Example
In 1998 U incurs qualifying expenditure of £500,000 on an industrial building. In 2003 U incurs an additional VAT liability of £10,000 in respect of the building. At that time the residue of qualifying expenditure is £400,000.
The £10,000 is added to the residue of qualifying expenditure giving a total of £410,000. Section 311 means that (subject to other relevant events) subsequent writing-down allowances must reflect the increased qualifying expenditure.
If from the time the additional VAT liability accrued 20 years remain, (out of the period of 25 years since first use of the building,) the revised writing-down allowance will be £20,500 for each year (£410,000 divided by 20).
Section 348: Additional VAT liabilities and writing off initial allowances
1174.This section is based on section 8(2)(a) and part of section 159A(3) of CAA 1990. It provides that an initial allowance in respect of an additional VAT liability is written off when the additional VAT liability accrues.
1175.Most initial allowances will relate to qualifying enterprise zone expenditure and will be given at 100%. In such cases the residue will be increased by this amount (under section 347(2)(b)) and immediately reduced again by this section.
1176.If a reduced initial allowance is made (or under paragraph 75(3) of Schedule 3 only a 20% initial allowance is available) then the net effect of these two rules is that the residue is increased by the difference between the additional VAT liability incurred and the initial allowance made.
Section 349 and 350: Additional VAT rebates
1177.These sections are based on parts of sections 3, 4 and 159A of CAA 1990. They deal with additional VAT rebates received in respect of qualifying expenditure.
1178.Section 349 applies when the additional VAT rebate received is less than the residue of qualifying expenditure immediately before the rebate accrues. In such cases, subsection (2) provides that writing-down allowances are revised accordingly. Section 351 provides that the residue is first reduced by the amount of the rebate.
1179.Section 350 applies in all cases when an additional VAT rebate is made. However, it is only relevant if the additional VAT rebate exceeds the residue of qualifying expenditure. Subsection (1) provides that the making of the additional VAT rebate is a balancing event. Under section 314, this can give rise to balancing allowances and balancing charges. However, subsection (2) provides that no balancing allowance can arise as a result of an additional VAT rebate.
1180.Subsection (3) provides that a balancing charge will only arise if the additional VAT rebate exceeds the residue of qualifying expenditure. Subsection (4) ensures that the balancing charge is equal to the difference.
1181.Subsection (5) deals with starting expenditure. If and only if:
a balancing charge is made under this section; and
the person to whom it is made is the person who incurred the qualifying expenditure,
then the starting expenditure is reduced by the amount of the balancing charge.
Section 351: Additional VAT rebates and writing off qualifying expenditure
1182.This section is based on section 8(12A) and part of section 159A(3) of CAA 1990. It provides that the residue of qualifying expenditure is reduced by the amount of any additional VAT rebate made.
Chapter 11: Giving effect to allowances and charges
Overview
1183.This Chapter provides how allowances and charges under Part 3 are given effect.
1184.Section 352 gives the rule for trades. Allowances and charges are treated as expenses and receipts of the trade. The same rule applies for professions and vocations occupying commercial buildings built with qualifying enterprise zone expenditure.
1185.Section 353 deals with buildings which are leased or licensed. The allowances and charges are treated as expenses and receipts of the person’s:
Schedule A business; or
overseas property business;
as appropriate. If the building is not an asset of any property business then the person is treated as carrying on a Schedule A business and the allowances and charges are given effect in that notional business.
1186.Section 354 provides for allowances and charges for certain buildings temporarily out of use to be given as if they were leased or licensed.
1187.Section 355 contains special rules under which balancing allowances in respect of industrial buildings used for mining may be carried back to earlier chargeable periods.
Section 352: Trades
1188.This section is based on parts of sections 9, 140, 144 and 161 of CAA 1990. It deals with allowances and charges under Part 3 for trades and, for commercial buildings, professions and vocations.
