Example
Trader R builds a factory on land R rents from C. C makes a contribution towards R’s expenditure on the construction of the factory for the purposes of R’s trade. The factory is used for a qualifying trade and R is entitled to industrial buildings allowances.
C can claim industrial buildings allowances as if the contribution had been expenditure on a similar factory.
C subsequently (within the writing-down period) sells the land to D. Then D is entitled to industrial buildings allowances for the chargeable period in which the transfer take place and subsequent chargeable periods.
Section 540: Agricultural buildings
1886.This section is very similar to section 539. But, on a transfer of a landlord’s relevant interest, the provisions of Part 4 apply in place of those for Part 3.
1887.Paragraph 110 of Schedule 3 maintains the effect of section 155(7) of CAA 1990 which can only have effect in relation to contributions made before 27 July 1989.
Section 541: Mineral extraction
1888.This section is similar to sections 539 and 540. But it is not necessary to provide for mineral extraction allowances for a landlord’s contribution for the purposes of a tenant’s trade. Mineral extraction allowances are only available to persons carrying on a trade. See Note 68 in Annex 2.
Section 542: Transfer of C’s trade or relevant activity
1889.This section is based on section 155(3) of CAA 1990. It provides for allowances under Parts 3 to 5 in respect of contributions for the purposes of a trade or other activity to be given to a successor if the activity is transferred.
Section 543: Contribution allowances under Part 9
1890.This section is based on part of section 134(8) of CAA 1990. It provides for allowances for contributions to expenditure on dredging.
Part 12: Supplementary provisions
Overview
1891.Part 12 contains provisions which do not fit naturally into other Parts. These are:
particular provisions for life assurance business (Chapter 1);
general provisions about additional VAT liabilities and repayments under the capital goods scheme (Chapter 2);
definitions about oil and oil licences and related matters (Chapter 3);
provisions for partnerships, successions and transfers (Chapter 4);
provisions for apportionments of proceeds from sales (for example) and other miscellaneous matters (Chapter 5); and
final provisions for the Act (Chapter 6).
Chapter 1: Life assurance business
Overview
1892.This Chapter makes provisions for companies carrying on life assurance business:
section 544 defines “management asset” and provides that there are no capital allowances on them other than plant and machinery allowances; and
section 544 defines “investment asset” and provides for capital allowances on them to be apportioned between categories of business.
Section 544: Management assets
1893.This section is based on section 434D(1), (2) and (7) of ICTA. It defines “management asset” and restricts the availability of allowances for management assets.
1894.Subsection (4) ensures that “expenses of management within section 76 of ICTA” is given the intended meaning by disregarding section 76(1)(d). See Note 69 in Annex 2.
Section 545: Investment assets
1895.This section is based on section 434E(1), (4) and (5) of ICTA. It defines “investment asset” and sets out rules for the allocation and availability of allowances for investment assets.
1896.Subsections (1) and (2) define “investment asset” as any asset held by a company carrying on any life assurance business other than a management asset. This is a change to the definition in section 434E(1), since there is no reference here to property businesses. See Change 61 in Annex 1.
1897.Subsection (3) requires any allowances in respect of investment assets to be apportioned between the categories of insurance business in the same way that income relating to the asset would be apportioned.
1898.Subsection (4) provides that capital allowances on investment assets are not available if the life assurance business is charged to tax under Case I of Schedule D, so that allowances are only available if the company is charged to tax on the I-E basis.
1899.Subsection (5) provides that capital allowances on investment assets are not taken into account in calculating the profits of the company’s pension business, life reinsurance business or overseas life assurance business. So, allowances on investment assets are only available in calculating the profits from the company’s BLAGAB.
Chapter 2: Additional VAT liabilities and rebates: interpretation, etc.
Overview
1900.This Chapter provides the interpretation for the provisions in Parts 2, 3 and 6 dealing with additional VAT liabilities and rebates. It is based on section 159A of CAA 1990.
1901.These provisions apply if taxpayers are required to make adjustments under the VAT capital items legislation (commonly known as the capital goods scheme) which is dealt with in regulations 112 to 116 of VAT Regulations 1995 (SI 1995/2518)).
Background
1902.The capital goods scheme is relevant to businesses that, under VAT legislation, make both exempt and non-exempt supplies. These traders are known as “partially exempt traders”. When a VAT-registered business incurs VAT on its purchases (input tax), it can usually offset these amounts against the tax it owes to HM Customs & Excise on its sales (output tax). However, partially-exempt businesses are not able to do so in respect of purchases attributable to exempt sales (or “supplies”).
1903.Generally with VAT, the rules for capital expenditure do not differ from the rules for revenue items. However, the capital goods scheme is an exception. For certain types of capital expenditure, it is necessary for partially-exempt businesses to make an annual adjustment over a period of five or ten years so that the reclaimable input tax reflects the proportion of use attributable to the making of non-exempt supplies during the period.
1904.The types of expenditure covered by the scheme can be broadly divided into three categories:
computers or computer equipment worth £50,000 or more;
land and buildings worth £250,000 or more; and
building works worth £250,000 or more.
Adjustments are made over a five-year period in respect of the first category; and they are made over a ten-year period in respect of the other categories.
