Capital Allowances Act 2001 - Explanatory Notes

Example

Assume that:

(a)

mineral extraction trader B acquires for £1,000 a mineral asset that used to be owned by a previous trader P; and

(b)

P had incurred £50 capital expenditure on mineral exploration and access and this capital expenditure is reflected as to £100 (of B’s purchase price) in the value of the mineral asset.

£50 is the lower of the two amounts in (b). B is treated as incurring:

(i)

£50 of qualifying expenditure on mineral exploration and access; and

(ii)

only £950 on the purchase of the mineral asset – but it may not all be qualifying expenditure because other restrictions in Chapter 3 or 4 may apply.

1414. There is nothing in this section for section 115(2)(b) of CAA 1990 which is unnecessary. See Note 52 in Annex 2.

Section 408: Acquisition of oil licence from non-trader

1415. This section is based on section 118(2) and sections 118(1) and 138A of CAA 1990. It sets out the proposition in section 118(2) after the necessary adaptations required by section 138A.

1416. Subsection (1) applies this section if:

• the trader acquires an interest in an oil licence the value of which is partly attributable to mineral exploration and access expenditure of the seller; and

• the seller has not carried on a mineral extraction trade.

1417. There is a minor change in subsection (1)(a) as in sections 400, 403 and 407 (paragraphs 1381, 1396 and 1412 above). See Change 47 in Annex 1.

1418. Subsection (2)(b) reduces the trader’s expenditure on acquiring the mineral asset by “E2”.

1419. Subsection (2)(a) treats the trader as incurring qualifying expenditure on mineral exploration and access of an amount that is capped at “E2”.

Example

Assume that:

• mineral extraction trader, B, acquires an oil licence for £1,000 from S;

• S is not a mineral extraction trader, but S has incurred expenditure of £50 on mineral exploration and access; and

• it is just and reasonable to attribute £300 of B’s purchase price to the £50 spent by S.

• B is treated as incurring:

  • £50 of qualifying expenditure on mineral exploration and access; and

  • only £700 (£1,000 - £300) on the purchase of the oil licence – but it may not all be qualifying expenditure because other restrictions in Chapter 3 or 4 may apply.

Section 409: Acquisition of other assets from non-traders

1420. This section is based on sections 118(1) and 121(3) of CAA 1990. If the seller of an asset has not been a mineral extraction trader it caps the buyer’s qualifying expenditure on acquiring an asset, if that asset represents the seller’s expenditure on mineral exploration and access. The cap is the amount of the seller’s mineral exploration and access expenditure represented by that asset.

1421. There is a minor change in subsection (1)(a) as in sections 400, 403, 407 and 408 (paragraphs 1381, 1396, 1412 and 1417 above). See Change 47 in Annex 1.

Section 410: UK oil licence: limit is original licence payment

1422. This section is based on section 116 of CAA 1990. It caps the qualifying expenditure on acquiring an interest in a UK oil licence to the amount originally paid to obtain the oil licence (or a reasonable part of the original payment).

1423. Subsection (4) makes it explicit that the cap does not affect any part of the expenditure that is treated as qualifying expenditure on mineral exploration and access by the first two sections in this Chapter.

Section 411: Assets generally: limit is residue of previous trader’s qualifying expenditure

1424. This section is based on sections 113 and 114 of CAA 1990. It prevents an increase in qualifying expenditure if the trader acquires an asset that, broadly, has previously been owned by another mineral extraction trader for the purposes of that earlier owner’s mineral extraction trade. The qualifying expenditure on acquiring the asset is limited to the residue of the previous trader’s qualifying expenditure.

Example

Assume that:

• mineral extraction trader, B, buys a mineral asset for £1,000;

• the mineral asset was previously owned by a previous trader, P; and

• P’s residue of qualifying expenditure related to the asset is £500.

B’s qualifying expenditure cannot exceed £500.

1425. Subsection (8) makes it explicit that the cap does not affect any part of the expenditure that is treated as qualifying expenditure on mineral exploration and access by the first two sections in this Chapter.

Section 412: Transfers of mineral assets within group: limit is initial group expenditure

1426. This section is based on part of section 117 of CAA 1990. It prevents an increase of qualifying expenditure on a mineral asset through a transfer between companies under common control.

1427. This is done by limiting the acquiring company’s capital expenditure on acquiring the mineral asset to the selling company’s capital expenditure on acquiring that mineral asset. This restriction is wider, in one sense, than the restriction in section 411 because this restriction applies even if a previous trader has not owned the mineral asset. Both restrictions can apply to the same acquisition.

Example

Assume that parent company A sells a mineral asset (originally bought for £500) to its subsidiary B for its then market value of £1000.

This section limits B’s capital expenditure to £500 – but it may not all be qualifying expenditure because other restrictions in Chapter 3 or 4 may apply.

1428. Subsection (2), in referring to “just and reasonable apportionment”, is a minor change. See Change 40 in Annex 1.

1429. Subsection (5) modifies the application of section 404 so that, broadly, the undeveloped market value of land is computed at the time the group first acquired the mineral asset. This is because the group’s capital expenditure is effectively limited to the capital expenditure that the group incurred (ignoring group transfers) on acquiring the mineral asset.

1430. Subsections (6) and (7) make corresponding modifications of section 405 if subsection (5) has applied. They put the buyer in broadly the same position as if the buyer had owned the interest in land from the time that it was purchased by the first group company.

Section 413: Transfers of mineral assets within group: supplementary

1431. This section is based on part of section 117 of CAA 1990.

1432. Subsection (2)(b) makes explicit that section 412 does not apply if an election is made for “step-in-shoes” treatment to apply to the buying company in relation to the mineral asset. That treatment will reflect an earlier deduction for the undeveloped market value of land.

1433. Subsection (4) makes it explicit that the cap in the previous section does not affect any part of the expenditure that is treated as qualifying expenditure on mineral exploration and access by the first two sections in this Chapter.

Chapter 5: Other kinds of qualifying expenditure

Overview

1434. This Chapter deals with qualifying expenditure that is neither on mineral exploration and access nor on acquiring a mineral asset.

1435. Section 414 permits expenditure on works to be qualifying expenditure if the works would have no value if:

• there were no mineral deposits; or

• the mineral deposits could not be worked.

1436. Section 415 permits certain contributions, to works for the benefit of employees abroad, to be qualifying expenditure.

1437. Section 416 permits certain post cessation restoration expenditure to be treated as qualifying expenditure that was incurred on the last day of trading.

Section 414: Expenditure on works likely to become valueless

1438. This section is based on parts of sections 98(1), 105 and 161(2) of CAA 1990. Capital expenditure on the construction of certain works may be qualifying expenditure if the works would have little or no value if the source could not be worked.

1439. There is a minor change insubsection (1)(b) as in sections 400, 403, 407, 408 and 409. See Change 47 in Annex 1.

Section 415: Contribution to buildings or works for benefit of employees abroad

1440. This section is based on section 108 of CAA 1990. It provides that capital sums contributed to the cost of certain buildings or works, to be used essentially for the benefit of persons employed abroad, may be qualifying expenditure if connected with the working of a source outside the UK and the other conditions in the section are satisfied.

1441. There is a minor change in subsection (1)(a) as in sections 400, 403, 407, 408, 409 and 414 (paragraphs 1381, 1396, 1412, 1417, 1421 and 1439 above). See Change 47 in Annex 1.

Section 416: Expenditure on restoration within 3 years of ceasing to trade

1442. This section is based on section 109 of CAA 1990. It allows certain restoration expenditure to be qualifying expenditure provided it is incurred within three years of the mineral extraction trade ceasing. The expenditure must meet the condition that it would have been either qualifying expenditure or deductible as a trading expense if it had been incurred before the trade ceased.

1443. Allowances are only available in Part IV of CAA 1990 on qualifying expenditure that meets the purposes of the mineral extraction trade test in section 98(1) of CAA 1990. That purpose test is not reproduced in this section. This is a change that is favourable to the taxpayer. See Change 47 in Annex 1.

Chapter 6: Allowances and charges

Overview

1444. This Chapter deals with allowances and charges on qualifying expenditure. There is no pooling of qualifying expenditure. Allowances may be balancing allowances or writing-down allowances. Writing-down allowances are given on a reducing-balance basis at rates of 10% on mineral asset expenditure and 25% in other cases. Disposal receipts may arise in respect of qualifying expenditure on the happening of certain events. Disposal receipts either restrict the allowances on that qualifying expenditure or result in balancing charges to recover excessive allowances. Balancing allowances are available on different kinds of qualifying expenditure in different circumstances.

1445. Section 417 sets out whether an allowance is available or a charge will be made for a chargeable period.

1446. Section 418 quantifies the allowance or charge.

1447. Section 419 defines the term “UQE” used in the previous two sections.

1448. Section 420 defines the term “disposal receipt” used in the earlier sections in terms of a “disposal value” to be brought into account.

1449. Section 421 and section 422 provide for the circumstances in which, and the chargeable period for which, a disposal value is to be brought into account in relation to qualifying expenditure.

1450. Section 423 and section 424 deal with the amount of a disposal value to be brought into account.

1451. Section 425 deals with an additional case, the receipt of a capital sum, in which a disposal value is brought into account in relation to qualifying expenditure.

1452. Sections 426 to 431 set out the periods in which a balancing allowance is available in relation to different kinds of qualifying expenditure.

Section 417: Determination of entitlement or liability

1453. This section is based on section 98(2) and (3) and section 100(1) of CAA 1990. It determines whether, in respect of qualifying expenditure, there is entitlement to an allowance or liability to a charge in a chargeable period. It is similar to section 55 in Part 2.

1454. There is no equivalent of sections 53 and 54 because qualifying expenditure is not pooled in this Part. The main factor common to the calculation of allowances in Part 2 is that writing-down allowances in this Part are also computed by applying a percentage to an amount which reduces from one chargeable period to the next – known as the reducing-balance basis.

1455. The meaning of “UQE” and “TDR” and when balancing allowances may be due are dealt with in detail later in the Chapter.

Section 418: Amount of allowances and charges

1456. This section is based on section 98(4) to (6) and section 100(2) and (3) of CAA 1990. It is similar to section 56. It determines the amount of entitlement or charge.

1457. Subsection (4) caps balancing charge(s) in respect of qualifying expenditure at the amount of allowances actually given on that qualifying expenditure. This can be expressed more directly than in Part 2 because pooling is not involved in calculating allowances and charges in this Part.

1458. Subsection (6) permits a person to claim less than the full amount of the allowance. See Change 38 in Annex 1.

Section 419: Unrelieved qualifying expenditure

1459. This section is based on section 98(2) and (3) of CAA 1990.

Section 420: Meaning of “disposal receipt”

1460. This section provides a signpost to the provisions in this Part and elsewhere that deal with this term. “Disposal receipts” are the amount of disposal value that the mineral extraction trader is required to bring into account and they feed into the three earlier sections dealing with entitlement/liability, amount and “UQE” respectively.

Section 421: Disposal of, or ceasing to use, asset

1461. This section is based on section 99(1) of CAA 1990. It requires a disposal value to be brought into account on an asset being disposed of or permanently ceasing to be used for the purposes of the mineral extraction trade.

Section 422: Use of asset otherwise than for permitted development etc.

1462. This section is based on section 99(1) and (2) and section 110(3) of CAA 1990. It requires a disposal value to be brought into account if certain developments occur. This can happen without the mineral asset being disposed of or permanently ceasing to be used for the purposes of the mineral extraction trade.