1189.There is a minor change. This is to provide for allowances and charges on commercial buildings to be given effect for professions and vocations. See Change 36 in Annex 1.
1190.Subsection (3) makes clear that the general rule in subsection (1) may be displaced by subsequent provisions.
Section 353: Lessors and licensors
1191.This section is based on sections 9 and 161(2A) of CAA 1990. It gives effect to allowances and charges in respect of an industrial building which is leased or licensed.
1192.Section 9 of CAA 1990 refers only to a Schedule A business. But section 161(2A) means this must be read as including an overseas property business. This section deals with both explicitly. So it gives effect to allowances and charges in the business of which the building is an asset. See Note 47 in Annex 2.
1193.Subsection (4) deals with the case in which this section applies but the person’s interest in the building is not an asset of any property business. As in CAA 1990, it provides a notional Schedule A business in which allowances and charges are given effect.
Section 354: Buildings temporarily out of use
1194.This section is based on section 15ZA of CAA 1990. It deals with the way allowances or charges are given effect if there has been temporary disuse of the building but it is still treated as an industrial building.
1195.Subsection (2) deals with cases in which a trade is discontinued or the relevant interest was subject to a lease or licence which ends. It provides for section 353(4) to apply so allowances and charges can be given effect.
1196.Subsection (3) provides that if:
liability to a balancing charge arises; and
the person liable last used the industrial building for the purposes of a trade which has subsequently ceased,
then certain deductions may be made from that balancing charge. The deductions are those allowable under section 105 of ICTA against income from post cessation receipts and so on.
1197.Subsection (4) makes clear this does not prevent other deductions.
1198.Subsection (5) excludes from this section events which are treated as the permanent discontinuance of a trade by sections 113(1) or 337(1) of ICTA.
1199.Subsection (6) provides that in the case of a commercial building (see section 281), the word “trade” includes a profession or vocation. This is a minor change. See Change 36 in Annex 1.
Section 355: Buildings for miners etc.: carry-back of balancing allowances
1200.This section is based on section 17(1) and (2) of CAA 1990. It provides for balancing allowances in respect of certain mining structures to be carried back to earlier chargeable periods.
Chapter 12: Supplementary provisions
Overview
1201.This Chapter makes various supplementary provisions for Part 3.
1202.Section 356 provides for the apportionment of sale proceeds if only part of the proceeds is in respect of qualifying expenditure.
1203.Section 357 is an anti-avoidance provision directed against arrangements which distort pricing.
1204.Section 358 deals with certain land requisitioned by the Crown.
1205.Section 359 provides rules for when a lease comes to an end.
1206.Section 360 defines “lease” and related terms.
Section 356: Apportionment of sums partly referable to non-qualifying assets
1207.This section is based on section 21(3) of CAA 1990. It is an additional provision over and above those in Part 12 which apportion sale proceeds between different property. It apportions the proceeds if there is a sale of the relevant interest in a building and only some of the assets represent qualifying expenditure.
1208.There is a minor change. Section 21(3) of CAA 1990 refers to an amount which “on a just apportionment is attributable to assets…”. Subsection (1) uses the words “on a just and reasonable apportionment is attributable to assets…”. In practice this should not make any difference to the outcome of an apportionment. See Change 40 in Annex 1.
1209.Subsection (2) makes clear that this applies not only on the sale of the relevant interest in a building but also to other balancing events which give rise to proceeds. See sections 315 and 316.
Section 357: Arrangements having an artificial effect on pricing
1210.This section is based on sections 10D and 151(1A) of CAA 1990. It deals with arrangements which have an artificial effect on pricing.
1211.Subsection (1) is directed at the sale of a relevant interest at an artificially inflated price. In order to determine qualifying expenditure that price is, broadly speaking, reduced to what it would have been in the absence of the arrangements which had an artificial effect.
1212.Subsection (2) deals similarly with the proceeds from a sale at an artificially inflated price.