1905.It is a general principle of income tax and corporation tax that any non-recoverable VAT should be relieved as a cost for direct tax purposes. When the capital goods scheme was introduced in 1990, it became necessary to ensure that the capital allowances provisions could cater for VAT adjustments made under the Scheme so far as they related to expenditure covered by CAA 1990. The legislation to do this was introduced in FA 1991. And to simplify matters, the legislation was only introduced to cover cases in which the original expenditure was covered by the rules for plant and machinery allowances, industrial buildings allowances or R&D allowances.
1906.Broadly under these rules, if a taxpayer incurs an additional VAT liability (because the proportion of exempt use has risen) then the additional VAT liability is treated as additional capital expenditure incurred. And if a taxpayer receives an additional VAT rebate (because the proportion of exempt use has fallen) then the taxpayer is treated as receiving disposal proceeds equal to the amount received. However, the rules differ between the various Parts. This reflects the different schemes for allowances and charges under these Parts.
Section 546: Introduction
1907.This section is new and introduces the Chapter.
Section 547: “Additional VAT liability” and “additional VAT rebate”
1908.This section is based on section 159A(6) of CAA 1990. It provides a definition of the terms “additional VAT liability” and “additional VAT rebate”.
Sections 548 and 549: Time when additional VAT liability or rebate is incurred, made, accrues etc.
1909.These sections are based on section 159A of CAA 1990. They determine when additional VAT liabilities and rebates are treated as arising.
1910.Section 159A(1) to (4) of CAA 1990 determines when additional VAT liabilities and rebates are treated as arising for the purposes of CAA 1990. It is clear that such rules are necessary to ensure that calculations of allowances and charges reflect the additional VAT liabilities and rebates in the correct chargeable periods.
1911.The legislation, however, provides two different sets of rules to determine the time an additional VAT liability or rebate is treated as arising. One of these sets of rules is applied when determining in which chargeable period a liability or rebate is to be brought into account (or for which chargeable period an allowance or charge is to be made under the 1990 Act). The other set of rules is used in all other circumstances. In particular, it is used when the legislation requires certain conditions to be met at the time when the additional VAT liability or rebate arises.
1912.However, there are instances in which the same terminology is used with two different meanings in the same sentence. This Act has removed this obstacle to the understanding of the rules and uses two different labels to refer to the two different sets of rules.
1913.The time, determined in CAA 1990 by section 159A(1) and (2), is now referred to as the time when the additional VAT liability is incurred or the additional VAT rebate is made. This is the meaning that applies in all cases except when determining the chargeable period in which a liability or rebate is to be brought into account (or for which chargeable period an allowance or charge is to be made under the 1990 Act). This is dealt with in section 548.
1914.The time, determined in CAA 1990 by section 159A(3) and (4), is now referred to as the time when the additional VAT liability or rebate accrues. This is dealt with in section 549. This time will generally be later than the time determined in section 548.
1915.One advantage of using the later time in the legislation is to ensure that the appropriate capital allowances calculations do not generally need to be made until after the adjustment has been calculated for VAT purposes.
1916.Section 159A(4) of CAA 1990 may appear to determine only the chargeable period in which the additional VAT liability or rebate arises (or in the language of the new Act “accrues”). But CAA 1990 requires in various provisions the time (rather than just the chargeable period) in which the additional VAT liability or rebate accrues. This Act provides this. See Note 70 in Annex 2.
Section 550: Apportionment of additional VAT liabilities and rebates
1917.This section is based on section 159A(5) and part of section 159A(7) of CAA 1990. It deals with cases in which it is necessary to apportion either the qualifying expenditure or the allowances or charges arising.
1918.In such cases, any additional VAT liability or rebate is subject to the same apportionment.
Section 551: Supplementary
1919.This section is based on section 159A(6) and part of section 159A(7) of CAA 1990. It provides definitions of terms used in the Chapter.
Chapter 3: Disposals of oil licences: Provisions relating to Parts 5 and 6
Overview
1920.This Chapter provides rules relating to the disposal of oil licences for the purposes of Parts 5 (mineral extraction) and 6 (research and development).
1921.These rules, whilst important to those concerned with the oil industry, are likely to be used by a minority of the users of either Part 5 or 6. They are dealt with here as they share many definitions in common but do not belong naturally in either Part 5 or Part 6.
1922.The rules require the “seller” and “purchaser” of certain interests in oil licences, related to undeveloped areas, to treat part of the consideration as having nil value. They also provide for the “recapture/reduction” of R&D allowances in certain cases in which an oil licence is disposed of.
Section 552: Meaning of “oil licence” and “interest in an oil licence”
1923.This section is based on sections 118A(4) and 138A(4) of CAA 1990, section 12(1) of OTA 1975 and section 196(5) of TCGA 1992.
1924.The section provides definitions for the purposes of this Chapter. Unlike section 118A(4) of CAA 1990 there is no reliance on cross-references to section 194 of TCGA 1992.
Section 553: Consideration to be treated as nil
1925.This section is based on parts of section 118A of CAA 1990 and section 196 of TCGA 1992. Section 118A is in Part IV of CAA 1990 but also has effect for Part VII of CAA 1990.
1926.The section treats certain consideration as having no value on the disposal of an oil licence relating to an undeveloped area.
1927.Disregarding some of the consideration affects the allowances and charges in Parts 5 and 6 that are associated with the acquisition or disposal of the oil licence concerned. Broadly, the “seller” may suffer a lower balancing charge and the purchaser may get lower allowances if this section applies.