1463. There is a minor change. Subsection (4)(b) contains a test by reference to general development orders in England. Section 110(3)(b) of CAA 1990 refers to Wales as well. This change has no practical effect at present. See Change 48 in Annex 1.

Section 423: Sections 421 and 422: amount of disposal value to be brought into account

1464. This section is based on section 99(3) and section 26(1) of CAA 1990. It gives the amount of the disposal value to be brought into account if one of the previous two sections applies.

1465. CAA 1990 leaves readers to adapt section 26 of that Act for the purposes of section 99(1) of that Act. It is clear that not all of section 26 is relevant to section 99(1) but it could be time consuming to arrive at the necessary adaptations.

1466. This section contains a Table setting out the disposal value so that reference to provisions in Part 2 and adaptations are not required in this Act.

1467. Item 2 of the Table is based on section 99(3) of CAA 1990. It refers to the disposal value as market value at the time of sale. See Note 17 in Annex 2.

Section 424: Disposal value restricted in case of interest in land

1468. This section is based on sections 99(3), 110 and 112 of CAA 1990. It excludes the undeveloped market value of land in arriving at its disposal value. This is because the undeveloped market value of land is excluded from qualifying expenditure when an interest in land is acquired.

1469. There is a minor change. Subsection (5)(b) contains a test by reference to general development orders in England whereas section 110(3)(b) of CAA 1990 refers to Wales as well. This change has no practical effect at present. See Change 48 in Annex 1.

Section 425: Receipt of capital sum

1470. This section is based on section 99(4) of CAA 1990. It requires capital sums, reasonably attributable to qualifying expenditure, to be brought into account as disposal values.

1471. Subsection (3) stops a capital sum from being taken into account twice.

Section 426: Pre-trading expenditure

1472. This section is based on section 101(5) of CAA 1990. It sets out the qualifying expenditure concerned and the chargeable period in which any allowance in respect of it will be a balancing allowance.

1473. The qualifying expenditure is pre-trading expenditure on mineral exploration and access if, before the trade began, the mineral exploration and access permanently ceased at the source concerned. The chargeable period is the one in which the trade begins.

Sections 427 to 431

1474. These sections are based on sections 99(1), 101 and 161(2) of CAA 1990. They provide other circumstances in which a person is entitled to a balancing allowance for the qualifying expenditure concerned.

Chapter 7: Supplementary provisions

Overview

1475. This Chapter deals with giving effect to allowances and charges and other matters.

1476. Section 432 sets out how allowances and charges are given effect for the mineral extraction trade.

1477. Section 433 gives relief for demolition costs in certain cases.

1478. Section 434 deals with when expenditure actually incurred before the trade starts is to be treated as incurred in this Part.

1479. Section 435 treats this Part as applying to shares in assets as it applies to parts of assets.

1480. Section 436 defines some terms used in this Part.

Section 432: Giving effect to allowances and charges

1481. This section is based on sections 104, 140(2), 144(2) and 161(2) and (5) of CAA 1990. It gives effect to allowances and charges as trading expenses or receipts for the chargeable period concerned.

Section 433: Treatment of demolition costs

1482. This section is based on sections 103 and 161(2) of CAA 1990. It allows net demolition costs to be added to the qualifying expenditure concerned in calculating the balancing allowance or balancing charge arising on the demolition of an asset representing qualifying expenditure.

1483. Subsection (3) stops the cost of demolition from being relieved more than once.

Section 434: Time when expenditure incurred

1484. This section is based on section 120(1) of CAA 1990.

1485. Subsection (2) avoids duplication that exists in CAA 1990 as to the time at which the qualifying expenditure is treated as incurred. See Note 51 in Annex 2.

Section 435: Share in assets

1486. This section is based on section 121(5) of CAA 1990.

Section 436: Meaning of “development” etc.

1487. This section is based on section 121(1) of CAA 1990.

Part 6: Research and development allowances

Overview

1488. This Part provides for research and development (R&D) allowances. Unlike other Parts the allowances are not labelled as initial, first-year, writing-down or balancing allowances. Allowances are broadly given at a rate of 100%. Balancing charges can recover “excessive allowances”.

1489. The aim is to give traders relief against trading income for capital expenditure on R&D. The R&D must be related to the trade and directly undertaken by the trader or on his or her behalf.

1490. Chapter 1 is introductory. It requires a person to have incurred qualifying expenditure on R&D to get allowances. The Chapter gives the meaning of “research and development” and what may be treated as expenditure on R&D.

1491. Chapter 2 gives the meaning of “qualifying expenditure”. Only traders can have qualifying expenditure and such expenditure must be incurred on R&D which is directly undertaken by the trader or on behalf of the trader. The cost attributable to bare land or most dwellings is not qualifying expenditure.

1492. Chapter 3 deals with allowances and charges on qualifying expenditure. There is no pooling of qualifying expenditure. The rate of allowances is 100%. Allowances are broadly given for the chargeable period in which occurs the later of:

• the trade starting; or

• the qualifying expenditure being incurred.

1493. When the trader ceases to own an asset representing qualifying expenditure a disposal value is brought into account (usually for the chargeable period in which it ceases to be owned). Disposal values either restrict allowances on the qualifying expenditure or lead to a balancing charge. Demolition costs may reduce disposal values or qualify for an allowance.

1494. Chapter 4 treats certain additional VAT liabilities as expenditure on R&D and certain additional VAT rebates as disposal values. The consequences of such treatment follow from the earlier Chapters. The additional VAT must be incurred or made by the time the asset in question is destroyed or ceases to be owned.

1495. Chapter 5 contains supplementary provisions including the treatment of allowances as trading expenses and charges as trading receipts.

History

1496. This Part has its origins in sections 28, 29 and 31 of FA 1944 (when the allowances were known as “scientific research allowances”). Minor changes were made to those sections in Income Tax Act 1945 (the Act which introduced capital allowances generally for expenditure on, among other things, industrial buildings and machinery or plant).

1497. Allowances were originally given for R&D expenditure (then called “scientific research expenditure”) of a capital nature over five years at 20% a year.

1498. If the expenditure was represented by an asset, there could be no claim for other types of capital allowance while the asset continued in use for R&D related to the trade concerned. But, if that asset ceased to be so used, there was then a balancing adjustment. The adjustment ensured the net relief equalled any loss in value of the asset by the date of its change of use. After that adjustment the person could claim other types of capital allowance.

1499. Section 20 of FA 1949 changed the rate of R&D allowances to 60% in the first year and 10% in each of the next four years.

1500. Section 21 of FA 1954 introduced provisions giving accelerated relief for the cost of demolishing assets representing capital expenditure on R&D.

1501. Section 36 of FA 1963:

• increased R&D allowances to 100%;

• amended the provisions dealing with “balancing allowances” and “balancing charges” to fit the new regime of 100% allowances; and

• provided that if an asset was bought and sold in the same year, an allowance was given in that year on any net cost of the asset. As a result any allowance otherwise due in the next year (on the preceding year basis of assessment then in force) was not to be given.

1502. Section 63 of FA 1985 stopped R&D allowances being given:

• on the cost of acquiring land or rights in or over land (except to the extent that part of the cost is properly attributable to a current building or structure on that land); and

• for expenditure on the provision of residential accommodation (except if the accommodation forms part of the premises used for R&D and the cost of that accommodation is not more than 25% of the cost of the entire structure).

1503. FA 1985 also expanded the recapture of allowances on an asset ceasing to be owned – previously a sale of the asset was required.

1504. Section 62 of FA 1988 introduced new capital gains tax and capital allowance rules for arm’s length disposals, made at the “pre-development” stage, of interests in oil licences in the UK or on the UK Continental Shelf. The new rules applied if the consideration for the disposal included either:

• an obligation to undertake a program of exploration and appraisal work in the area covered by the licence; or

• another such “pre-development” licence interest.

1505. Such consideration is treated as having a nil value for the purpose of recovering R&D allowances on the disposal of the licence interest.

1506. Section 121 and Schedule 13 of FA 1989 introduced provisions that:

• allow apportionment of expenditure if an asset is sometimes to be used for R&D and sometimes to be used for other purposes;

• define when an asset, that is sold, ceases to be owned; and

• give a single set of provisions to prevent double allowances whereby claimants make an irrevocable choice as to what type of allowance they wanted on particular expenditure.

1507. CAA 1990 consolidated the provisions about capital allowances (other than those contained in Chapter I of Part XIII of ICTA).

1508. FA 1991 introduced changes so that:

• additional VAT liabilities on an amount that got a R&D allowance might also qualify for such an allowance; and

• additional VAT rebates would give rise to a recapture of allowances.

1509. FA 1996 inserted section 138A of CAA 1990. This was to make sure that R&D allowances on capital expenditure on mineral exploration and access could be recovered on the disposal of an interest in an oil licence, to the extent that the expenditure had added value to the oil licence. This provision applied retrospectively as well as prospectively. FA 1996 therefore inserted section 138B of CAA 1990 to cater for the potentially retrospective element of section 138A. Section 138B allowed the transferor to use a lower disposal value than that given by section 138A, if that value was also used in calculating the transferee’s entitlement to capital allowances.

1510. FA 1996 also:

• applied section 151 of CAA 1990, dealing with apportionments that could affect more than one person, to Part VII of CAA 1990; and

• extended the relief mentioned in paragraph 1504 above so that it applies to oil licences world-wide and not only to UK and UK Continental Shelf licences.

1511. FA 2000 changed:

• the term “scientific research” previously used to the present term “research and development”;

• introduced a more detailed definition of what constitutes R&D; and

• ensured that appeals on the meaning of “research and development” could go to an independent tribunal.

Chapter 1: Introduction

Overview

1512. This Chapter introduces R&D allowances. They are given to traders who incur qualifying expenditure. Chapter 2 defines “qualifying expenditure” and contains the condition that the person must be a trader.

1513. Section 437 requires qualifying expenditure on R&D in order for allowances to be given and defines “research and development”.

1514. Section 438 gives the meaning of “expenditure on research and development”. That meaning excludes, with minor exceptions, expenditure on dwellings.

Section 437: Research and development allowances

1515. This section is based on section 139(1)(a) of CAA 1990.

1516. Subsection (1) provides that qualifying expenditure on R&D is needed before allowances can be made.

1517. Subsection (2) gives the extended meaning of “research and development” in this Part to include oil and gas exploration and appraisal.

Section 438: Expenditure on research and development

1518. This section is based on sections 137(3) and 139(1)(c) of CAA 1990. It sets out what is included and excluded from being expenditure on R&D and also permits just and reasonable apportionments of expenditure.

1519. Subsection (4) is more explicit than section 137(3) of CAA 1990, in that it only permits certain expenditure on a dwelling to be treated as on R&D. See Note 53 in Annex 2.

1520. Subsection (5) requires any apportionment to be “just and reasonable”. This is a change, see Change 40 in Annex 1.

Chapter 2: Qualifying expenditure

Overview

1521. This Chapter defines “qualifying expenditure” and excludes expenditure on “land” from being qualifying expenditure.

1522. Section 439 defines “qualifying expenditure”.

1523. Section 440 prevents expenditure on land from being qualifying expenditure subject to exceptions for existing buildings or structures on the land.