Section 358: Requisitioned land
1213.This section is based on section 16(1), (2) and (3) of CAA 1990. It treats a person who is legitimately occupying and trading on requisitioned land as holding an interest in that land.
1214.Subsection (1) applies this section for the “period of requisition” when compensation for requisitioned land would be payable under section 2(1)(a) of the Compensation (Defence) Act 1939. It does not matter whether or not agreement has been reached concerning the compensation payable.
1215.Subsection (2) provides that for the period of requisition of land by the Crown it is as if the Crown were in possession of the land under a lease.
1216.Subsection (3) is concerned with a person who is authorised by the Crown to occupy any part of the land and carries on a trade during the period of requisition. That person is to be treated as holding a sublease of the land from the Crown.
1217.Subsection (4) provides that the lease mentioned in subsection (2) or the sublease in subsection (3) is to be regarded as falling within the appropriate provisions of this Part.
1218.Subsection (5) deals with a person entitled to the land, who makes a payment in respect of a building constructed on the land during the period of requisition. If the payment is made to the Crown, it is to be treated as in consideration of the surrender of the lease. If the payment is made in accordance with subsection (3) to the occupier, then it is to be treated as the surrender of the sublease.
Section 359: Provision applying on termination of lease
1219.This section is based on section 16(4), (5), (6) and (7) of CAA 1990. It is of general application to this Part whenever a lease is terminated.
Section 360: Meaning of “lease” etc.
1220.This section is based on parts of sections 4A(13), 161(2) and 162 of CAA 1990. It defines terms for Part 3.
Part 4: Agricultural buildings allowances
Overview
1221.This Part provides for agricultural buildings allowances. These may be writing-down allowances or balancing allowances. It also provides for balancing charges.
1222.Chapter 1 makes allowances available if qualifying expenditure has been incurred on the construction of a building for the purposes of husbandry. The person incurring the expenditure must have an interest in the related agricultural land. The first use of the building must be for husbandry.
1223.Chapter 2 defines the “relevant interest”. Allowances are given to the person holding the relevant interest.
1224.Chapter 3 defines “qualifying expenditure” for the purposes of agricultural buildings allowances.
1225.Chapter 4 provides entitlement to writing-down allowances. These are generally at 4% a year of the qualifying expenditure.
1226.Chapter 5 provides for balancing allowances and balancing charges if the relevant interest in the related agricultural land is transferred or the agricultural building is destroyed.
1227.Chapter 6 gives effect to allowances and charges.
Background
1228.The principal theme underlying the legislation is to give relief for capital expenditure incurred on the construction of buildings and structures for the purposes of husbandry. To do this the legislation needs to identify:
what expenditure qualifies for capital allowances;
who gets the allowances; and
how much relief is given.
History
1229.ITA 1945 introduced capital allowances for capital expenditure on the construction of agricultural and forestry buildings and works. Allowances were given at 10% a year for ten years to the owner or tenant of agricultural or forestry land. There were no balancing adjustments.
1230.Capital allowances generally were not, and still are not, available for expenditure on dwelling-houses. But allowances were given on expenditure on farmhouses (up to one third of the expenditure) and on cottages.
1231.FA 1978 introduced initial allowances at 20%.
1232.As part of a wider reform of business taxation, FA 1985 abolished initial allowances. It also reduced writing-down allowances to 4% a year.
1233.FA 1986 introduced a new system of agricultural buildings allowances. This included balancing adjustments. Balancing allowances gave an option of accelerated relief if a building or work was demolished or destroyed. It also introduced two special conditions. No allowances are given to a person who sells the agricultural land before the building has been brought into first use. And no allowances are given if the first use of the building is not for husbandry.
1234.FA 1988 abolished allowances for forestry buildings and works. This was part of a general reform which took the profits, gains and losses of forestry out of the tax system.
1235.The legislation was consolidated as Part V of CAA 1990.
1236.As a temporary measure FA 1993 introduced initial allowances of 20% for expenditure incurred under contracts from November 1992 to October 1993.