1928.Subsection (3) might seem to use a different definition of “material disposal” from section 118A(2) of CAA 1990 but this is not the case. See Note 71 of Annex 2.
Section 554: Circumstances in which oil licence relates to undeveloped area
1929.This section is based on section 118A(4) of CAA 1990, section 12(1) of OTA 1975 and section 196 of TCGA 1992. It determines when an oil licence relates to an undeveloped area without using a cross-reference to section 194 of TCGA 1992.
Section 555: Disposal of oil licence with exploitation value
1930.This section is based on section 138A of CAA 1990.
1931.When the section applies, part of the consideration for the oil licence is treated for the purpose of Part 6 (research and development) as if it were for the disposal of an asset representing qualifying expenditure. That treatment can lead to a recapture of R&D allowances given in relation to that qualifying expenditure.
Section 556: Minor definitions
1932.This section is based on sections 64A(12), 118A(4) and 138A(4) of CAA 1990, sections 1(1) and 12(1) of OTA 1975 and section 196 of TCGA 1992. It deals with minor definitions for the purposes of this Chapter.
Chapter 4: Partnerships, successions and transfers
Overview
1933.This Chapter provides rules for the transfer of and succession to trades and for the continuity of partnerships.
1934.Section 557 gives the application of sections 558 and 559. Section 558 provides for the continuity of allowances to partnerships. Section 559 deals with transfers on succession without sale.
1935.Section 560 provides rules for the transfer of insurance company businesses and section 561 deals with the transfer of a UK trade from a company resident in one European Union member state to a company resident in another.
Background
1936.There are other rules for successions elsewhere in this Act. In Part 2, sections 263 and 265 provide parallel provisions to sections 557 to 559. Section 343(2) of ICTA also provides for capital allowances to be given to a successor company in some circumstances. That provision is left in ICTA so that readers see there the full provisions for company reconstructions. But the text of section 343(1) and (2) is given below for ease of reference.
Section 343 Company reconstructions without a change of ownership
Where, on a company (“the predecessor”) ceasing to carry on a trade, another company (“the successor”) begins to carry it on, and—
on or at any time within two years after that event the trade or an interest amounting to not less than a three-fourths share in it belongs to the same persons as the trade or such an interest belonged to at some time within a year before that event; and
the trade is not, within the period taken for the comparison under paragraph (a) above, carried on otherwise than by a company which is within the charge to tax in respect of it;
then the Corporation Tax Acts shall have effect subject to subsections (2) to (6) below.
In paragraphs (a) and (b) above references to the trade shall apply also to any other trade of which the activities comprise the activities of the first mentioned trade.
The trade shall not be treated as permanently discontinued nor a new trade as set up and commenced for the purpose of the allowances and charges provided for by the Capital Allowances Acts; but—
there shall be made to or on the successor in accordance with those Acts all such allowances and charges as would, if the predecessor had continued to carry on the trade, have fallen to be made to or on it; and
the amount of any such allowance or charge shall be computed as if—
the successor had been carrying on the trade since the predecessor began to do so, and
everything done to or by the predecessor had been done to or by the successor (but so that no sale or transfer which on the transfer of the trade is made to the successor by the predecessor of any assets in use for the purpose of the trade shall be treated as giving rise to any such allowance or charge).
The preceding provisions of this subsection shall not apply if the successor is a dual resident investing company (within the meaning of section 404) which begins to carry on the trade after 31st March 1987.
Section 557: Application of sections 558 and 559
1937.This section is based on section 152 of CAA 1990. It sets out the Parts of this Act to which sections 558 and 559 do not apply.
1938.These are Parts 2, 6 and 10 (plant and machinery, research and development, and assured tenancies). Those Parts have separate rules.
Section 558: Effect of partnership changes
1939.This section is based on section 152(3) of CAA 1990. It provides for continuity of allowances if the members of a partnership change.
1940.Subsection (5) contains a change because of its application to property businesses. See Change 62 in Annex 1.
Section 559: Effect of successions
1941.This section is based on section 152(1) and (2) of CAA 1990. If an asset is transferred on succession, without a sale of the asset and the succession is following a deemed discontinuance, then the transfer is treated as a sale at market value.
1942.It does not apply to plant and machinery but section 265 provides a similar rule. See paragraph 911 above.
1943.If the succession is between connected persons then an election under section 569 may be available to substitute a lower figure. See paragraph 1973 below.
1944.Subsection (5) contains a change because of its application to property businesses. See Change 62 in Annex 1.
Section 560: Transfer of insurance company business
1945.This section is based on section 152A of CAA 1990. It provides what is known as a “step-in-shoes” rule for transfers of insurance company businesses.
1946.The transfer has to be approved by a court under Part I of Schedule 2C to the Insurance Companies Act 1982 or be a qualifying overseas transfer within paragraph 4A of Schedule 19AC to ICTA.
Section 561: Transfer of a UK trade to a company in another member State
1947.This section is based on section 152B of CAA 1990. It provides a “step-in-shoes” rule for the transfer of a UK trade if it is transferred from a company resident in one member state to a company resident in another.
1948.This section cannot apply unless section 140A of TCGA 1992 applies so it needs to be read with sections 140A and 140B of TCGA 1992.
Chapter 5: Miscellaneous
Overview
1949.This Chapter provides miscellaneous provisions which apply to the whole Act or to several Parts of it.