Section 439: Qualifying expenditure

1524. This section is based on sections 137(1) and (4) and 139(1)(d) and (2) of CAA 1990.

1525. It sets out the conditions to be satisfied for a person to have qualifying expenditure. There are two threads depending on whether the expenditure is incurred while the person is trading or before that trade starts.

1526. Some conditions are common to the two threads. These are that:

• the person must be a trader;

• the expenditure must be capital expenditure incurred by the person on R&D; and

• the R&D must be directly undertaken by the person or on the person’s behalf.

1527. For expenditure incurred before the person starts trading, the trade has to be connected with the R&D.

1528. For expenditure incurred while trading, the trade must be related to the R&D.

1529. Subsection (3) introduces “the relevant trade” as a term that can be used to avoid the need for phrases such as “the trade in respect of which the expenditure has been treated as qualifying expenditure”.

1530. Subsection (4) requires any apportionment to be “just and reasonable”. This is a change, see Change 40 in Annex 1.

1531. Subsection (5) extends the R&D that can be treated as related to a trade that the person is carrying on.

Section 440: Excluded expenditure: land

1532. This section is based on section 137(2) of CAA 1990. It stops the cost of land (other than the amount attributable to buildings or structures on the land) from being qualifying expenditure.

1533. Section 137(2) of CAA 1990 takes a slightly different approach. It prevents allowances being given on such expenditure but it is not thought that there is any difference. For a more detailed discussion see Note 54 in Annex 2.

1534. Subsection (3) uses the term “just and reasonable apportionment”. This is a change, see Change 40 in Annex 1.

Chapter 3: Allowances and charges

Overview

1535. This Chapter deals with allowances and charges on qualifying expenditure. There is no pooling of qualifying expenditure. An allowance can be made in respect of qualifying expenditure only for one chargeable period. Disposal values may arise in relation to qualifying expenditure on the happening of certain events. Disposal values restrict allowances on the qualifying expenditure or result in balancing charges to recover excessive allowances. Demolition costs may reduce balancing charges or, in certain cases, give rise to allowances.

1536. Section 441 sets out when an allowance can be made, the chargeable period for which it is made and its amount.

1537. Section 442 sets out when a person is liable to a balancing charge and its amount.

1538. Section 443 deals with disposal values and the events on which they arise. Disposal values are relevant to the previous two sections. There are signposts to a special provision relating to oil licences and also to the Chapter dealing with additional VAT rebates.

1539. Section 444 deals with the chargeable period for which a disposal value is to be brought into account.

1540. Section 445 sets out relief available for the costs of demolishing an asset representing qualifying expenditure.

Section 441: Allowances

1541. This section is based on sections 137(1) and (5) and 138(2) of CAA 1990.

1542. This section uses the term “allowances” instead of “deduction in taxing a trade” which is found in CAA 1990. See Note 55 in Annex 2 for more detail.

1543. CAA 1990 essentially gives an allowance of 100% of qualifying expenditure and a charge (capped at the allowance given) of all of the disposal value relating to that qualifying expenditure. This section takes a different approach.

1544. Subsection (1) gives an allowance in the relevant chargeable period. The allowance equals the excess of qualifying expenditure over any disposal value taken into account for that relevant chargeable period (instead of an allowance equal to that qualifying expenditure and a charge on that disposal value). See Change 39 in Annex 1.

1545. Subsection (2) defines “relevant chargeable period”, a term used in subsection (1). There are minor differences between the formulation used in subsection (2)(b) and that used in section 137(5) of CAA 1990 which looks at whether the expenditure was incurred “before the setting up and commencement of the trade” rather than before the chargeable period in which the trade is set up and commenced. See Note 56 in Annex 2.

1546. Subsection (3) permits a claim of less than the full amount of an allowance to be made by the person. See Change 38 in Annex 1.

Section 442: Balancing charges

1547. This section is based on section 138(1), (2) and (2A) of CAA 1990.

1548. Subsections (1) to (3) provide a balancing charge if a disposal value arises in a chargeable period after the one in which an allowance is made in respect of the qualifying expenditure concerned. There is no longer a balancing charge in the same period as an allowance is made – see Change 39 in Annex 1. The balancing charge is limited to the allowance previously made in respect of that qualifying expenditure. Section 138(2) of CAA 1990 refers to a “trading receipt” but it seems clearer to follow the other Parts of this Act and refer to a balancing charge. It is not thought that this has any effect. See Note 55 of Annex 2.

1549. Subsection (4) defines the term “unclaimed allowance”. Most people will claim all of the allowances to which they are entitled because there is no possibility of getting any amount unclaimed in a later chargeable period. But having recognised the possibility that a reduced claim may be made it is necessary to ensure that balancing charges are not made if such a person has a disposal value but the allowance claimed is not more than the net cost of the R&D asset concerned. This is achieved by subsection (3)(a) which uses this term. See Change 49 in Annex 1.

1550. Subsection (5) signposts the effect that additional VAT rebates may have on the amount in subsection (4). That alerts users who may be affected but leaves this section simple for the majority who will not be affected by VAT rebates.

Section 443: Disposal values and disposal events

1551. This section is based on sections 138(1), (3A), (4), (5) and (6) and 138A(1) of CAA 1990. It says when a disposal value is brought into account and gives a Table from which the amount of the disposal value can be found.

1552. Subsection (1) gives the main cases in which a disposal value must be brought into account.

1553. Subsection (2) is a signpost to another case in which a disposal value must be brought into account.

1554. Subsection (3) gives cases excluded from subsection (1).

1555. Subsection (4) has a Table giving the disposal value if subsection (1) applies. There are minor changes referring to:

• “net proceeds” of sale; section 138(4)(a) of CAA 1990 refers to “proceeds”; and

• limiting other compensation to “capital sums” – a limitation which is not in section 138(5) of CAA 1990

1556. These bring the Table closer to the formulations used in other Parts of this Act. See Change 50 in Annex 1.

1557. Subsection (5) sets out exceptions from subsection (4).

1558. Subsection (6) provides a signpost to a provision concerning additional VAT rebates that could lead to a disposal value being brought into account without the existence of a disposal event.

1559. Subsection (7) defines “disposal event”.

Section 444: Disposal events: chargeable period for which disposal value is to be brought into account

1560. This section is based on section 138(2) of CAA 1990.

1561. Subsection (1) says that this section is about the chargeable period for which a disposal value under section 443 is brought into account. Section 138(2) of CAA 1990 gives a specific time at which, essentially, a balancing charge arises whereas this section provides a chargeable period for which a disposal value arises. The approach in this section is more consistent with other Parts of this Act that bring disposal values into account for a chargeable period and with R&D allowances being given for a chargeable period. See Note 57 in Annex 2.

1562. Subsections (2) and (3) deal with the normal case in which the disposal event occurs after the chargeable period for which an allowance is made. They also deal with the less usual case in which the disposal event occurs in the same chargeable period as an allowance is made for the qualifying expenditure. Subsection (3)(a) contains a change. See Change 51 in Annex 1.

1563. Subsection (4) deals with the unusual case in which a disposal event occurs before the chargeable period for which an allowance is due in respect of the qualifying expenditure concerned. CAA 1990 does not appear to explicitly address this situation. Section 138(3) of CAA 1990 looks as if it might be in point but it does not handle this case satisfactorily. Subsection (4) deals with the unusual case in a more coherent fashion. See Change 51 in Annex 1.

Section 445: Costs of demolition

1564. This section is based on sections 138(5) and 139(5) of CAA 1990. Section 138(5) is particularly difficult to follow. Its reference to “the person carrying on the trade” might suggest that demolition costs are ignored if they are incurred before the trade commences. This section proceeds on the basis that such costs ought not to be ignored. See Change 52 in Annex 1.

1565. Subsections (1) to (3) allow the net demolition costs of an asset representing qualifying expenditure to reduce the disposal value that arises on that demolition.

1566. Subsections (4) and (5) provide for an allowance if the net demolition costs are greater than the disposal value. But only if, prior to demolition, the asset has only ever been used for R&D related to the relevant trade.

1567. Subsection (6) stops the demolition costs being taken into account more than once.

Chapter 4: Additional VAT liabilities and rebates

Overview

1568. This Chapter deals with the effect of additional VAT liabilities and rebates in respect of an asset representing qualifying expenditure. They can result in additional qualifying expenditure or generate (or increase) a disposal value.

1569. Section 446 points to the definition of the terms used in this Chapter.

1570. Section 447 treats certain additional VAT liabilities as if they were capital expenditure on R&D.

1571. Section 448 treats certain additional VAT rebates as if they were disposal values and deals with their effect on the calculation of allowances and charges in later chargeable periods.

Section 446: Introduction

1572. This section gives a signpost to the places where the terms used in this Chapter are defined. Those definitions apply to several Parts.

Section 447: Additional VAT liability treated as additional expenditure etc.

1573. This section is based on sections 137(1A), 138(1) and 159A(3) of CAA 1990.

1574. Subsection (1) treats the additional VAT liability as if it was capital expenditure on the same R&D. That is a necessary, but not sufficient, condition for the additional VAT liability to be qualifying expenditure.

1575. Subsection (2) excludes from subsection (1) additional VAT liabilities incurred after a certain time.

1576. Subsection (3) gives the chargeable period for which an allowance resulting from an additional VAT liability is to be made. The wording of subsection (3)(b) is related to section 441(2)(b). See Note 56 in Annex 2.

Section 448: Additional VAT rebate generates disposal value

1577. This section is based on section 138(3A) of CAA 1990. It treats an additional VAT rebate, to which the section applies, as if it is a disposal value to be brought into account (usually) for the chargeable period in which the rebate accrues. The words “or, if the rebate is made on or after the date on which the trade is permanently discontinued, accruing immediately before the discontinuance” at the end of section 138(3A) are thought to be unnecessary and have not been rewritten. See Note 58 in Annex 2.

1578. Subsections (1) to (3) set out the additional VAT rebates to which the section applies. The reference in section 138(3A) of CAA 1990 to a person “carrying on a trade” could be thought to indicate that VAT rebates are ignored if they are made before the relevant trade starts. Section 444 now provides that relief can be obtained for the commercial loss where an asset is bought and sold at a loss before the relevant trade starts. It would be odd if VAT rebates made in relation to such an asset, and which are a factor in arriving at the commercial loss, were ignored. This section proceeds on the basis that such rebates are taken into account just as an additional VAT liability incurred before the relevant trade starts might be taken into account under section 137(1A) and 137(5) of CAA 1990. See Change 53 in Annex 1.

1579. Subsections (4) and (5) provide that the VAT rebate is treated as a disposal value. This differs from section 138(3A) of CAA 1990 that effectively provides that the whole of the VAT rebate is treated as a balancing charge. In most cases this will have no effect because the person has claimed a 100% allowance. But it could have an effect if the person claims less than the full allowance available on the qualifying expenditure. This change reduces the charge in such a case. See Change 49 in Annex 1.

Section 449: Effect on balancing charges of additional VAT rebates in earlier chargeable periods

1580. This section is based on section 138(1), (2) and (2A) of CAA 1990.

1581. The treatment of VAT rebates as disposal values under section 448 means that, in contrast to section 138(3A) of CAA 1990, the receipt of the VAT rebate may not lead to a balancing charge because there are unclaimed allowances under section 442(4).

1582. To the extent that an unclaimed allowance shields a disposal value in one chargeable period this section reduces, for later chargeable periods, that unclaimed allowance by the amount shielded so that relief is not obtained more than once. See Change 49 in Annex 1.

