4) to (6) consider cases in which there is a question relating to an election under section 198 or 199 which is to be determined by the Special or General Commissioners.
739.These special rules are required as hearings by Commissioners are usually in private and these situations affect the tax liabilities of different taxpayers. It is therefore necessary to modify the normal procedures to allow all parties to appear before, or make written representations to, the Commissioners.
Chapter 15: Asset provided or used only partly for qualifying activity
Overview
740.This Chapter restricts writing-down allowances, balancing allowances and balancing charges for plant and machinery which is provided or used only partly for the purposes of the qualifying activity.
741.Section 205 deals with the reduction of first-year allowances if it appears that the plant or machinery is provided only partly for the qualifying activity.
742.Section 206 provides that qualifying expenditure on plant or machinery provided or used partly for the purposes of the qualifying activity and partly not is allocated to a single asset pool. It also gives rules for that pool.
743.Section 207 reduces writing-down allowances, balancing allowances and balancing charges for plant or machinery used partly for the purposes of the qualifying activity and partly not.
744.Section 208 is an anti-avoidance provision. It provides a disposal event if:
there is a significant reduction in the use for the purposes of the qualifying activity; and
the market value of the asset exceeds the available qualifying expenditure in the single asset pool by more than £1 million.
Background
745.The general conditions as to availability of plant and machinery allowances are in section 11. Subsection (4)(a) says that expenditure on the provision of plant or machinery has to be wholly or partly for the purposes of the qualifying activity. This Chapter explains how allowances are computed if use is only “partly”.
746.The idea is that allowances should be restricted in a “ just and reasonable” way having particular regard to the extent to which the plant or machinery is used for purposes other than those of the qualifying activity. In practice this means that allowances are reduced proportionately for non-qualifying use (for example, private use in the case of a sole trader).
747.It would be impossible to achieve the correct adjustment if the expenditure was pooled with expenditure on other plant or machinery. So this Chapter requires a single asset pool. For rules about pooling in general see Chapter 5. Section 54(2) contains the rule that a single asset pool cannot contain expenditure relating to more than one asset.
Section 205: Reduction of first-year allowances
748.This section is based on section 79(1) of CAA 1990. It restricts first-year allowances.
749.Subsection (1) restricts a first-year allowance if it appears that the plant or machinery will be used for purposes other than those of the qualifying activity. The reduction of allowances must be just and reasonable having regard to the relevant circumstances.
750.Subsection (2) expands the meaning of “relevant circumstances”. These include looking forward to the extent to which the plant or machinery is likely to be used for purposes other than those of the qualifying activity. There may be other circumstances.
751.Subsection (3) is makes clear the reduction in first-year allowances does not increase the qualifying expenditure on which writing-down allowances can be claimed in later chargeable periods. See Note 38 in Annex 2.
Section 206: Single asset pool etc.
752.This section is based on section 79(2), (3) and (4) of CAA 1990. It provides for single asset pools for all expenditure incurred partly for the purposes of the qualifying activity and partly for other purposes.
753.Subsections (1) and (2) set up the single asset pool.
754.Subsection (3) sets up a single asset pool when any expenditure already in a pool starts to be use partly for purposes other than those of the qualifying activity. The plant or machinery will previously have been used wholly for the purposes of the qualifying activity. This subsection picks up the consequences of the disposal event in section 61(1)(e). The value of the disposal event will be market value, derived from the Table in section 61.
755.Subsection (4) disapplies section 61(1)(e) for expenditure already in a single asset pool under this Chapter.
Section 207: Reduction of allowances and charges on expenditure in single asset pool
756.This section is based on section 79(2), (5) and (6) of CAA 1990. It provides rules for balancing allowances and charges which are equivalent to those for writing-down allowances.
757.Subsection (3) expands the meaning of “relevant circumstances”. These include looking forward to the extent to which the plant or machinery is likely to be used for purposes other than those of the qualifying activity. There may be other circumstances, including for example use in previous years.
758.Subsection (4) is new and is intended to clarify the position in future years of qualifying expenditure which was subject to a restriction of writing-down allowances under this section. See Note 38 in Annex 2.