1950.Section 562 deals with apportionments if property is sold together.
1951.Sections 563 and 564 provide a procedure for determining certain questions affecting two or more persons.
1952.Section 565 deals with tax agreements for income tax purposes.
1953.Section 566 provides a special rule for companies not resident in the UK.
1954.Sections 567 to 570 provide for market value if sales are between connected persons or are transactions to obtain a tax advantage. They also provide for an election (if the sale is not a transaction to obtain a tax advantage) which will allow the price to be the amount of unused capital allowances.
Section 562: Apportionment where property sold together
1955.This section is based on section 150 of CAA 1990. It provides that if property is sold with other property the net proceeds are apportioned on a just and reasonable basis.
1956.Use of “just and reasonable apportionment” is a change from section 150(1) of CAA 1990 which uses “just apportionment”. See Change 40 in Annex 1.
1957.All property sold as part of one bargain is treated as sold together.
1958.There is nothing in this section to reflect section 150(5) of CAA 1990. It has not been rewritten. See Note 72 in Annex 2
Section 563: Procedure for determining certain questions affecting two or more persons
1959.This section and section 564 are based on section 151 of CAA 1990. They provide for apportionments which affect two or more persons to be decided by one body of appeal Commissioners in one hearing.
Section 564 Questions to which procedure in section 563 applies
1960.Section 564 sets out the general cases in which the procedure in section 563 applies to decide:
apportionment of a sum for Parts 3 to 12; and
market value for Part 2 and the other provisions listed.
1961.The procedure in section 563 is also applied in two other, particular circumstances over and above these general types which it would not be helpful to deal with here. See sections 357(6) and 561(4).
1962.The omission of Part 2 (plant and machinery) from subsection (1) might be thought odd. But there is no need for the procedure in section 563 for Part 2 generally. It is only directly relevant for market value – dealt with by subsection (2)(a). The procedure in section 563 could, however, apply to of plant and machinery indirectly. For example on a sale of plant and machinery with other property, the sale proceeds would fall to be apportioned under section 562. That apportionment could affect the tax of both the buyer and seller.
1963.Subsection (4) applies section 564 to cases procedures in which section 561(3) applies. This is a change because section 152B of CAA 1990 (which is the origin of section 561) contains its own apportionment arbitration rules. See Change 63 in Annex 1.
Section 565: Tax agreements for income tax purposes
1964.This section is based on section 143 of CAA 1990. It provides that a tax agreement for income tax purposes, without assessment, treats an allowance as if given effect under an assessment.
Section 566: Companies not resident in the United Kingdom
1965.This section is based on section 149 of CAA 1990. It provides that capital allowances for companies not resident in the UK are given effect against income chargeable from the source of income to which the capital allowances are related.
Section 567: Sales treated as being for alternative amount: introductory
1966.This section is based on section 157(1)(a) of CAA 1990. It applies sections 568 to 570 and defines the tests – control and tax advantage – which decide if they can apply.
1967.Subsection (2) defines the “control test”. This is not a term used in this Act outside sections 567 to 570.
1968.Subsection (3) clarifies “body or persons” in subsection (2).
1969.Subsection (4) defines the “tax advantage test” for the purposes of these sections. This term is also not used elsewhere in the Act.
1970.Subsection (5) introduces the rule from section 152B(10) of CAA 1990 that section 157 shall not apply if section 152B applies (transfer of a UK trade, rewritten in section 561).
1971.Section 157(3) of CAA 1990 is not rewritten. This is because this section and sections 569 and 570 clearly apply to non-resident persons without an explicit statement to that effect. See Note 73 in Annex 2.
Section 568: Sales treated as being at market value
1972.This section is based on section 157(4) of CAA 1990. It treats a sale as being at market value if either the control test or tax advantage test is met.
Section 569: Election to treat sale as being for alternative amount
1973.This section is based on section 158 of CAA 1990. It provides for an election to be made by connected persons to substitute the alternative amount for the market value of an asset given by section 568 if the control test is met but the tax advantage test is not.
1974.Subsection (2) makes clear this is subject to section 570 which prevents an election in some circumstances.
Section 570: Elections: supplemental
1975.This section is based on section 158 of CAA 1990. It prevents an election under section 569 in some circumstances.
1976.Subsection (1) is based on section 158(5) of CAA 1990. It means an election cannot be made if the sale is a relevant sale for Part 4 (agricultural buildings).
1977.Subsection (2) is based on section 158(3)(a) and (b) of CAA 1990. It prevents elections if, broadly speaking, the qualifying expenditure does not stay within the United Kingdom tax net.
1978.Subsection (3) is based on section 158(3)(a) or CAA 1990. It defines “relevant allowance or charge” for the purposes of subsection (2). This excludes sales if an allowance or charge is not capable of being made for Parts 3, 5, 6, 9 and 10 (industrial buildings, mineral extraction, research and development, dredging, and assured tenancies).
1979.The inclusion of Part 9 (dredging) in this list may seem odd as sections 567 to 570 do not apply to Part 9. That is because in Part 9 a disposal event does not lead to a disposal value being brought into account. So substituting market value as the disposal value would have no effect.
1980.The scope of this subsection is wider. It prevents an election if, as a result of the sale, any allowances or charges in the Parts listed would no longer be made. This applies whether or not the allowance involved is the subject of the election. For example an election might (but for this section) be made in respect of an industrial building. But if, as a result of the sale, no dredging allowance would fall to be made then the election is prohibited.