Chapter 5: Supplementary provisions

1583. This Chapter deals with giving effect to allowances and charges and the time when an asset that is sold ceases to be owned.

Section 450: Giving effect to allowances and charges

1584. This section is based on sections 137(1), 140(2) and (5), 144(2) and (3) and 161(2) and (5) of CAA 1990. It gives effect to allowances and charges as trading expenses or trading receipts in the chargeable period for which they are made.

Section 451: Sales: time of cessation of ownership

1585. This section is based on section 139(4) of CAA 1990. It defines references to the time of cessation of ownership in the case of a sale.

Part 7: Know-how allowances

Overview

1586. This Part provides for know-how allowances. The allowances are available to traders who incur qualifying expenditure on acquiring know-how for use in their trade. There is a defined class of know-how in relation to which qualifying expenditure can arise. Qualifying expenditure is pooled for the purpose of calculating entitlement to allowances and liability to charges.

1587. Chapter 1 requires a person to have incurred qualifying expenditure on acquiring know-how to get allowances. It also:

• defines “know-how” for the purposes of this Part; and

• treats know-how as property so that general provisions of this Act which refer to property can apply to know-how.

1588. Chapter 2 defines “qualifying expenditure” for a trader and sets out cases in which there is no qualifying expenditure. The same expenditure can only be qualifying expenditure in relation to one trade – so that relief is only given once.

1589. Chapter 3 deals with entitlement to allowances or liability to charges and the amounts involved. Qualifying expenditure is pooled to calculate allowances and charges. There is a separate pool for each trade for which there is qualifying expenditure. Disposal values can arise in relation to qualifying expenditure. Disposal values come out of the pool and thus effectively reduce allowances or result in balancing charges. There is no limit on disposal values in this Part. This Chapter also gives effect to allowances and charges. They are treated as trading expenses or receipts.

History

1590. Section 21 of FA 1968 introduced provisions giving traders capital allowances for capital expenditure on acquiring know-how. The allowances were given, broadly, on a straight line basis over six years. A balancing allowance was available if the trade permanently ceased before the end of the six-year period. There were also provisions dealing with receipts from the disposal of know-how. Section 21 was treated as if it was contained in Part I of CAA 1968. This legislation was consolidated as sections 386 and 387 of ICTA 1970 but still treated as if it was in Part I of CAA 1968.

1591. Section 65 of, and Schedule 18 to, FA 1985 altered the system of capital allowances for know-how so that expenditure is pooled. Allowances are no longer given on the separate items of expenditure but on the reducing balance in the pool. The earlier system of giving balancing allowances in relation to individual items of expenditure was also replaced by a system for balancing adjustments closer to, but not identical to, that for plant and machinery.

1592. The provisions in ICTA 1970 and Schedule 18 to FA 1985 were consolidated as sections 530, 531, 532 and 533 of ICTA. Sections 530, 531, 532 and 533 were treated as if they were in Part I of CAA 1968. Subsequently they were treated as if they were in CAA 1990.

Structure of this Part

1593. As nearly 15 years have passed since 1 April 1986 the previous system for giving capital allowances over six years does not need to be rewritten. Section 530(6) and (8) of ICTA is therefore not rewritten in this Act.

1594. This Part:

• brings the legislation dealing with capital allowances (broadly section 530 and parts of sections 531 to 533 of ICTA) into this Act in order to make it more accessible; and

• splits that material into separate Chapters having regard to both the structure of know-how allowances and the structure used for other allowances.

1595. Section 531 of ICTA deals with more than just capital allowances. Section 531(1) is relevant to trading income and section 531(4) is relevant for income taxed under Case VI of Schedule D. The parts of section 531 that are not about capital allowances remain in ICTA.

Chapter 1: Introduction

Overview

1596. This Chapter introduces know-how allowances. They are given to traders who incur qualifying expenditure. Chapter 2 defines “qualifying expenditure” and contains the condition that the person must be a trader. This Chapter defines “know-how” and treats it as property.

1597. Section 452 requires qualifying expenditure on acquiring know-how in order for allowances to be given and defines “know-how”.

1598. Section 453 treats know-how as property.

Section 452: Know-how allowances

1599. This section is based on sections 532(1) and 533(7) of ICTA and section 161(2) of CAA 1990. It explains that allowances are only available to persons who incur qualifying expenditure on acquiring know-how. The section defines “know-how”.

1600. Subsection (3)(a) omits the examples of geothermal energy in section 161(2) of CAA 1990. They are not needed. See Note 46 in Annex 2.

Section 453: Know-how as property

1601. This section is based on section 532(5)(a) of ICTA. It treats know-how as property for this Act. This allows general provisions of this Act to apply to know-how. There would otherwise have to be specific provisions saying that this or that section applies to know-how as it does to property with the necessary modifications. An example of these general provisions is the provision dealing with apportionment of consideration on sales of property.

Chapter 2: Qualifying expenditure

Overview

1602. This Chapter defines “qualifying expenditure” and excludes certain expenditure from being qualifying expenditure.

1603. Section 454 defines “qualifying expenditure”, stops a person taking it into account for more than one trade and deals with expenditure incurred before the trade starts.

1604. Section 455 stops certain expenditure being qualifying expenditure if:

• it is relieved in some other way;

• treated as on goodwill; or

• arises from a transaction between certain persons and there is common control.

Section 454: Qualifying expenditure

1605. This section is based on section 530(1) and (7) and section 531(3) of ICTA. It defines “qualifying expenditure”.

1606. Subsection (1) lists the expenditure on acquiring know-how that is qualifying expenditure. A person must carry on a trade in order to have qualifying expenditure but that expenditure may be incurred before the trade starts.

1607. Subsection (2) stops capital allowances being given more than once on the same qualifying expenditure. This provision does not appear explicitly in ICTA. See Note 59 in Annex 2.

1608. Subsection (3) ensures that qualifying expenditure qualifies for allowances when the relevant trade starts in the case of qualifying expenditure incurred before that trade starts.

1609. Subsection (4) defines a term used in subsection (3).

Section 455: Excluded expenditure

1610. This section is based on sections 530(1) and 531(2) and (7) of ICTA. It deals with those cases in which expenditure on know-how is not qualifying expenditure.

1611. Subsection (1) excludes expenditure that has been deducted in some other fashion – for example under section 531(5) of ICTA.

1612. Subsections (2) and (3) exclude expenditure if the buyer and seller are under common control.

1613. Subsection (4) excludes expenditure that section 531(2) of ICTA treats as expenditure on goodwill for all the purposes of corporation tax, income tax and capital gains tax.

Chapter 3: Allowances and charges

Overview

1614. This Chapter deals with allowances and charges on qualifying expenditure. Qualifying expenditure is pooled. There is a separate pool for each trade. Disposal values can arise in relation to qualifying expenditure. Disposal values effectively reduce allowances or lead to balancing charges.

1615. Section 456 requires pooling of qualifying expenditure to be carried out separately for each trade concerned.

1616. Section 457 sets out whether there is an allowance or a charge for a chargeable period.

1617. Section 458 deals with the amount of the allowance or charge.

1618. Sections 459 to 461 set out how to find “AQE” which is a term used in the earlier sections.

1619. Section 462 deals with when a disposal value is to be brought into account, and its amount, in respect of qualifying expenditure.

1620. Section 463 gives effect to allowances and charges as trading expenses or trading receipts.

Section 456: Pooling of expenditure

1621. This section is drafted to introduce pooling explicitly.

1622. Subsection (2) provides explicitly that there is a separate pool in respect of each trade for which there is some qualifying expenditure. It can be inferred from section 530(2)(b) of ICTA that there are separate pools for separate trades.

Section 457: Determination of entitlement or liability

1623. This section is based on section 530(2) and (3) of ICTA. It decides if a person is entitled to an allowance or liable to a charge.

1624. Section 459 defines “AQE” in the pool for a chargeable period. Section 462 decides if a disposal value is brought into account for a chargeable period (and how much).

Section 458: Amount of allowances and charges

1625. This section is based on section 530(2) and (3) of ICTA. Subsections (1) to (3) set out the calculation of a writing-down allowance for a chargeable period. The rate at which writing-down allowances are given is 25% per year. The amount of a writing-down allowance is adjusted if the chargeable period is more or less than a year and if the trade is carried on for only part of the chargeable period.

1626. There is a minor change.Subsection (4) allows a person to claim a writing-down allowance of less than the full entitlement for the chargeable period. See Change 38 in Annex 1.

1627. Subsections (5) and (6) set out the calculation of a balancing charge or balancing allowance for a chargeable period.

Section 459: Available qualifying expenditure

1628. This section is based on section 530(4) of ICTA. It defines “available qualifying expenditure” in a pool for a chargeable period. That is essentially any unrelieved qualifying expenditure brought forward from the previous chargeable period plus any qualifying expenditure added to the pool for the current chargeable period.

Section 460: Allocation of qualifying expenditure to pools

1629. This section is based on section 530(4)(a) of ICTA. It sets out when qualifying expenditure can be added to a pool.

1630. There is a minor change. This section allows qualifying expenditure to be added to a pool either in the chargeable period in which it is incurred or in a later chargeable period. This is in line with the approach taken in this Act to plant and machinery allowances in Part 2. It gives taxpayers flexibility – albeit it is only likely to be of practical interest in unusual circumstances. See Change 54 in Annex 1.

Section 461: Unrelieved qualifying expenditure

1631. This section is based on section 530(4)(b) of ICTA. It sets out the amount that is carried forward in a pool from one chargeable period to the next chargeable period.

1632. Subsection (3) stops any amount being carried forward after the trade is permanently discontinued. This makes explicit the fact that the pool ceases to exist on the ending of the trade in relation to which that pool exists. There would only be unrelieved qualifying expenditure if the taxpayer were to choose, for some reason, not to claim all of a balancing allowance that is available on the trade cessation. See Note 60 in Annex 2.

Section 462: Disposal values

1633. This section is based on sections 530(5) and 531(2) of ICTA. It determines disposal values and the periods for which they are to be brought into account.

1634. Subsection (2) gives the amount brought into account. It limits the amounts to capital sums, which makes explicit the fact that receipts that are income do not come out of the pool in addition to being taxed as income. ICTA does not limit the disposal value to capital sums. See Change 55 in Annex 1.

Section 463: Giving effect to allowances and charges

1635. This section is based on section 532(1) of ICTA and sections 140(2), 144(2) and 161(2) and (5) of CAA 1990. It gives effect to allowances and charges as trading expenses or receipts. This makes explicit the way in which effect is given to allowances and charges. See Note 61 in Annex 2.

Part 8: Patent allowances

Overview

1636. This Part provides for patent allowances. The allowances are available to persons who incur qualifying expenditure on patent rights for the purposes of a trade or who are taxable on any income receivable from those patent rights. Qualifying expenditure is pooled for the purpose of calculating entitlement to allowances and liability to charges.

1637. Chapter 1 introduces the Part. It requires a person to have incurred qualifying expenditure on purchasing patent rights to get allowances. It defines “patent rights” and provides for the application of the Part to:

• rights to acquire future patent rights; and

• the grant and acquisition of licences.

1638. Chapter 2 defines “qualifying expenditure” for the purposes of patent allowances. This may be qualifying trade expenditure or qualifying non-trade expenditure.