Section 208: Effect of significant reduction in use for purposes of qualifying activity
759.This section is based on section 79A of CAA 1990 which was introduced by section 79(2) of FA 2000. It is an anti-avoidance rule. It provides for a special disposal event at market value if:
there is a significant reduction in the use for the purposes of the qualifying activity; and
the market value of the asset exceeds the available qualifying expenditure in the single asset pool by more than £1 million.
760.Subsection (1) sets out the conditions that have to apply and subsection (2) gives the effect. The disposal value in subsection (2) will be market value (from the Table in section 61).
761.Subsection (2) will mean that the single asset pool ends and a new one begins because of the general pooling rules for the final chargeable period in section 65.
Chapter 16: Partial depreciation subsidies
Overview
762.This Chapter deals with partial depreciation subsidies. These occur if some other person makes a payment to take account of some of the depreciation on an asset.
763.Section 209 defines “partial depreciation subsidy”.
764.Section 210 reduces first-year allowances if it appears that there will be a partial depreciation subsidy.
765.Section 211 provides that qualifying expenditure subject to a partial depreciation subsidy is allocated to a single asset pool and gives rules for that pool.
766.Section 212 provides for the reduction of writing-down allowances, balancing allowances and balancing charges for expenditure in a single asset pool under this Chapter.
Background
767.If the payment covers all of the depreciation, section 37 will prevent the plant or machinery qualifying for allowances unless the payment is taken into account as income.
768.This Chapter is similar to Chapter 15 in that it provides for a just and reasonable reduction of allowances and charges and for single asset pools to enable the reductions to be taken into account.
769.It would be impossible to achieve the correct adjustment if expenditure on the asset were kept in a pool with other assets. So this Chapter provides for single asset pools. For rules about pooling in general see Chapter 5. Section 54(2) contains the rule that a single asset pool cannot contain expenditure relating to more than one asset.
770.Section 80(7) of CAA 1990 has not been rewritten as such because it defines a term, “relevant period”, which is not necessary in this Act.
Section 209: Meaning of “partial depreciation subsidy”
771.This section is based on section 80(1), (2) and (3) of CAA 1990. The term “depreciation subsidy” is new and is used in this Act instead of the term “wear and tear subsidy” which is used by section 80 of CAA 1990. See Note 13 in Annex 2.
Section 210: Reduction of first-year allowances
772.This section is based on section 80(2) of CAA 1990. It provides for a just and reasonable reduction to any first-year allowance if it is appears that there will be a partial depreciation subsidy payable during the period of use.
773.Subsection (2) is new and is intended to clarify the position in future years of qualifying expenditure if a first-year allowance has been claimed which was subject to a restriction under this Chapter. See Note 38 in Annex 2.
Section 211: Single asset pool etc.
774.This section is based on section 80(3), (4), (5) and (7) of CAA 1990. It sets up a single asset pool for qualifying expenditure on plant or machinery when a partial depreciation subsidy is paid.
775.Subsections (3) and (4) apply if the expenditure has already been allocated to a pool, and not previously been subject to a partial depreciation subsidy. When the subsidy is paid, there is a special disposal event and a single asset pool is set up. This is a disposal event in addition to those listed in section 61(1). The disposal value will be market value, as derived from the Table in section 61.
776.Subsection (5) stops there being a disposal event if:
there is a change in the subsidy; and
the expenditure is already in a single asset pool under this Chapter.
Section 212: Reduction of allowances and charges on expenditure in single asset pool
777.This section is based on section 80(3), (5)(b) and (6) of CAA 1990. It deals with the reduction of writing-down allowances, balancing allowances and balancing charges if a partial depreciation subsidy is paid.
778.Subsection (3) is new and is intended to clarify the position in future years of qualifying expenditure if a first-year allowance has been claimed which was subject to a restriction under this Chapter. See Note 38 in Annex 2.
Chapter 17: Anti-avoidance
Overview
779.This Chapter restricts capital allowances on certain transactions in plant and machinery. It applies if:
a person acquires plant or machinery by purchase, a hire-purchase type contract or assignment of such a contract; and
the transaction is between connected persons, or to obtain a tax advantage or a sale and leaseback.