1981.Subsection (4) is based on section 158(3)(c) of CAA 1990. It is relevant to assured tenancy allowances.
Chapter 6: Final Provisions
Overview
This Chapter deals with definitions and interpretations that apply to the whole Act.
Section 571: Application of Act to parts of assets
1982.This section is based on section 161(7) of CAA 1990. It provides that references to an asset include references to part of an asset (except if the context otherwise applies).
Section 572: References to sale of property and time of sale
1983.This section is based on section 150(4) of CAA 1990. It defines references to “sale of property” and “time of sale”.
1984.Subsection (1) defines “references to sale of property” to include references to exchange of property.
1985.Subsections (2) and (3) modify references to sale in subsection (1).
1986.Subsection (4) defines the “time” of sale for the purposes of this Act.
Section 573: Transfers treated as sales
1987.This section is based on various sections of CAA 1990. It applies to Parts 3 (industrial buildings), 4 (agricultural buildings) and 10 (assured tenancies) and treats transfers of the relevant interest as sales.
Section 574: Meaning of “control”
1988.This section is based on section 161(2) of CAA 1990. It gives the meaning of “control” for the whole of this Act.
Section 575: Connected persons
1989.This section is based on various sections of CAA 1990. It applies section 839 of ICTA to this Act.
Section 839 of ICTA (Connected persons)
For the purposes of, and subject to, the provisions of the Tax Acts which apply this section, any question whether a person is connected with another shall be determined in accordance with the following provisions of this section (any provision that one person is connected with another being taken to mean that they are connected with one another).
A person is connected with an individual if that person is the individual’s wife or husband, or is a relative, or the wife or husband of a relative, of the individual or of the individual’s wife or husband.
A person, in his capacity as trustee of a settlement, is connected with—
any individual who in relation to the settlement is a settlor,
any person who is connected with such an individual, and
any body corporate which is connected with that settlement.
In this subsection “settlement” and “settlor” have the same meaning as in Chapter IA of Part XV (see section 660G(1) and (2)).
For the purpose of subsection (3) above a body corporate is connected with a settlement if—
it is a close company (or only not a close company because it is not resident in the United Kingdom) and the participators include the trustees of the settlement; or
it is controlled (within the meaning of section 840) by a company falling within paragraph (a) above.
Except in relation to acquisitions or disposals of partnership assets pursuant to bona fide commercial arrangements, a person is connected with any person with whom he is in partnership, and with the wife or husband or relative of any individual with whom he is in partnership.
A company is connected with another company—
if the same person has control of both, or a person has control of one and persons connected with him, or he and persons connected with him, have control of the other; or
if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom he is connected.
A company is connected with another person if that person has control of it or if that person and persons connected with him together have control of it.
Any two or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company.
In this section—
“company” includes any body corporate or unincorporated association, but does not include a partnership, and this section shall apply in relation to any unit trust scheme as if the scheme were a company and as if the rights of the unit holder s were shares in the company;
“control” shall be construed in accordance with section 416; and
“relative” means brother, sister, ancestor or lineal descendant.
Section 576: Meaning of “the Inland Revenue” etc.
1990.This section includes a minor change in giving the meaning of two terms used in this Act: “the Inland Revenue” and “the Board of Inland Revenue”.
1991.The change is that the term “Inland Revenue” is used in various places in this Act where CAA 1990 refers to an “inspector”. This is in keeping with the approach taken in legislation since 1994. But the term “the Board of Inland Revenue” is kept and used if CAA 1990 requires something to be done by the Board (as in sections 554(4) and 563(4)). See Change 64 in Annex 1.
1992.Subsection (3) is based on the definition of “the Board” in section 161(2) of CAA 1990.
Section 577: Other definitions
1993.This section is based in part on section 161 of CAA 1990 but contains material derived from various sources. It provides other minor definitions for the whole Act.
1994.Subsection (1) contains some definitions which are new in this Act. These are “property business”, “tax year” and “tax year 2001-02”.
1995.Subsection (2) is based on section 161(9) of CAA 1990. It contains a change because of its application to property businesses. See Change 62 in Annex 1.
1996.Section 161(3) of CAA 1990 has not been reproduced in this section. Its effect is preserved in another way. See Note 74 in Annex 2.
1997.Subsection (5) introduces Schedule 1 which is in two Parts. Part 1 is a list of abbreviations used. Part 2 is a list of where expressions are defined in the Act. There are some other expressions defined for the purposes of particular Chapters or sections which are not listed in Part 2 of Schedule 1.
Section 578: Consequential amendments
1998.This section gives effect to Schedule 2.
Section 579: Commencement and transitional provisions and savings
1999.This section provides for commencement and gives effect to Schedule 3.
2000.Subsection (1) provides that this Act shall have effect for income tax chargeable periods ending on or after 6 April 2001, and for corporation tax chargeable periods ending on or after 1 April 2001.
2001.This is subject to paragraph 8 of Schedule 3 to this Act. That enables taxpayers to elect to apply the “old” law if something done before 1 or 6 April 2000 (as the case may be) has a different effect in a chargeable period which straddles the commencement date because of changes made by this Act.
Section 580: Repeals
2002.This section gives effect to Schedule 4.
Section 581: Citation
2003.This section allows this Act to be cited as Capital Allowances Act 2001.