1639. Chapter 3 deals with determining entitlement to allowances or liability to charges and calculating the amounts involved. Qualifying expenditure is pooled. There is a separate pool for each trade for which there is qualifying trade expenditure and one pool for qualifying non-trade expenditure. Disposal receipts can arise in relation to qualifying expenditure. Disposal receipts come out of the pool and effectively reduce entitlement to allowances or result in balancing charges. The disposal receipt (or total disposal receipts if there are part disposals of the patent rights) in relation to an item of qualifying expenditure is limited to that qualifying expenditure.

1640. Chapter 4 contains the rules about how allowances and charges are given effect for the chargeable period:

• allowances and charges for qualifying trade expenditure are treated as trading expenses or receipts of the trade; and

• allowances for qualifying non-trade expenditure are deducted from patent income and there are provisions for carry forward of excess allowances. Charges for qualifying non-trade expenditure are treated as Case VI income for income tax and as patent income for corporation tax.

1641. Chapter 5 contains supplementary provisions. These include a rule limiting qualifying expenditure in cases of purchases between connected parties or for avoidance.

1642. Provisions for expenditure incurred before 1 April 1986 are in paragraphs 92 to 102 of Schedule 3.

History

1643. Income Tax Act 1945 introduced capital allowances for patent rights. It also introduced provisions dealing with the “revenue treatment” of capital profits from the sale of patent rights.

1644. Allowances were originally given for each separate item of capital expenditure on the purchase of patent rights. Those allowances were given on a straight line basis over, broadly, the life of the patent rights that had been bought. A balancing allowance was available on the disposal of the whole of the patent rights if the sale proceeds were less than the unrelieved cost of the patent rights at the time of the sale. Balancing charges were made if patent rights were sold for more than the unrelieved cost of the patent rights at the time of the sale.

1645. FA 1986 changed the way allowances are given. Capital expenditure on the purchase of patent rights incurred after 31 March 1986 is pooled. Allowances are given on the balance in the pool. There are also balancing allowances and charges similar to, but not identical with, those for plant and machinery.

1646. Both sets of provisions – for expenditure before and after the changes in 1986 – were consolidated in Chapter I of Part XIII of ICTA together with provisions about the “revenue treatment” of capital profits. These are sections 520 to 529 and 532 and 533 of ICTA.

Structure of this Part

1647. This Part:

• brings the legislation dealing with capital allowances (broadly all or parts of sections 520 to 523, 528, 532 and 533 of ICTA) into this Act in order to make it more accessible; and

• splits that material into separate Chapters having regard to both the structure of patent allowances and the structure used for other allowances.

Chapter 1: Introduction

Overview

1648. This Chapter introduces patent allowances. They are given to persons incurring qualifying expenditure on the purchase of patent rights. The Chapter defines “patent rights”. It contains extensions to deal with licences and cases if a patent has not yet been granted for an invention. “Qualifying expenditure” is defined in Chapter 2.

1649. Section 464 requires qualifying expenditure on purchasing patent rights in order for allowances to be given and defines “patent rights”.

1650. Section 465 extends this Part to deal with certain cases concerning rights in respect of an invention if a patent has not yet been granted.

1651. Section 466 extends this Part to deal with grants of licences in respect of patents.

Section 464: Patent allowances

1652. This section is based on section 533(1) of ICTA. It explains that allowances under this Part are only available to persons who incur qualifying expenditure on purchasing patent rights and defines “patent rights”.

Section 465: Future patent rights

1653. This section is based on section 533(5) and (6) of ICTA. It treats expenditure by a person on the right to acquire future patent rights as if it was on the purchase of patent rights – even if a patent has not yet been granted in respect of the invention. Relief would not be available to the payer without this provision.

1654. Subsection (2) treats the expenditure on the right to acquire future patent rights as if it were expenditure on the patent rights if that person subsequently acquires those rights.

1655. Subsection (4) gives corresponding treatment to the recipient of the payment. It treats the recipient as receiving the sum for a sale of patent rights even if a patent has not yet been granted for the invention.

Section 466: Grant of licences

1656. This section is based on section 533(2) and (3) of ICTA. It enables:

• section 468 or 469 to apply to licence acquisitions. They would not otherwise as they require a purchase of patent rights; and

• section 476(2) to apply to the grant of a licence. Section 476(2) requires a sale of patent rights.

Chapter 2: Qualifying expenditure

Overview

1657. This Chapter defines “qualifying expenditure”. There are two types of qualifying expenditure. The way in which allowances are given in respect of the two types is different.

1658. Section 467 sets out the two types of qualifying expenditure.

1659. Section 468 deals with qualifying trade expenditure.

1660. Section 469 deals with non-trade qualifying expenditure.

Section 467: Qualifying expenditure

1661. This section introduces the two types of qualifying expenditure. The main difference between them is in the way allowances and charges are given effect in Chapter 4.

Section 468: Qualifying trade expenditure

1662. This section is based on sections 520(1), (2)(a) and (3), 528(1) and 532(1) of ICTA and section 161(3) of CAA 1990. It defines “qualifying trade expenditure”.

1663. Subsection (1) incorporates the effect of section 161(3) of CAA 1990. See Note 74 in Annex 2.

1664. Subsection (2) prevents capital allowances being given more than once on the same qualifying expenditure. This is to make the point explicit. See Note 59 in Annex 2.

1665. Subsection (3) treats qualifying expenditure incurred before the trade starts as if it was incurred when the trade starts.

1666. Subsection (4) prevents subsection (3) applying if a person sells all of the patent rights before the trade starts.

Section 469: Qualifying non-trade expenditure

1667. This section is based on section 520(2)(b) of ICTA. It defines “qualifying non-trade expenditure”.

Chapter 3: Allowances and charges

Overview

1668. This Chapter deals with allowances and charges on qualifying expenditure. Qualifying expenditure is pooled. There is a separate pool for each trade for which a person has qualifying trade expenditure and a single pool for a person’s qualifying non-trade expenditure. Disposal receipts can arise in relation to qualifying expenditure. Disposal receipts effectively reduce allowances or lead to balancing charges.

1669. Section 470 requires pooling and sets out the separate pools.

1670. Section 471 sets out whether there is an allowance or a charge for a chargeable period.

1671. Section 472 deals with the amount of the allowance or charge.

1672. Sections 473 to 475 set out how to find “AQE” which is a term used in the earlier sections.

1673. Section 476 and 477 deal with when a disposal receipt is to be brought into account in respect of qualifying expenditure and its amount.

Section 470: Pooling of expenditure

1674. This section is drafted to introduce pooling explicitly.

1675. Subsection (2) provides that there is a separate pool for each trade for which a person has qualifying trade expenditure and a single pool for any qualifying non-trade expenditure of that person. As with plant and machinery and know-how, this Act refers explicitly to these separate pools rather than, as in CAA 1990, leaving them to be deduced.

Section 471: Determination of entitlement or liability

1676. This section is based on section 520(4) to (6) of ICTA. It determines if a person is entitled to an allowance of liable to a charge. It applies to each pool separately for each chargeable period.

1677. Section 473 defines “AQE” in the pool for a chargeable period. Section 476 defines the “disposal receipts” which contribute to the calculation of TDR to come out of the pool for a chargeable period.

1678. There is a minor change. Subsections (4) to (6) determine if an entitlement to an allowance is to a writing-down allowance or a balancing allowance. In the case of qualifying non-trade expenditure, subsection (6) provides for a balancing allowance when all of the patent rights, on which such expenditure was incurred, have been wholly disposed of or come to an end. Section 520(4)(c) and (5) of ICTA might be read as denying a balancing allowance if the last of the relevant patent rights does not come to an end but is wholly disposed of. See Change 56 in Annex 1.

Section 472: Amount of allowances and charges

1679. This section is based on section 520(4) and (6) of ICTA. It determines the amount of a writing-down allowance.

1680. Subsections (1) to (3) set out the calculation of a writing-down allowance for a chargeable period. The rate at which writing-down allowances are given is 25% per year on a reducing-balance basis. The amount of a writing-down allowance is adjusted if the length of the chargeable period is more or less than a year and if the trade was carried on for only part of the chargeable period.

1681. There is a minor change. Subsection (4) allows a person to claim a writing-down allowance of less than the full entitlement for the chargeable period. There is nothing for this in CAA 1990. See Change 38 in Annex 1.

1682. Subsections (5) and (6) set out the calculation of a balancing charge or allowance for a chargeable period.

Section 473: Available qualifying expenditure

1683. This section is based on section 521(1) of ICTA. It defines “available qualifying expenditure” in a pool for a chargeable period.

Section 474: Allocation of qualifying expenditure to pools

1684. This section is based on sections 520(2), 521(1)(a) and 528(1) of ICTA. It allows qualifying expenditure to be put into the pool either in the chargeable period in which it is incurred or in a later chargeable period.

1685. There is a minor change. This section allows qualifying expenditure to be allocated to a pool for any chargeable period subject to the specific provisions in subsections (2) to (4). So it allows qualifying expenditure to be added to a pool for a chargeable period after that in which it is incurred. It is unlikely that taxpayers will in practice wish to do so. But this flexibility is consistent with the approach taken for plant and machinery allowances in Part 2. See Change 54 in Annex 1.

Section 475: Unrelieved qualifying expenditure

1686. This section is based on section 521(1)(b) of ICTA. It sets out the amount that is carried forward in a pool from one chargeable period to the next chargeable period.

1687. Subsection (3) stops any amount being carried forward after the trade is permanently discontinued. There would only be unrelieved qualifying expenditure if the taxpayer were to choose for some reason not to claim all of a balancing allowance that is available in those circumstances. See Note 60 in Annex 2.

Section 476: Disposal value of patent rights

1688. This section is based on section 521(2) of ICTA. It defines “disposal receipt”. It is the disposal value under this section or (in rare circumstances) under Schedule 12 to FA 1997 or any other enactment.

1689. Subsection (2) sets out when disposal values are to be brought into account.

1690. Subsection (3) sets out the amount of a disposal value under this section. But this is subject to section 477. That ensures the disposal values in relation to particular patent rights do not exceed the qualifying expenditure incurred on the purchase of those patent rights.

1691. There is a minor change. This section limits the amounts to capital sums. This makes clear that proceeds that are income are not both taxed as income and brought into account as disposal receipts. ICTA does not limit the disposal value to capital sums. See Change 55 in Annex 1.

Section 477: Limit on amount of disposal value

1692. This section is based on section 521(3) and (4) of ICTA. It limits a person’s disposal value, or disposal values, from a sale of patent rights to the qualifying expenditure incurred by that person on purchasing the rights.

1693. Subsections (2) and (3) increase the limit of a person’s disposal value, or disposal values, if the patent rights were acquired from a connected person.

Chapter 4: Giving effect to allowances and charges

Overview

1694. This Chapter deals with the way in which allowances and charges are made. They are treated as trading expenses and receipts if qualifying trade expenditure is involved. They are treated as deductions from patent income or, broadly, as patent income if qualifying non-trade expenditure is involved.

1695. Section 478 deals with allowances and charges for a pool of qualifying trade expenditure.

1696. Section 479 deals, for income tax, with allowances and charges for a pool of qualifying non-trade expenditure.

1697. Section 480 deals, for corporation tax, with allowances and charges for a pool of qualifying non-trade expenditure.

Section 478: Persons having qualifying trade expenditure

1698. This section is based on sections 528(1) and 532(1) of ICTA and sections 140(2), 144(2), and 161(2) and (5) of CAA 1990. It gives effect to allowances and charges in respect of qualifying trade expenditure as trading expenses or receipts. This treatment is what one would expect but the path to it in CAA 1990 is not straightforward. See Note 61 in Annex 2.