780.The Chapter has four main blocks of legislation:
section 213 gives an overarching definition of the type of transaction that is targeted;
sections 214 to 218 prevent or restrict allowances in transactions that do not involve a finance lease;
sections 219 to 226 prevent or restrict allowances if a finance lease is involved; and
sections 227 to 232 deal with other miscellaneous matters.
History
781.Section 78 of, and Schedule 7 to, CAA 1968 contained anti-avoidance rules in respect of plant and machinery transactions. These related to, among other things, sales between connected persons and “sole or main benefit” transactions.
782.FA 1971 included, in paragraph 3 of Schedule 8, new anti-avoidance rules intended to prevent the artificial acceleration of allowances. They form the basis of section 75 of CAA 1990.
783.Section 68(3) to (7) and (10) of FA 1972 introduced further anti-avoidance rules. These form the basis of section 76 of CAA 1990. They deal mainly with:
sale and leaseback transactions if the leaseback was not to the seller but to a person connected with the seller; and
cases in which there was no continuity of use for the purposes of the seller’s business before and after the sale and leaseback.
784.The 1972 provisions worked by extending the 1971 rules. This approach was preserved in sections 75 and 76 of CAA 1990.
785.Section 59 of, and paragraph 11 of Schedule 14 to, FA 1991 made further changes. These ensured that the rules worked properly when the expenditure concerned carried an additional VAT liability.
786.Further provisions to prevent tax loss arising from certain finance leasing arrangements were enacted in paragraph 11 of Schedule 12 to FA 1997 and in sections 44 to 47 of F(No.2)A 1997. Those relevant to this Chapter are:
a definition of “finance lease” (section 82A of CAA 1990);
a rule to restrict writing-down allowances on expenditure on plant and machinery for finance leasing in the chargeable period in which it is incurred (section 25(5A) to (5C) of CAA 1990);
extensions to the rules in sections 75 and 76 to apply in cases of sale and leaseback if the leaseback is under a finance lease (section 76A of CAA 1990); and
a rule modifying the provision on hire-purchase type arrangements in section 60 if plant or machinery is acquired for finance leasing (section 60(2A) of CAA 1990).
787.Finally, further rules were added by section 77(1) of FA 2000. That inserted section 76B of CAA 1990. It applies, on election, only in cases of sale and leaseback. It relaxes some of the restrictions on the lessor’s entitlement to writing-down allowances. It applies whether or not a finance lease is involved.
Structure of Chapter 17
788.This Chapter restructures the anti-avoidance provisions in CAA 1990 to:
integrate common aspects of that legislation: sections 75, 76 and 76A of CAA 1990 apply as “layers” created by successive Finance Acts which progressively modified the legislation. As a result that legislation operates as a series of extensions: section 76 extends the section 75 rules; and section 76A extends the section 75 rules as extended by section 76. That does not make for easy reading;
group related provisions together: for example, section 76A of CAA 1990 applies only if a finance lease is involved. That type of case is likely to be of interest to even fewer users than Chapter 17 as a whole. So the sections applying only to finance lease cases (sections 219 to 226) come after the sections which apply in other cases;
deal in separate sections with distinct rules: for example, the three cases in which a “relevant transaction” may occur are each the subject of a separate section (sections 214 to 216).
Section 213: Relevant transactions: sale, hire-purchase (etc.) and assignment
789.This section is based mainly on section 81(3) and parts of section 75(1), (2) and (3) of CAA 1990. It introduces and defines the term “relevant transaction” which is central in determining when this Chapter applies.
790.Subsection (1) identifies the three methods of acquisition which are “relevant transactions”. It also introduces the convention of using “B” and “S” to represent what may be thought of as the “buyer” and the “seller” in these transactions. (They may not be literally a buyer and a seller – for example if the transaction is the assignment of rights under a contract.) The commentary on this Chapter uses “buyer” and “seller” similarly.