Schedule 1: Index of defined expressions
2004.Schedule 1 lists expressions defined in the Act.
Schedule 2: Consequential amendments
Paragraph 1
2005.This paragraph amends section 42(7) of TMA 1970. That provision deals with claims and elections in respect of activities carried on in partnership.
2006.The amendment includes a reference to section 129 (allocation of expenditure on ships to appropriate non-ship pool). This is included because this Act now provides for an election to allocate expenditure on the provision of a ship to the appropriate non-ship pool. See Change 21 in Annex 1.
2007.Sections 30 and 31 of CAA 1990 deal respectively with the postponement and bringing back into play of first-year and writing-down allowances. The rules for the different kinds of allowance are now dealt with by single provisions. For example, section 131 deals with subsequent claims for both first-year allowances and writing-down allowances that were previously postponed. But under CAA 1990, only claims in respect of writing-down allowances are dealt with in section 42(7) of TMA 1970. To ease the administration for partnerships, this Act ensures that claims in respect of first-year allowances will also be covered by section 42(7). See Change 65 in Annex 1.
2008.The references to sections 40B and 40D of F(No.2)A 1992 replace the references to section 68(5) and (9) of CAA 1990. These are new and arise from the new sections to be inserted into that Act by paragraph 83 of this Schedule.
2009.The references to sections 1 and 22 to 25 of CAA 1990 are not rewritten in this Act. They relate to claims for allowances and are covered by section 3(3) of this Act. See Note 1 in Annex 2.
Paragraph 4
2010.This paragraph amends the Table in section 98 of TMA 1970. That provision deals with penalties for taxpayers who fail to provide the Inland Revenue with required information. Column 1 of the Table deals with cases in which information is required following the service of a notice by the Inland Revenue; column 2 deals with information required in other cases.
2011.The references in column 1 to sections 23(4) and 49(4) of CAA 1990 are to be removed and not replaced. Similarly with the references to sections 23(2) and 49(2) in column 2. This is because sections 23 and 49 of CAA 1990 are not being rewritten.
Paragraphs 13 and 14
2012.These paragraphs remove the references to section 29 of CAA 1990 in sections 65A and 70A of ICTA. These sections state that the rules for furnished holiday lettings businesses do not apply to overseas property. In section 17(1) it is clearly stated that such a business cannot be a qualifying activity in respect of overseas property. As a result, the rule does not need to be restated in ICTA.
Paragraphs 16 and 17
2013.These paragraphs relate to section 63(2) and Changes 12 and 13 in Annex 1.
Paragraphs 22 and 23
2014.These paragraphs amend sections 117 and 118 of ICTA which deal with limited partners. The amendment removes references to sections 141 and 145 of CAA 1990 which have no effect. See Note 75 in Annex 2.
Paragraph 25
2015.This paragraph amends section 198 of ICTA which deals with deductions from employees’ emoluments. The words being removed are to be preserved in the new Act. See section 20(2) and (3).
Paragraph 30
2016.This paragraph is based on section 142 of CAA 1990. It restricts the use of loss relief under sections 380 and 381 of ICTA (income tax losses) in certain circumstances.
2017.The paragraph inserts into ICTA a new section 384A which puts the provision alongside existing similar provisions.
Paragraph 32
There are no longer any allowances that can be given to traders by discharge or repayment. This amendment therefore omits section 393A(5) and (6) of CAA 1990. See Note 75 in Annex 2.
Paragraph 38
2018.This removes the reference to section 161(5) of CAA 1990. That provision deals with the “taxing of trades”. This concept is replaced in this Act by treating allowances as expenses and any balancing charges as income. As a result, the opening words of section 411(10) are no longer needed.
Paragraph 39
2019.This removes sections 434D and 434E of ICTA. These are being rewritten as sections 255 to 257 (part of Chapter 19 of Part 2) and sections 544 and 545 (Chapter 1 of Part 12).
Paragraph 40
2020.This updates a reference to section 306 of Income and Corporation Taxes Act 1970 which should have been revised to read section 28 of CAA 1990 when the capital allowances legislation was last consolidated. It is sufficient to change the reference to Part 2 of the Capital Allowances Act and this should be clearer for users of the legislation.
Paragraph 42(3)
2021.This updates the definition for “regional development grant” in section 495 of ICTA. This removes the references to the Industrial Development Act 1982 and the Industry Act 1972 which have ceased to have any practical relevance.
Paragraph 44
2022.This removes sections 520 to 523 of ICTA which are rewritten by Part 8 of this Act (patent allowances).
Paragraph 45
2023.This paragraph amends the reference to section 152 of CAA 1990. That section deals with successions and partnership changes. The principal parts of these provisions have been rewritten as sections 558 and 559. However, as section 525 of ICTA is only concerned with cases in which there is a (deemed) discontinuance of the relevant activity, the revised reference need only be to section 559.
Paragraph 46
2024.This paragraph removes references to sections 520 to 523 of ICTA. See paragraph 45 above.
Paragraph 47
2025.This removes section 530 of ICTA which is rewritten by Part 7 of this Act (know-how allowances).
Paragraphs 48 to 50
2026.These amendments are made as a result of provisions relating to capital allowances for patents and know-how being moved to the Capital Allowances Act.