Section 479: Persons having qualifying non-trade expenditure: income tax

1699. This section is based on sections 528(2) and (4) of ICTA. It gives effect to allowances and charges for non-trade qualifying expenditure for income tax.

1700. It does not reproduce the words at the end of section 528(2)(b) of ICTA about tax being discharged or repaid accordingly. Nor does it reproduce the closing words of section 528(2) which require a claim for relief to be made under that subsection. See Note 63 in Annex 2.

1701. The second half of section 532(1) of ICTA is not rewritten. See Note 62 in Annex 2.

1702. Subsection (4) treats charges in respect of qualifying non-trade expenditure as income taxable under Case VI of Schedule D. Such charges are treated as income from patents by section 483, which allows the charges to be reduced by allowances in respect of qualifying non-trade expenditure.

Section 480: Persons having qualifying non-trade expenditure: corporation tax

1703. This section is based on sections 528(3) and (4) of ICTA. It gives effect to allowances and charges for non-trade qualifying expenditure for corporation tax.

1704. Subsection (3) provides that excess allowances can be carried forward and deducted from patent income of later accounting periods so long as the company remains within the charge to tax. The second half of section 532(1) of ICTA does not allow a more generous offset of such excess allowances. See Note 62 in Annex 2.

1705. Subsection (4) treats charges in respect of qualifying non-trade expenditure as income from patents. This treatment allows charges to be reduced by allowances in respect of qualifying non-trade expenditure.

Chapter 5: Supplementary provisions

Overview

1706. This Chapter deals with limits on qualifying expenditure in certain cases and minor provisions that do not naturally fit into earlier Chapters.

1707. Section 481 deals with limits on qualifying expenditure if:

• the purchase of patent rights is from a connected person; or

• a main benefit is to get patent allowances.

1708. Section 482 deals with certain payments by a government if the payments may not be under a licence of patent rights.

1709. Section 483 defines “patent income”.

Section 481: Anti-avoidance: limit on qualifying expenditure

1710. This section is based on section 521(5) and (6) of ICTA. It puts limits on the amount of qualifying expenditure if a person purchases patent rights from a connected person or as part of a transaction that has as a main benefit the obtaining of allowances.

Section 482: Sums paid for Crown use etc. treated as paid under licence

1711. This section is based on section 533(4) of ICTA. It treats certain sums paid by a government in relation to a patented invention as if the payments were made under a licence. This allows the sections in this Part referring to sales of patent rights to operate on such payments.

Section 483: Meaning of “income from patents”

1712. This section is based on section 533(1). It defines “income from patents”. That term is used in sections 479 and 480 to describe the amount against which allowances in respect of qualifying non-trade expenditure can be offset.

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.

Part 10: Assured tenancy allowances

Overview

1754. This Part provides for assured tenancy allowances. These can be writing-down allowances or balancing allowances. Balancing charges can recover “excessive allowances”.

1755. Allowances are only available in relation to expenditure incurred after 9 March 1982 and before 1 April 1992, on dwelling-houses let on assured tenancies.

1756. Chapter 1 provides that both qualifying expenditure on a building and the existence of a qualifying dwelling-house are needed for allowances to be given. It sets out some conditions relating to when a building is a qualifying dwelling-house – further conditions are in Chapter 4. The Chapter also sets time limits on the qualifying expenditure that is eligible for allowances – further material on qualifying expenditure is in Chapter 3. The meaning of “approved body” is given. Expenditure attributable to land (rather than a building) cannot be construction expenditure. The treatment of expenditure on “capital repairs” is set out.

1757. Chapter 2 deals, in relation to construction expenditure, with the relevant interest in the building and the relevant interest in a dwelling-house comprised in the building. A person must have the relevant interest in a dwelling-house in order to claim allowances on qualifying expenditure.

1758. Chapter 3 deals, in relation to construction expenditure, with qualifying expenditure. Allowances can only be claimed if there is qualifying expenditure. Qualifying expenditure may not exist and it need not be the same as construction expenditure.

1759. Chapter 4 deals with some requirements for a dwelling-house to be a qualifying dwelling-house. Allowances are only given in relation to a qualifying dwelling-house. If a dwelling-house ceases to be a qualifying dwelling-house, otherwise than on the sale of the relevant interest, there is a deemed market-value sale of the relevant interest – which may result in appropriate balancing adjustments being made.

1760. Chapter 5 sets out the conditions to be satisfied for a person to get writing-down allowances. Only persons who are or have been approved bodies can have writing-down allowances for a chargeable period and then only if:

• that person has the relevant interest in a dwelling-house (Chapter 2);

• there is qualifying expenditure in relation to that dwelling-house (Chapters 1 and 3); and

• at the end of the chargeable period the dwelling-house is a qualifying dwelling-house (Chapters 1 and 4).

The Chapter also gives the calculation of writing-down allowances and the meaning of “qualifying expenditure attributable to a dwelling-house”.

1761. Chapter 6 deals with balancing adjustments that can occur up to 25 years after the dwelling-house is first used. These balancing adjustments are either balancing allowances or balancing charges and are made to or on the person entitled to the relevant interest immediately before a balancing event. The Chapter deals with balancing events and the calculation of balancing adjustments.

1762. Chapter 7 sets out the calculation of the residue of qualifying expenditure appropriate to a dwelling-house. The concept of the residue is important as an allowance is limited to the residue of qualifying expenditure immediately before the allowance is made. The residue is also used in other Chapters in calculating the rate of writing-down allowances following transfers of the relevant interest and in the calculation of balancing adjustments.

1763. Chapter 8 explains how allowances and charges under this Part are made and contains supplementary material.

History

1764. A scheme of capital allowances was introduced in FA 1982 for expenditure on the construction of properties for letting on assured tenancies under the Housing Act 1980. Under that Act bodies approved by the Secretary of State could let property at freely-negotiated rents outside the provisions of the Rent Acts provided that certain conditions were met. The intention of the new allowance was to encourage the construction of new properties for letting to individuals by private bodies and to stimulate the construction industry. The legislation was based broadly on that for industrial buildings allowances with initial allowances at 75% and writing-down allowances at 4%. Initial allowances were withdrawn by FA 1984 over a period ending on 31 March 1986.

1765. Assured tenancies were introduced in the Housing Act 1980 for approved bodies. There was nothing to prevent an unincorporated body of persons, such as a partnership, from applying and approval was not refused merely on the grounds of non-corporate status. But the capital allowances were intended to be available only to companies so the definition of “qualifying dwelling-house” was amended with effect from 5 May 1983 to exclude landlords other than companies.

1766. The allowances as introduced were limited to qualifying expenditure incurred after 9 March 1982 and before 1 April 1987. FA 1987 extended this to expenditure incurred before 1 April 1992.

1767. The Housing Act 1988 introduced a new scheme of assured tenancies under which landlords no longer needed approval. This meant that changes were needed as approval of landlords was a feature of the system of assured tenancy allowances. FA 1988 therefore contained provisions to:

• prevent balancing charges arising purely as a result of changes made by the Housing Act 1988; and

• stop most expenditure after 14 March 1988 qualifying for relief.

Structure of this Part

1768. The legislation is not spent as writing-down allowances may continue for 25 years or more after expenditure was incurred. But there can be no new qualifying expenditure or new bodies that can claim writing-down allowances. Most (and possibly all) practical issues have been resolved by now with writing-down allowances being claimed year by year.

1769. As these allowances were based largely on industrial buildings allowances, the same structure has, so far as possible, been adopted as in Part 3.

Chapter 1: Introduction

Section 490: Assured tenancy allowances

1770. This section is based on sections 84(1), 86(1), (2) and (4) and 97(1) of CAA 1990.

1771. It sets out the requirements for qualifying expenditure and a qualifying dwelling-house before allowances are available.

1772. The section gives part of the meaning of “qualifying dwelling-house” and a signpost to other provisions that deal with the concept of a qualifying dwelling-house.

1773. This section refers to a number of terms that are not defined in the Taxes Acts. Definitions, which are not exhaustive in all cases, are set out below.

Section 56(1) of the Housing Act 1980 (repealed with savings by the Housing Act 1988)

A tenancy under which a dwelling-house is let as a separate dwelling is an assured tenancy and not a housing association tenancy (within the meaning of section 86 of the 1977 Act) or a protected tenancy if–

(a)

the conditions described in section 56A or 56B are satisfied,

(b)

the interest of the landlord has, since the creation of the tenancy, belonged to an approved body, and

(c)

the tenancy would, when created, have been a protected tenancy or, as the case may be, a housing association tenancy but for this section.”

1774. Section 56A of the Housing Act 1980 dealt with buildings erected after 7 August 1980. Section 56B of the Housing Act 1980 dealt with buildings to which works had been carried out and other conditions satisfied.

Section 1(1) of the Housing Act 1988

A tenancy under which a dwelling-house is let as a separate dwelling is for the purposes of this Act an assured tenancy if and so long as–

(a)

the tenant or, as the case may be, each of the joint tenants is an individual; and

(b)

the tenant or, as the case may be, at least one of the joint tenants occupies the dwelling-house as his only or principal home; and

(c)

the tenancy is not one which, by virtue of subsection (2) or subsection (6) below, cannot be an assured tenancy.”

Section 18(1) of the Rent Act 1977

Subject to sections 24(3) and 143 of this Act, a “regulated tenancy” is, for the purposes of this Act, a protected or statutory tenancy

Section 86(1) of the Rent Act 1977

In this Part of this Act “housing association tenancy” means a tenancy to which this Part of this Act applies

Section 56(4) of the Housing Act 1980 (repealed with savings by the Housing Act 1988)

In this Part of this Act “approved body” means a body, or one of a description of bodies, for the time being specified for the purposes of this Part of this Act in an order made by the Secretary of State.

Section 491: Allowances available in relation to old expenditure only

1775. This section is based on sections 84 and 96(3) of CAA 1990. It contains time limits regarding when qualifying expenditure is incurred if allowances are to be given under this Part. Expenditure must have been incurred by 31 March 1992 in order for allowances to be given in respect of it.

Section 492: Meaning of “approved body”

1776. This section is based on section 97(1) of CAA 1990. Section 56(4) of the Housing Act 1980 is set out above.

Section 493: Expenditure on the construction of a building

1777. This section is based on sections 93(1) and 97(2) of CAA 1990. It stops allowances being given for the cost of land and says how “capital repairs” are treated. There are similar provisions in Part 3.

Chapter 2: The relevant interest

Section 494: Introduction

1778. This section is a signpost that the Chapter deals, in relation to expenditure on constructing a building, first with the concept of the relevant interest in the building and then with the relevant interest in a dwelling-house comprised in the building. There may be more than one dwelling-house comprised in a building.

Section 495: General rule as to what is the relevant interest in the building

1779. This section is based on section 95(1) and (2) of CAA 1990.

1780. In relation to construction expenditure, the relevant interest is the interest in the building that the person incurring that expenditure holds when the expenditure is incurred.

1781. Subsection (2) signposts the fact that later provisions in this Chapter can modify the general rule

1782. Subsection (3) deals with the case in which the person incurring the construction expenditure holds more than one interest in the building.