791.Subsection (2) defines the expenditure subject to the rules: capital expenditure incurred under relevant transactions.
792.Subsection (3) is based on section 81(3). It allows the anti-avoidance provisions in this Chapter to work properly if a person brings plant or machinery received as a gift into use for business purposes. That person is treated as having incurred capital expenditure in buying the plant or machinery from the donor.
Sections 214 to 216: Connected persons, transactions to obtain allowances, and sale and leaseback etc.
793.These three sections are based on parts of section 75(1), (2) and (3) and 76(1) of CAA 1990. They give the three types of relevant transaction which lead to restrictions on allowances:
between connected persons;
to obtain allowances; and
sale and leaseback (and so on).
794.“Connected persons” for this purpose are defined in section 232.
795.Section 216 identifies sale and leaseback type transactions in subsection (1)(b):
paragraph (i) is the basic case dealt with in section 75 of CAA 1990 (which applies if an asset has been used in the seller’s business and continues to be so used after the sale); and
paragraph (ii) covers the circumstances dealt with in section 76(1) of CAA 1990 (which applies if the asset is used by a connected person or there is not necessarily continuity of use in S’s business).
Section 217: No first-year allowance for B’s expenditure
Section 218: Restriction on B’s qualifying expenditure
796.These sections are based on sections 75(1), (2) and (3) and 76(2), (4) and (7) of CAA 1990. They restrict the buyer’s allowances if a relevant transaction is within sections 214 to 216:
section 217 denies the buyer first-year allowances; and
section 218 restricts the buyer’s qualifying expenditure. This stops a buyer getting more capital allowances by, for example, paying a connected person over the odds for plant or machinery.
797.But if the transaction is a sale and finance leaseback sections 223 to 225 apply instead.
Section 219: Meaning of “finance lease”
798.This is the first of a group of nine sections which deal with transactions involving finance leases. It is based on part of section 82A of CAA 1990. It defines “finance lease” for the purposes of this Chapter.
799.The definition relies on the treatment of the lease in the accounts which is required under normal accountancy practice. Subsection (2) makes clear that this test is applied as if the lessor and connected persons were United Kingdom companies. See Note 39 in Annex 2.
800.Subsection (3) defines “accounts” for this section. It means that the accountancy treatment test must be applied also to the consolidated accounts of any group to which the lessor belongs or would, under United Kingdom company law, belong if it were a United Kingdom company.
Section 220: Allocation of expenditure to a chargeable period
801.This section is based on section 25(5A) to (5C) of CAA 1990. Its effect is to restrict qualifying expenditure (and so writing-down allowances) for the first chargeable period if finance lessors incur expenditure part-way through the chargeable period.
802.Subsection (1) derives from section 25(5A). That provision provides for expenditure incurred in a chargeable period not to be taken into account, except for any part relating to the time after it is incurred. This Act expresses this rule more simply by turning it around to prevent expenditure relating to the time before it is incurred being taken into account.
803.Subsection (1)(b) is based on section 25(5C). Section 25(5C) is necessary in CAA 1990 because section 25(1)(a)(i) excludes from a person’s qualifying expenditure any expenditure “any part of which” has formed part of that person’s qualifying expenditure for a previous chargeable period. Because of the way in which this Act rewrites section 25(1)(a) no equivalent of section 25(5C) is strictly needed. But the reader of this section may not be sure whether subsection (1)(a) merely delays the expenditure from forming part of the available qualifying expenditure or excludes it permanently. Subsection (1)(b) makes the position clear.
804.Subsection (2) is based on section 25(5B). It disapplies the rule in subsection (1)(a) if a disposal value has to be brought into account in the same chargeable period in which the expenditure is incurred. It leaves the person to get relief as usual for the qualifying expenditure less the disposal value.
Section 221: Meaning of “sale and finance leaseback”
805.This and the following five sections only apply if a sale and leaseback involving a finance lease is involved.
806.In CAA 1990 such cases are dealt with (in section 76A) as an extension to the basic section 75 or 76 case. And the different aspects are all included in the same section. This Act brings together in one group all the rules for this kind of case but in a separate section for each aspect.