Paragraph 51
2027.This paragraph amends section 577 of ICTA. That section deals with certain disallowable expenses incurred in providing business entertainment. The provisions relating to capital allowances are included in section 269 and are therefore no longer necessary in ICTA.
Paragraph 52
2028.This paragraph is based on section 35(2) and (3) and parts of section 36 of CAA 1990. It inserts new sections 578A and 578B in ICTA. These maintain restrictions on car rental costs if a car has a retail price when new in excess of £12,000.
2029.This legislation is related to that which restricts capital allowances in respect of cars costing more than £12,000 (see Chapter 8 of Part 2 of the Act). It was introduced with the capital allowances legislation by FA 1971 and consolidated with it in CAA 1990. However the legislation does not deal with capital expenditure and is better dealt with in ICTA.
2030.New section 578A(1) lists the activities that are affected by the restriction.
2031.New section 578A(2) provides that these rules do not apply to “qualifying hire cars” or to cars with a retail price of £12,000 or less.
2032.New section 578A(3) includes a formula to determine the proportion of rental costs that may be allowed for tax purposes. This proportion effectively provides relief in respect of the first £12,000 of the retail price plus half of the excess. So, for example, a car with a retail price of £24,000 will obtain relief in respect of three quarters of the rental costs.
2033.New section 578A(4) deals with rental rebates received. It provides that only a proportion should be taxed as income. This proportion is the same as the proportion that obtained relief under subsection (3).
2034.New section 578B(1) to (3) defines the terms used in new section 578A.
2035.New section 578A(4) provides that the £12,000 threshold may be changed by the Treasury.
Paragraph 61
2036.Section 834(2) of ICTA supplements section 6(4) of ICTA to extend the meaning of “trade” and “profits” in certain parts of ICTA and for the purposes of sections 144 and 145 of CAA 1990. These extended meanings are not needed for this Act.
Paragraph 62
2037.Section 835(8) of ICTA refers to Parts I to VI of CAA 1990. However, in practice, this provision only relates to allowances in respect of special leasing. There is also a similar rule for patents within ICTA itself. As a result, the reference has been replaced to deal with these two specific situations. See Note 62 in Annex 2.
Paragraph 64
2038.Paragraph 10B(2A) of Schedule 19AC to ICTA modifies section 440 of ICTA by inserting a subsection (4AA). This paragraph substitutes a new text of that subsection (4AA) to take account of the way section 81 of CAA 1990 is rewritten in this Act.
2039.Prior to this substitution subsection (4AA) referred to sections 81 and 83 of CAA 1990:
Section 81 of the 1990 Act (as it has effect by virtue of section 83(2A) of that Act) shall apply in relation to any case in which an asset or part of an asset held by an overseas life insurance company-
ceases to be within the category set out in paragraph (h) of subsection (4) above; and
at the same time comes within another of the categories set out in that subsection.
2040.The text substituted by this paragraph differs in two respects.
2041.First, it omits the words in parentheses which refer to section 83(2A) of CAA 1990. Section 83(2A), in summary, confirmed that capital allowances are restricted to the part of the trade or other activity that is taxable in the UK. It was inserted by FA 2000. The reference in paragraph 10B(2A) of Schedule 19AC (which was also inserted by FA 2000) was then a useful reminder of its effect. In this Act the effect of section 83(2A) of CAA 1990 is preserved. And it applies to all chargeable periods to which this Act applies. There is then no need to remind readers of the point.
2042.Second, the substituted text refers only to section 13 (use for qualifying activity of plant or machinery provided for other purposes). In contrast, the reference in subsection (4AA) provides for section 81 to apply. That includes, in principle, cases falling within section 81(1)(b) of CAA 1990 – see section 14 (use for qualifying activity of plant or machinery which is a gift). This is however of no effect in the context of subsection (4AA).
Paragraphs 75 and 76
2043.There are no longer any allowances that can be given to traders by discharge or repayment. This amendment therefore removes such references in The Social Security Contributions and Benefits Act 1992 and The Social Security Contributions and Benefits (Northern Ireland) Act 1992. See Note 75 in Annex 2.
Paragraphs 77 and 79
2044.The new section 37(2)(c) of TCGA 1992 and reference to disposal values (rather than “balancing charge”) in section 195 of TCGA 1992 are consequential on a change of approach taken in Part 6 of this Act. Where Part VII of CAA 1990 gives, in respect of qualifying expenditure, an allowance and a charge in the same chargeable period, Part 6 of this Act gives a “net allowance”. See Note 57 in Annex 2.
Paragraph 82
2045.This paragraph is based on section 68 of CAA 1990. That is legislation for expenditure on films which may or may not be capital expenditure. It:
treats the expenditure as revenue expenditure (and does other things); or
if an election can be and is made, leaves the expenditure to be treated as revenue or capital expenditure in the normal way.
2046.This paragraph puts the provisions with other legislation about films. It includes in the new section 40B of F(No.2)A 1992 a definition of “relevant periods”. This is expressed differently from section 68(3) of CAA 1990. The revised wording makes clear what the relevant period is if no accounts of the trade or business concerned are made up for a period. See Note 76 in Annex 2.
Paragraph 105
2047.This paragraph amends Schedule 33 to the Greater London Authority Act 1999. Subparagraph (3) replaces paragraph 4(9) of that Schedule. At a first glance it appears that the replacement adds a provision preventing writing-down allowances from arising from a qualifying transfer – something that does not appear in the original paragraph. This, however, is not a change as both the original paragraph and its replacement prevent the transfer from giving rise to qualifying expenditure and as a result prevent writing-down allowances from arising. The additional words in the replacement paragraph simply make clearer the preclusion of writing-down allowances.