Section 496: Interest acquired on completion of construction

1783. This section is based on section 97(3) of CAA 1990.

1784. It deals with the case in which the person incurring the construction expenditure becomes entitled to an interest in the building when construction is completed. Without this provision there might be no relevant interest because that person might have no interest in the building when the construction expenditure is incurred. The absence of a relevant interest could effectively deny relief for the cost of the building that might otherwise be available.

1785. There is added “or as a result of the” in paragraph (b). See Change 34 in Annex 1. But this change is likely to have no effect for this Part as qualifying expenditure and the relevant interest have almost certainly been established many years ago.

Section 497: Effect of creation of subordinate interest

1786. This section is based on part of section 95(3) of CAA 1990. It provides that the relevant interest is not changed by the creation of a subordinate interest.

Section 498: Merger of leasehold interest

1787. This section is based on part of section 95(3) of CAA 1990. If the relevant interest is a leasehold interest, which merges in a way set out in the section, the relevant interest becomes the interest into which the leasehold merges.

Section 499: Provisions applying on termination of lease

1788. This section is based on section 94 of CAA 1990.

1789. Subsection (1) does not reproduce section 94(1)’s reference to “capital expenditure” as the expenditure in relation to which there is a relevant interest. The equivalent in this Act would have been “qualifying expenditure”. But the different approach has no effect. If there is no qualifying expenditure there is nothing for this section, or Part, to act on.

1790. Subsections (2) and (3) treat a lease as continuing in certain circumstances. The rule prevents balancing adjustments being made in circumstances in which it would be inappropriate.

1791. Subsection (4) treats the relevant interest (the lease) as surrendered for consideration if the lessor makes certain payments to the lessee on the lease termination. Section 572(1)(b) will then treat the surrender of the lease as if it was a sale of the relevant interest. Section 514(a) then gives a balancing event on which any appropriate balancing adjustment can be made.

1792. Subsection (5) treats a new lease as the same lease as a terminated lease in the circumstances set out.

Section 500: The relevant interest in the dwelling-house

1793. This section is based on part of section 95(1) of CAA 1990.

Chapter 3: Qualifying expenditure

Section 501: Capital expenditure on construction

1794. This section is based on parts of sections 85(1) and (2) and 87(1) of CAA 1990. It sets out when the construction expenditure is qualifying expenditure.

Section 502: Purchase of unused dwelling-house used where developer not involved

1795. This section is based on parts of section 91(1) and (2) of CAA 1990. It gives the qualifying expenditure if the relevant interest in the building is sold before the dwelling-house is first used and no developer is involved.

1796. Section 91 of CAA 1990 is expressed to apply for the purposes of sections 85 to 90 of CAA 1990. But, as it is clear that section 91 is also meant to apply for the purpose of section 96, that limitation is omitted in this section. See Note 65 in Annex 2.

Section 503: Purchase of dwelling-house sold unused by developer

1797. This section is based on parts of section 91(1) and (3) of CAA 1990. It gives the qualifying expenditure if the relevant interest in the building is sold before the dwelling-house is first used and a developer is involved.

1798. As in section 502 the limitation in section 91 of CAA 1990 is omitted. See Note 65 in Annex 2.

Chapter 4: Qualifying dwelling-houses

Section 504: Requirements relating to the landlord

1799. This section is based on section 86(3) and (5) of CAA 1990. It sets out some of the conditions for a dwelling-house to be a qualifying dwelling-house. One of the conditions is that the landlord is a company (subject to a transitional exception).

Section 505: Qualifying dwelling-houses: exclusions

1800. This section is based on part of section 86(3) of CAA 1990. It gives circumstances in which a dwelling-house is not a qualifying dwelling-house.

Section 506: Dwelling-house ceasing to be qualifying dwelling-house

1801. This section is based on section 89 of CAA 1990. It allows a dwelling-house to continue to be treated as a qualifying dwelling-house during periods of temporary disuse. The section also ensures that a balancing adjustment can be made if a dwelling-house ceases to be a qualifying dwelling-house despite the fact that the relevant interest in the dwelling-house has not been sold.

Chapter 5: Writing-down allowances

Section 507: Entitlement to writing-down allowance

1802. This section is based on part of section 85(1) of CAA 1990. It sets out the conditions needed for a person to claim a writing-down allowance.

1803. Subsection (2) allows a claim for less than the full writing-down allowance. See Change 38 in Annex 1.

Section 508: Basic rule for calculating amount of allowance

1804. This section is based on part of section 85(2) of CAA 1990. It gives the rate at which writing-down allowances are available if there has been no change under the following section.

Section 509: Calculation of allowance after sale of relevant interest

1805. This section is based on part of section 85(3) of CAA 1990. It gives a formula to work out the new rate at which writing-down allowances are available following a sale of the relevant interest on which a balancing adjustment falls to be made.

1806. Subsection (2) refers to the 25-year period beginning with the day on which the “dwelling-house” was first used in the definition of “B”. But section 85(3) of CAA 1990 refers to the period beginning with the date on which the “building” was first used. Section 85(3) is not consistent with section 87(2) of CAA 1990 which limits the period during which balancing adjustments can be made by reference to first use of the dwelling-house. This section is rewritten on the basis that a mistake was made in section 85(3)’s reference to first use of the building. See Note 66 in Annex 2.

Section 510: Allowance limited to residue of qualifying expenditure attributable to dwelling-house

1807. This section is based on section 85(4) of CAA 1990. It stops allowances from exceeding the qualifying expenditure in respect of which they are given.

Section 511: Qualifying expenditure attributable to dwelling-house

1808. This section is based on section 96(1) and (2) of CAA 1990. This Chapter calculates allowances by reference to the qualifying expenditure attributable to the dwelling-house. This section sets out how to determine the qualifying expenditure attributable to a dwelling-house starting with the qualifying expenditure attributable to the building (found from Chapter 3). A limit is set on the qualifying expenditure attributable to a dwelling-house.

Section 512: Residue of qualifying expenditure attributable to dwelling-house

1809. This section is partly based on section 90(1) of CAA 1990. It gives a signpost to where details on the residue, which is referred to in this Chapter, can be found.

Chapter 6: Balancing adjustments

Section 513: When balancing adjustments are made

1810. This section is based on section 87(1) and (2) of CAA 1990. It sets out when balancing adjustments are made and who they are made to or on.

Section 514: Balancing events

1811. This section is based on parts of sections 87(1) and 150(4) of CAA 1990. It lists events which can trigger a balancing adjustment.

Section 515: Proceeds from balancing events

1812. This section is based on part of section 156 of CAA 1990. It sets out in tabular form the proceeds to be used in calculating the balancing adjustment.

Section 516: Dwelling-house a qualifying dwelling-house throughout

1813. This section is based on section 87(3) and (4) and part of section 88(1) of CAA 1990.

1814. It sets out the calculation of a balancing adjustment if the dwelling-house was always a qualifying dwelling-house while the person held the relevant interest. Essentially the balancing adjustment is found by a straight comparison of the proceeds against the residue.

Section 517: Dwelling-house not a qualifying dwelling-house throughout

1815. This section is based on section 88 of CAA 1990. It sets out the calculation of a balancing adjustment if the dwelling-house was not a qualifying dwelling-house for some of the time that the person held the relevant interest.

1816. The calculation starts by comparing the proceeds with the person’s “starting expenditure”. The “starting expenditure” is defined in section 521.

1817. If the proceeds exceed or equal the starting expenditure, all allowances given to the person are recaptured by a balancing charge.

1818. If the proceeds are less than the starting expenditure then the person has broadly suffered a “loss” on the dwelling-house. This “loss” is pro-rated to the part of the person’s period of ownership during which the dwelling-house was a qualifying dwelling-house. There is a formula for this in section 522 and the result is called the adjusted net cost.

1819. Then there is a balancing allowance or balancing charge, as the case may be, based on whether the adjusted net cost is more (allowance) or less (charge) than the allowances given to the person. The adjustment is the difference between the proceeds and the adjusted net cost.

Section 518: Overall limit on balancing charge

1820. This section is based on section 87(6) of CAA 1990. It limits balancing charges on a person to allowances given to that person.

Section 519: Recovery of old initial allowances made on incorrect assumptions

1821. This section is based on section 87(7) and (8) of CAA 1990. It ensures that initial allowances made under earlier provisions can be withdrawn if the dwelling-house has not yet been used and turns out not to be a qualifying dwelling-house when it is first used. This is a transitional provision which, as time goes by, is increasingly unlikely to be needed.

Section 520: The relevant period of ownership

1822. This section is based on section 88(5) of CAA 1990 (“the relevant period”).

Section 521: Starting expenditure

1823. This section is based on section 88(5) of CAA 1990 (“the capital expenditure”). There seems to be an obvious mistake in section 88(5) as it must have been intended to define “the capital expenditure appropriate to the dwelling-house” which is the term used in section 88(2). This section is rewritten to correct that mistake.

Section 522: Adjusted net cost

1824. This section is based on section 88(5) of CAA 1990.

Chapter 7: Writing off qualifying expenditure attributable to dwelling-house

Section 523: Introduction

1825. This section is based on part of section 90(1) of CAA 1990. It is a signpost to the fact that the residue of qualifying expenditure appropriate to a dwelling-house varies with the time at which it is to be found. The residue is found by starting with the qualifying expenditure appropriate to the dwelling-house and making any adjustments required by this Chapter up to the time concerned.

Section 524: Writing off initial allowances

1826. This section is based on section 90(2) of CAA 1990. It writes off any initial allowances that were made in respect of the qualifying expenditure attributable to the dwelling-house. The write off occurs when the dwelling-house is first used.

Section 525: Writing off writing-down allowances

1827. This section is based on section 90(3) and (4) of CAA 1990. It writes off any writing-down allowances that were made in respect of the qualifying expenditure attributable to the dwelling-house. The write off occurs at the end of the chargeable period for which the allowance is given.

1828. Subsection (2) clarifies the order in which adjustments to the residue must be made in the unusual case in which a balancing event also occurs at the end of the chargeable period.

Section 526: Writing off expenditure for periods when building not used as qualifying dwelling-house

1829. This section is based on section 90(5) of CAA 1990. It writes off part of the qualifying expenditure attributable to the dwelling-house for any period, after it is first used, during which the dwelling-house is not a qualifying dwelling-house. The write off is at the rate at which writing-down allowances could have been given during that period if the dwelling-house had been a qualifying dwelling-house.

1830. The rate at which writing-down allowances could have been given might vary during the period when the dwelling-house is not a qualifying dwelling-house. If so, the write off is found by splitting the period into periods during which the rate is the same and adding together the write-offs appropriate to each of those periods.

Section 527: Writing off or increase of expenditure where balancing adjustment made

1831. This section is based on section 90(6) to (8) of CAA 1990. It increases the residue of qualifying expenditure attributable to the dwelling-house by any balancing charge and reduces it by any balancing allowance made when the relevant interest is sold. The adjustment is made at the time when the relevant interest is sold.

1832. Subsection (4) makes sure that this section cannot result in the purchaser of the relevant interest “inheriting” a residue of qualifying expenditure greater than the price the purchaser effectively paid for the dwelling-house.

Section 528: Treatment of demolition costs

1833. This section is based on section 90(9) of CAA 1990. It allows the net cost of demolition of the dwelling-house to be added to the residue immediately before the demolition occurs if a balancing adjustment may occur on the demolition. This increase in the residue permits appropriate relief for the demolition costs in working out the balancing adjustment under Chapter 6.