807.This section is based mainly on parts of sections 75, 76 and 76A of CAA 1990. It introduces and defines the term “sale and finance leaseback”.
Section 222: Disposal value restricted
808.This section is based on mainly on sections 76A(5), (6) and (10) of CAA 1990. It restricts the seller’s disposal value if a sale and finance leaseback is involved.
809.Subsection (2) lists directly the different values to be compared to arrive at the disposal value. This is based on some particularly complex parts of CAA 1990 which require cross-references and comparisons between sections.
810.Subsection (3) gives the rules for determining the “notional written-down value” – one of the values listed in subsection (2). In CAA 1990 this is defined by means of a notional trade. Removing that abstraction does not change the results from the calculation. See Note 24 in Annex 2.
811.Subsection (4) disapplies this section in sale and finance leasebacks if more than half the risk to the lessor has been removed. In those cases the restrictions are greater: see section 225.
Section 223: No first-year allowance for B’s expenditure
812.This section is based on parts of sections 75(1), (2) and (3), 76(1) and 76A(1) of CAA 1990. It prevents any first-year allowance for the buyer’s expenditure in sale and finance leaseback cases.
813.In CAA 1990 this is achieved by applying (in section 76A(1)) the “basic” provision in section 75 to such cases. This Act sets out provisions for this special case separately. This section corresponds to section 217.
814.Subsection (1) prevents any first-year allowance being made to the buyer under a sale and finance leaseback.
815.Subsection (2) provides for the withdrawal of any first-year allowance incorrectly made.
Section 224: Restriction on B’s qualifying expenditure
816.This section is based mainly on section 76A(5), (9) and (10) of CAA 1990. It corresponds to section 218. It restricts, for sale and finance leaseback cases, the buyer’s available qualifying expenditure (and so restricts entitlement to writing-down allowances).
817.Subsection (5) disapplies this section in sale and finance leasebacks if more than half the risk to the lessor has been removed: in those cases the restrictions are greater. See section 225.
Section 225: B’s qualifying expenditure if lessor not bearing non-compliance risk
818.This section is based on parts of section 76A(6), (7), (8) and (12) of CAA 1990. It prevents any allowances in sale and finance leaseback arrangements if more than half the risk to the lessor has been removed otherwise than by guarantees by persons connected with the lessor.
819.Subsection (1) defines the circumstances in which this section applies.
820.Subsection (2) states the effect of the section: the expenditure of the buyer (or of the lessor if they are not the same person) is not qualifying expenditure for capital allowances purposes.
Section 226: Qualifying expenditure limited in subsequent transactions
821.This section is based on section 76A(3), (4) and (7) of CAA 1990. It limits qualifying expenditure for plant or machinery which has been the subject of a sale and finance leaseback which restricted the seller’s disposal value. The limit is the sum of:
the disposal value which was brought into account under section 222; and
any installation costs allowable under section 25.
Sections 227 and 228: Sale and leaseback or sale and finance leaseback: election for special treatment
822.These two sections are based mainly on section 76B of CAA 1990. They apply, if the parties elect, to transactions involving new and unused assets. They enable writing-down allowances claimed by the buyer (the lessor) to be limited only to the smaller of:
the cost to the seller (the lessee) or anyone connected with the seller; and
the sale price to the buyer (the lessor).
823.This applies to both finance lease and non-finance lease cases.
824.In section 227:
subsection (2)(b) is based in part on section 83(1) of CAA 1990 which defines “new”;
subsection (3) ensures that the conditions in subsection (1) work properly if the transaction is the assignment of the benefit of a hire-purchase or like contract; and
subsection (6) is an interpretation rule to fix the date of the transaction for the purposes of the election required under subsection (4).
825.Section 228 gives the effect of an election:
subsection (1) disapplies the limits of sections 218 and 224 and substitutes a restriction on the buyer’s qualifying expenditure in accordance with subsections (2) and (3). The net effect of them is as summarised in paragraph 822 above.
subsection (4) makes this subject to section 225 which prevents any allowance at all in sale and leasebacks if more than half the risk to the lessor has been removed.
subsection (5) states the consequences of the special treatment for the seller: no allowances are due in respect of the seller’s expenditure on the asset.