2048.Similarly with subparagraph (6) which replaces paragraph 10(10) of Schedule 33.
Paragraph 108
2049.This paragraph amends Schedule 22 to FA 2000 (tonnage tax). Most of the amendments are straightforward.
2050.Subparagraph (16) replaces a reference to “section 8(1) to (12) of the Capital Allowances Act” in paragraph 84(2). The new reference (to “Chapter 8 of Part 3”) appears to go wider than the original version. However, paragraph 84 only applies when the company disposes of the relevant interest in an industrial building or structure. As a result, there is no change by now referring to the whole of Chapter 8. Similarly, there is no need to refer to section 351 which deals with additional VAT rebates.
Schedule 3: Transitionals and savings
2051.Provisions of only transitional effect are brought together in this Schedule. This is different from the approach taken in CAA 1990. It allows this Act to meet comments from those who responded in consultation that:
the effect of provisions in the existing legislation should be maintained in the Act even if there is very little chance of their having practical effect; and
shorter and clearer legislation in the main body of the Act helps readers who want to know the treatment of expenditure in periods covered by the Act.
2052.There is nothing in this Schedule to reflect section 18(11) of CAA 1990. See Note 78 in Annex 2.
2053.Sections 39(2)(a) and (8)(a), 40(4)(a) and (b)(ii), 45, 47 and 49 of CAA 1990 (“the old expenditure provisions”) are not reproduced in this Schedule. See Note 77 in Annex 2.
Paragraphs 1 to 7
2054.Paragraph 2 is included to ensure that provisions in the Act which change the law are not subject to the general proposition about continuity.
Paragraph 8
2055.This paragraph allows anyone affected by the minor changes in the law in this Act to elect that those changes do not apply for a chargeable period which started before 1 April 2001 (for corporation tax) or 6 April 2001 (for income tax) and ends after. This allows the Act to be applied as soon as practicable (which is what consultation showed was generally wanted) without imposing changes retrospectively.
2056.Paragraph 8(5) provides two meanings of “the relevant chargeable period”. In general it is a chargeable period which straddles 1 or 6 April. But there is a special rule for contributions. This is because a contribution might, in principle at least, be made in a straddling chargeable period (or an earlier chargeable period) to expenditure which is not incurred until a chargeable period which starts after 1 or 6 April.
Paragraph 24
2057.This paragraph ensures that the further registration requirement for the deferment rules (in section 154) does not apply in respect of ships first brought into use before 21 April 1994.
Paragraph 46 to 51
2058.These paragraphs maintain entitlement to first-year allowances for additional VAT liabilities in respect of plant or machinery within the VAT capital goods scheme. This arises broadly if:
there was expenditure on computers which qualified for first-year allowances in the period 1 November 1992 to 31 October 1993 or 2 July 1997 to 1 July 1998;
the expenditure was incurred by a partially-exempt business; and
the proportion of exempt business changes.
2059.This affects a tiny minority of taxpayers. They will all have had to claim the first-year allowances in accordance with the legislation for the periods in question. The possibility of additional VAT liabilities only arises for up to ten years after the expenditure. So the legislation is both transitory and of only very limited interest.
2060.The same approach is taken to initial allowances for contracts entered into between October 1992 and November 1993 for buildings in enterprise zones. See paragraph 75.
Paragraph 55
2061.This paragraph is based on section 82 of CAA 1990. It provides for expenditure which was:
incurred before 6 April 1976; and
was not eligible expenditure within section 39 of FA 1976
to be unaffected by the Act.
2062.The type of expenditure that is involved relates back to before the introduction of pooling in FA 1971. Expenditure could not be pooled under the FA 1971 provisions if it was incurred before 27 October 1970. In 1976, remaining expenditure which was still not pooled could be pooled but an exception was made for some types of expenditure, broadly those things that would be in single asset pools.
2063.In CAA 1990 the position was preserved by section 82 of CAA 1990. This disapplied CAA 1990 and all its repeals for this expenditure so that it continued to be treated as before, without being pooled.
2064.It is impossible to say whether any of these pools are still in existence and it is equally impossible to say that there are none. This paragraph therefore preserves the position.
Paragraph 88
2065.This is based on section 119 of CAA 1990 and deals with the transition from MOWA in 1986. Its principal effect now is to allow recapture under Part 5 of excessive relief on expenditure incurred before 1 April 1986 even where some or all of that relief was given under MOWA.
Paragraph 94
2066.This paragraph is based on section 522(2) and (7) of ICTA and section 146(3) of CAA 1990. It provides writing-down allowances for expenditure on the purchase of patent rights incurred before 1 April 1986.
2067.Subparagraph (2) preserves the effect of section 161(3) of CAA 1990. See Note 74 in Annex 2.
Paragraph 98
2068.This paragraph is based on section 523(4) of ICTA. It provides a reduced writing-down allowance on pre-1 April 1986 expenditure.
2069.Subparagraph (3) is new. It provides that the reduced writing-down allowance is proportionately increased or reduced if the chargeable period for which it is given is more or less than a year. See Change 66 in Annex 1.
Schedule 4: Repeals
2070.This Schedule makes repeals.