Chapter 8: Supplementary provisions

Section 529: Giving effect to allowances and charges

1834. This section is based on section 92 of CAA 1990 and parts of sections 140(2), 144(2) and 161(5) of CAA 1990.

1835. It sets out how allowances are given and charges are made. Section 92(1) of CAA 1990 is not rewritten. See Note 67 in Annex 2.

Section 530: Apportionment of sums partly referable to non-qualifying assets

1836. This section is based on section 97(4) of CAA 1990.

1837. The price paid for the relevant interest in the building may be attributable to things other than construction expenditure in relation to which relief may be given under this Part. For instance, an element of the price will usually be attributable to land. This section allows appropriate apportionments to be made of the price paid.

1838. Apportionment is also allowed for insurance receipts (and so on) – which are not sale proceeds. This prevents proceeds coming into the calculation of balancing adjustments to the extent that the proceeds are attributable to expenditure for which no relief can be given.

1839. Subsection (1) omits the reference to “or structure” contained in section 97(4) of CAA 1990. That was a mistake because those words are not relevant to Part IV of CAA 1990 although the equivalent words in section 21(3) of CAA 1990 are relevant to Part I of CAA 1990.

1840. Subsection (1) uses the term “just and reasonable apportionment”. Section 97(4) on which it is based uses “just apportionment”. This is a change. See Change 40 in Annex 1.

Section 531: Meaning of “dwelling-house”, “lease” etc.

1841. This section is based on section 97(1) (“dwelling-house”) of CAA 1990 and sections 161(2) and 162 of CAA 1990.

Part 11: Contributions

Overview

1842. This Part deals with contributions one person (the contributor “C”) makes to expenditure by another person (the recipient “R”).

1843. Chapter 1 generally stops the recipient (R) getting capital allowances on expenditure met by the contributor (C). But there are exceptions to this general rule.

1844. Chapter 2 enables the contributor (C) to get capital allowances under Parts 2 to 5 for a contribution in some cases.

Background

1845. ITA 1945 introduced provisions to deny allowances if expenditure was met by a grant or other capital contribution. But exceptions were made to this for:

• insurance or other compensation; and

• contributions (other than government grants and the like) from someone who could not get capital allowances on them under the provisions for contributors.

1846. The legislation for contributors gave the contributor (C) entitlement to:

• plant and machinery allowances;

• industrial buildings allowances;

• agricultural buildings allowances; or

• mineral extraction allowances;

for capital contributions for the purposes of the contributor’s trade, or a trade carried on by the contributor’s tenant, if the contribution met certain conditions.  The main conditions were that:

• the recipient (R) would have been entitled to allowances but for the rule described in paragraph 1845; and

• the contributor (C) would have been entitled to allowances if C had incurred the expenditure on a similar asset.

1847. Similar legislation was included in section 17 of FA 1956 which introduced allowances for dredging.

1848. This broad approach remains in sections 153 to 155 of CAA 1990 and (for dredging) section 134(8) of CAA 1990. But sections 153 to 155 incorporate various changes since 1945. The main changes were:

• FA 1971 revised the legislation enabling the contributor (C) to get plant and machinery allowances to take account of the introduction of pooling; and

• FA 1989 (in preparation for consolidation in CAA 1990):

  • extended the provisions to professions and vocations as for trades;

  • denied the recipient (R) allowances if the contributor (C) could get tax relief for the contribution as a trading expense; and

  • required contributions on which the contributor (C) claimed plant and machinery allowances to be allocated to a separate pool.

Chapter 1: Exclusion of expenditure met by contributions

Overview

1849. This Chapter gives the rules for contributions for a recipient (R).

1850. Section 532 is the general rule. The recipient (R) is not treated as incurring expenditure if it is met by a contribution. This section does not apply for dredging but section 533 gives a similar rule for that.

1851. Sections 534 to 536 are exceptions to the general rule in section 532 for:

• Northern Ireland regional development grants;

• insurance or other compensation; and

• some contributions by persons (other than public bodies) who cannot get tax relief for them.

Section 532: The general rule excluding contributions

1852. This section is based on parts of sections 153(1) and (4) and 134(8) of CAA 1990 together with part of section 532(1) of ICTA. It gives the general rule excluding contributions from expenditure for the purposes of all Parts other than Part 9. It also defines “public body” for the purposes of Chapter 1.

1853. Section 532(1) of ICTA treats sections 520 to 531 and 533 as if they were contained in CAA 1990.

Section 533: Exclusion of contributions to dredging

1854. This section is based on section 134(8) of CAA 1990. It gives the rule excluding contributions to expenditure on dredging.

Section 534: Northern Ireland regional development grants

1855. This is the first of three sections which make exceptions to the general rule in section 532. It is based on parts of section 153(1) of CAA 1990 and section 137 of FA 1982. It leaves expenditure met by Northern Ireland regional development grants to qualify for capital allowances (if, of course, the necessary conditions are met).

1856. Subsection (1) uses the term “Northern Ireland legislation”. This term is defined by Schedule 1 and section 24(5) of the Interpretation Act 1978. Paragraph 3 of Schedule 13 to the Northern Ireland Act 1998 provides an amendment which would cover Acts of the Assembly.

1857. Subsections (2) and (3) are based on section 137 of FA 1982. Their effect is that the general rule in section 532 excluding contributions does apply (despite subsection (1)) if a grant is “netted off” by paragraph 8 of Schedule 3 to OTA 1975 for the purposes of arriving at expenditure for petroleum revenue tax relief. In summary, in these particular circumstances the recipient (R) cannot get capital allowances.

1858. Subsection (3) deals with a subset of these cases if part of the expenditure met by the grant would have qualified for petroleum revenue tax relief (but for paragraph 8) and part would not have. The part which would not have qualified for relief is left for the “normal” capital allowances rules to apply. In summary, the recipient (R) may be able to get capital allowances for that part of the grant.

1859. Paragraph 106 of Schedule 3 maintains other provisions relating to this exception which have at most only transitional effect.

Section 535: Insurance or compensation money

1860. This section is based on part of section 153(2) of CAA 1990. It excludes from the general rule insurance or other compensation payable in respect of the destruction of an asset and similar disposal events.

1861. There is a minor change. In CAA 1990 this exception does not apply for Part VII (R&D allowances). This Act applies the exception to Part 6 (R&D allowances). So expenditure is not denied R&D allowances because it was met by insurance or the like. See Change 58 in Annex 1.

Section 536: Contributions not made by public bodies and not eligible for tax relief

1862. This section is based mainly on section 153(2) and (3) of CAA 1990. It excludes contributions from the general rule (and so leaves the recipient (R) with expenditure which might qualify for allowances) if the conditions in subsections (2) and (3) are met. There are two minor changes.

1863. Subsections (3) and (5) are based on section 153(2)(b) of CAA 1990. In sections 153 to 155 of CAA 1990 there are explicit references to a profession or vocation as well as a trade. But Part II of CAA 1990 treats some other activities (“qualifying activities” in Part 2 of this Act) as trades for various purposes.

1864. Section 27, which treats professions and vocations (and offices and employments) like trades, does so only for the purposes of Part II of CAA 1990. So “trade” in sections 153 to 155 of CAA 1990 clearly does not have its meaning extended by section 27 (although as mentioned above it is explicitly extended to mean also profession and vocation).

1865. Sections 28, 28A and 29 of CAA 1990 deem other things to be trades. Their effect is not limited in the same way to Part II of CAA 1990. So whether or not “trade” in sections 153 to 155 includes them is not clear. This affects both the contributor (C) and the recipient (R) (because if C’s activity is included it may mean R cannot get allowances).

1866. This Act replaces these deemed trades by qualifying activities in Part 2. As a result this Part makes explicit the activities to which it applies for the purposes of plant and machinery allowances. Subsection (5) does this. See Change 59 in Annex 1.

1867. In section 153 of CAA 1990 this exception does not apply for Part VII (R&D allowances). In this Act it does. As with paragraph 1861 above, see Change 58 in Annex 1.

1868. Section 126(4) of FA 1990 makes a similar exception for contributions out of certain pools payments. That legislation is not incorporated in this Act as the likelihood of contributions being made now is very small. Section 126(4) will, however, continue in force should there be any such contributions in periods covered by this legislation.

1869. Paragraph 107 of Schedule 3 maintains the transitional provisions in section 153(5) of CAA 1990 for contributions made before 27 July 1989.

1870. “Public body” is defined in section 532.

Chapter 2: Contribution allowances

Overview

1871. This Chapter enables certain contributions to another person’s expenditure to qualify for allowances under Parts 2 to 5 and Part 9.

1872. Section 537 gives the general conditions which have to be satisfied for contributions to be able to lead to allowances under Parts 2 to 5.

1873. Sections 538 to 541 then give additional details relevant to each of those Parts in turn.

1874. Section 542 provides for allowances to be given on contributions after the transfer of a trade or relevant activity.

1875. Section 543 provides allowances for contributions for dredging.

Section 537: Conditions for contribution allowances under Parts 2 to 5

1876. This section is based on parts of section 154 of CAA 1990. It gives the general conditions which have to be met if a contributor (C) is to be able to get allowances under Parts 2 to 5 for a contribution.

1877. Section 154 of CAA 1990 applies explicitly to trades, professions and vocations. Subsection (4) applies for this Chapter the explicit list of activities in section 536(5). See paragraph 1866 above and Change 59 in Annex 1.

Section 538: Plant and machinery

1878. This section is based mainly on sections 154(2) and 155(6) of CAA 1990 together with parts of sections 154(1) and 155(2) and (3) of CAA 1990. If the conditions in subsection (1) are met, the contributor (C) is treated by subsection (2) as incurring expenditure on, owning and using R’s asset. This means the contributor (C) meets some of the conditions for plant and machinery allowances which otherwise would mean the contributor (C) had no entitlement. It does not mean the contributor (C) is necessarily entitled to plant and machinery allowances. For example the asset must still be plant or machinery.

1879. There is a minor change. Subsection (3) requires expenditure to be allocated to a single asset pool. This was the intention in 1989 (in what became, on consolidation, section 155(6) of CAA 1990) in order that plant and machinery allowances for a contribution could be given to a successor if part of a trade was transferred. But the fact that the expenditure is meant to be allocated to a single asset pool was not achieved unambiguously. See Change 60 in Annex 1.

1880. The general rule for single asset pools for contributions expenditure now covers contributions to expensive cars, in contrast to section 35(1) of CAA 1990 which handles them separately. See Note 19 in Annex 2.

1881. Subsections (4) to (6) provide for allowances in respect of contributions to be given to a successor when an activity or part of an activity is transferred.

1882. The single asset pool for contributions expenditure on plant and machinery leads to writing-down allowances at 25%, 10% or 6% as appropriate. Sections 102(2) and 109(3) apply to all types of single asset pools. See Note 23 in Annex 2.

1883. By providing explicitly for property businesses to be “relevant activities” for the purposes of Part 2 it is not necessary for this Act to make specific provision for plant and machinery allowances for a landlord’s contributions to expenditure for the purposes of a tenant’s trade. See Note 68 in Annex 2.

Section 539: Industrial buildings

1884. This section is based on section 154(1) and parts of section 155 of CAA 1990. If the conditions in subsection (1) are met, the contributor (C) is treated by subsection (2) as incurring expenditure on, and using, a similar asset to R’s.

1885. Subsections (3) to (6) provide for entitlement to industrial buildings allowances in respect of contributions made for the purposes of a tenant’s trade to go with the relevant interest held by C.