Section 229: Hire-purchases etc.
826.This section is based on sections 25(6) and 60(2A) of CAA 1990. It provides special rules for hire-purchase and similar contracts for this Chapter.
827.Paragraph 351 above mentioned provisions to make sure the disposal value introduced in section 68 does not disadvantage a person to whom the contract is assigned in a transaction within this Chapter. These are those special provisions. They provide, in summary, that the disposal value for the purposes of this Chapter only is what it would have been if:
there had been an ordinary hire-purchase or similar contract; and
the plant or machinery had been brought into use.
See Change 27 in Annex 1.
Section 230: Exception for manufacturers and suppliers
828.This section is based on section 76(5) of CAA 1990. It disapplies the restrictions in sections 217, 218 and 222 to 225 if plant or machinery is sold by the manufacturer, unused and in the ordinary course of the manufacturer’s business. The effect is that allowances are given on the sale price of the asset.
Section 231: Adjustment of assessments etc.
829.This section is based on section 75(5) of CAA 1990. It ensures that effect can be given to the provisions of this Chapter.
Section 232: Meaning of “connected person”
830.This section is based mainly on sections 75(4), 76(6)(b) and 76A(11) and parts of sections 76A(12) and 82A of CAA 1990. It defines “connected person” for the purposes of this Chapter.
Section 233: Additional VAT liabilities and rebates
831.Section 233 reflects the way this Act deals separately with additional VAT under the capital goods scheme in Chapter 18. It points to the sections there that relate to Chapter 17.
Chapter 18: Additional VAT liabilities and rebates
Overview
Section 234: Introduction
832.This section introduces terms used in the Chapter. It refers users to the definitions of these terms in Chapter 2 of Part 12.
Section 235: Additional VAT liability treated as qualifying expenditure
833.This section is based on section 24(1A) of CAA 1990. It provides that an additional VAT liability may be treated as further qualifying expenditure.Subsection (1) provides the conditions for the section to apply. These are that:
a person has incurred qualifying expenditure (this is known as “the original expenditure);
an additional VAT liability is incurred in respect of the original expenditure; and
the plant or machinery is (still) provided for the purposes of the qualifying activity when the additional VAT liability is incurred.
834.Subsection (2)(a) ensures that the additional VAT liability is then treated as further qualifying expenditure in respect of the plant or machinery. This is necessary to ensure that the cap on disposal values in section 62 correctly takes into account the additional VAT liability incurred.
835.Subsection (2)(b) allows this further qualifying expenditure to be taken into account in the chargeable period in which the additional VAT liability accrues.
Section 236: Additional VAT liability generates first-year allowance
836.This section is based on section 22(1A) and (1B) of CAA 1990. It ensures that, if the original expenditure also attracted first-year allowances, then the additional VAT liability may also qualify for first-year allowances.
837.Subsection (2)(a) provides that the additional VAT liability is the “same type” of first-year qualifying expenditure as the original expenditure. This wording is in line with the heading in the Table in section 52 which provides for different rates of first-year allowance depending on the circumstances of the first-year qualifying expenditure.
838.Subsection (3) ensures that:
the Table of rates of first-year allowances in section 52 applies for the additional VAT liability as well as in respect of the original expenditure; and
the taxpayer can choose to take a first-year allowance in respect of only part of the further qualifying expenditure.
839.Subsection (4) makes it clear that the availability of first-year allowances is subject to the rules in sections 237 (general exceptions) and 241 (anti-avoidance).
840.Some of the first-year allowance rules that could be invoked by this section are not generally relevant to this Act – for example, the rules applying to expenditure incurred between 1 November 1992 and 31 October 1993. If an additional VAT liability is incurred in respect of expenditure that qualified for a first-year allowance under those rules, the rate of first-year allowance on the additional VAT liability will be in accordance with those rules. For this transitional purpose, these rules are rewritten in paragraphs 46 to 51 of Schedule 3.
Section 237: Exceptions to section 237
841.This section is based on sections 22(3CA) and (6B) and 22B(1) of CAA 1990. It lists some of the circumstances in which a first-year allowance is not available in respect of an additional VAT liability.
842.Other circumstances are provided for in section 241. These circumstances are kept separate because section 241 is part of the anti-avoidance legislation.
843.This Act clarifies the rules that restrict the availability of first-year allowances in respect of additional VAT liabilities. See Change 28 in Annex 1.
Section 238: Additional VAT rebate generates disposal value
844.This section is based on section 24(7) of CAA 1990. It requires, in certain circumstances, the recipient of an additional VAT rebate to bring the rebate into account as a disposal value. In most cases, this would simply reduce the available qualifying expenditure in the pool to which the original expenditure was allocated.
845.Subsection (1)(c) ensures that this section applies only if the recipient of the additional VAT rebate owned the plant or machinery during the chargeable period in which the rebate was made.
846.Subsections (2) and (3) ensure that the disposal value is brought into account in the chargeable period in which the additional VAT rebate accrues.
847.If another disposal value is to be brought into account in respect of the same plant or machinery in that chargeable period then the amount of the additional VAT rebate is added to this disposal value. The cap on disposal values in section 62 takes into account the combined amounts.
848.If there is no other disposal value to be brought into account in respect of the same plant or machinery in that chargeable period, then the disposal value to be brought into account is the amount of the additional VAT rebate. In these circumstances, the cap on the disposal value is given by section 239.
Section 239: Limit on disposal value where additional VAT rebate
849.This section is based on section 26(2A) and part of section 26(2), (3) and (4) of CAA 1990. It modifies the operation of the cap on disposal value in section 62 if there is, or has been, an additional VAT rebate in respect of the plant or machinery.
850.Subsections (1) and (2) apply if:
there is an event giving rise to the disposal value which is not the making of an additional VAT rebate; and
in respect of the plant or machinery there is an additional VAT rebate either in that chargeable period or in a previous chargeable period.
851.Subsection (2) ensures that the cap on the disposal value is reduced to take into account any previous additional VAT rebates. This ensures that any balancing charge may not exceed the total allowances previously given in respect of the plant or machinery.
852.Subsections (3) and (4) apply if the only event giving rise to a disposal value is the making of an additional VAT rebate.
853.Subsection (4) provides that the cap on the disposal value is reduced to take into account any previous disposal values brought into account in respect of the plant or machinery as a result of any earlier event.
854.These subsections contain a change. Section 26(2A) of CAA 1990 deals with the cap on disposal value when the event giving rise to the disposal value is the making of an additional VAT rebate. The words at the end of that subsection specifically state that previous additional VAT rebates should not be taken into account when operating the cap. The consequence of this is that in some situations a taxpayer can be required to bring in a disposal value in excess of the total qualifying expenditure incurred on the plant or machinery. This anomaly has been removed. See Change 29 in Annex 1.
855.Subsections (5) and (6) modify the special rule in section 62(3). They apply when the person bringing into account a disposal value had acquired the plant or machinery from a connected person. For each connected person in a chain of transactions, it is necessary to calculate the total qualifying expenditure incurred on the plant or machinery net of any additional VAT rebates made. The cap on the disposal value is then the highest net qualifying expenditure of all the persons in the chain.
Section 240: Additional VAT liability
856.This section is based on section 37(4A) of CAA 1990. It applies if an additional VAT liability is incurred in respect of plant or machinery on which a short-life asset election has been made under section 85.
857.If a balancing allowance has been made following a disposal event in respect of a short-life asset pool, this section provides that a subsequent additional VAT liability may give rise to a further balancing allowance.
858.Normally, it is not possible for an additional VAT liability to be qualifying expenditure if it is incurred after the disposal of the plant or machinery. However, this section provides an exception if:
the plant or machinery was subject to an election under section 85;
a balancing allowance has arisen in the short-life asset pool;
an additional VAT liability is incurred after the end of the chargeable period in which the balancing allowance was incurred; and
the additional VAT liability was not taken into account when calculating the balancing allowance.
