Example
The assumptions are as in the example for section 59 on page 47 except that P sells the van on 1 March 2004 for £3,000. This is an arm’s length sale at market value. The disposal value is £3,000.
For 2003-04 P has:
available qualifying expenditure of £4,125; and
total of any disposal receipts of £3,000;
and, as AQE exceeds TDR, is entitled to writing-down allowances at 25% on £4,125 - £3,000 = £1,125
309.Item 2 in the Table provides for the market value to be found at the time of the sale. CAA 1990 is silent on this. But it is implicit. See Note 17 in Annex 2.
310.There is a minor change. Item 5 in the Table gives a disposal value which is not in CAA 1990 in relation to the abandonment of certain plant or machinery. Section 24(6)(c)(ii) of CAA 1990 gives this disposal event. But section 26 of CAA 1990 does not give a disposal value for that specific event. In the absence of any specific disposal value within section 26(1), the disposal value is given by section 26(1)(f). It is the open market value of the plant or machinery. This is at odds with the treatment of other plant or machinery when it is demolished or possession is lost; with the treatment of plant or machinery that is dismantled or demolished as part of a decommissioning programme; and it is uncertain. Item 5 in the Table accordingly provides for the disposal value to be the insurance or other compensation received. See Change 10 in Annex 1.
Section 62: General limit on amount of disposal value
311.This section is based on section 26(2) and (3) of CAA 1990 with a minor change. It puts a cap on disposal values.
312.Subsection (1) is the general rule. It is based on section 26(2) of CAA 1990. The disposal value for any plant or machinery is limited to the qualifying expenditure incurred on it. This is part of the underlying theme of this Part: plant and machinery allowances are given in total for the actual depreciation suffered on the asset. Without this provision someone who (exceptionally) sells plant or machinery for more than they paid for it would end up with an overall charge.
313.Subsections (2) and (3) modify the general rule concerning plant or machinery acquired from a connected person. They are based on section 26(3) of CAA 1990. They limit the disposal value to the greatest amount of qualifying expenditure incurred by any of those connected persons. This rule goes hand in hand with the provisions in section 61 which allow a person to:
sell at less than market value to a connected person who can claim capital allowances; and
bring only the sale proceeds into account as a disposal value (rather than the open market value).
314.Without subsections (2) and (3) people could avoid balancing charges, if allowances exceeded the actual depreciation, by selling to a connected person who then sells the plant or machinery.
315.The rules are expressed in this section in terms of qualifying expenditure. Section 26(2) and (3) of CAA 1990 gives the rule in terms of capital expenditure. This is a change which is in principle generally favourable to taxpayers. It leaves out of account capital expenditure incurred by a connected person who is not carrying on a qualifying activity. It can in theory have a knock-on effect which is against a taxpayer’s interests if the disposal comes within Chapter 17. This is because the benefit for the seller of a lower disposal value may then result in a lower amount of qualifying expenditure for the buyer. See Change 11 in Annex 1.
316.Section 575 defines a “connected person”.
Section 63: Cases in which disposal value is nil
317.This section is based on parts of sections 24, 67, 69, 70 and 71 of CAA 1990 and of sections 21A, 65A, 70A, 83A and 84 of ICTA. It also makes minor changes. It provides a nil disposal value for a number of disposal events.
318.Subsection (1) is based on section 24(6) of CAA 1990. That provides that:
this subsection shall not require a person to bring into account the disposal value of any machinery or plant which he disposes of by way of gift in such circumstances that there is a charge to tax under Schedule E.
319.This provision has in the past caused some confusion. It was sometimes read as meaning that there was no disposal event at all. That is not right. But the absence of a disposal value still has some odd effects. For example suppose a person buys plant or machinery, claims first-year allowances and then gives it to an employee in the same chargeable period. On the basis of CAA 1990 they would not be entitled to allocate the balance of their qualifying expenditure to a pool. Subsection (1) provides a nil disposal value which allows them to do so. It also makes clearer the effect of the legislation. This could be to the disadvantage of the recipient if the gift were a transaction within Chapter 17 as it prevents the recipient from also claiming allowances. But this is thought to be unlikely in practice. See Change 12 in Annex 1.
320.Subsection (2) makes similar provision for gifts to certain charities, heritage and other bodies, and educational establishments. This is based on parts of sections 83A and 84 of ICTA. They provide that section 24 of CAA 1990 does not require a disposal value to be brought into account. Subsection (2) makes a minor change, as in subsection (1), to provide a nil disposal value with similar effects. See Change 12 in Annex 1.
321.Subsection (2) also omits the requirements in section 84 of ICTA that the person making the gift must have claimed plant and machinery allowances and make a claim for the relief section 84 provides. This is in principle in taxpayers’ favour but is very unlikely to make any practical difference. It does however simplify the legislation for gifts to educational establishments and bring it into line with the more modern legislation in section 83A of ICTA which has neither of these requirements. See Change 13 in Annex 1.
322.Subsection (3) lists the qualifying activities which get the benefit of a nil disposal value for gifts within subsection (2). This is based partly on sections 83A and 84 of ICTA. Those sections refer explicitly to trades, professions and vocations. But the effect of other provisions in ICTA is that Schedule A businesses and overseas property businesses are also included. It might be thought that other qualifying activities were also covered for the purposes of plant and machinery allowances. But there is no provision in ICTA which extends sections 83A and 84 to them. See Note 18 in Annex 2.
323.Subsection (4) points to the provisions in ICTA which impose a charge on donors if they or persons connected with them receive any benefit from the gift.
324.Subsection (5) provides nil disposal values for expenditure of the types dealt with by section 27. CAA 1990 has the same provisions in sections 67 and 69 to 71.
Section 64: Case in which no disposal value need be brought into account
325.This section is a minor change. It provides that no disposal value need be brought into account in respect of qualifying expenditure if no first-year allowances have been made and no expenditure has been allocated to a pool.
326.There is no explicit provision in CAA 1990 equivalent to this section. It is, however, in line with practice.
327.On the basis that section 25(1) of CAA 1990 requires expenditure to be allocated automatically to a pool, there would be little need for such a provision given that the disposal value is limited to the capital expenditure incurred. But a taxpayer would appear to be required to bring a disposal value into account even if they had not appreciated they had qualifying expenditure and had made no use of it. CAA 1990 also leaves unclear what taxpayers should do if a change in the accepted meaning of plant or machinery results in their having disposal values to bring into account for what they never knew was expenditure on plant or machinery.
328.In practice the Inland Revenue have accepted that expenditure which is not added to the pool, for whatever reason, may be added for a later period provided there has not been a disposal event. This more flexible approach is followed in this Act. The Inland Revenue have also accepted that no disposal value need be brought into account if no first-year allowances have been made and none of the expenditure has been allocated to a pool.
329.Subsection (1) puts this on a clearer statutory basis. It provides that no disposal value need be brought into account if no expenditure is allocated to a pool (which, when read with section 58(6), means also that no first-year allowances are made). See Change 14 in Annex 1.
330.Subsections (2) to (4) are consequential on the change in subsection (1). They require a person (“C”) who has qualifying expenditure for plant or machinery acquired from a connected person to bring into account a disposal value if:
C allocates any qualifying expenditure to a pool (or gets first-year allowances); or
any of the connected persons in the transaction or train of transactions before C brings into account a disposal value.
331.The first is no more than the general rule. The second prevents the minor change in subsection (1) being used by connected persons to escape bringing into account disposal values on plant or machinery for which allowances are claimed. See again Change 14 in Annex 1.
332.Section 575 defines a “connected person”.
Section 65: The final chargeable period
333.This section is based on the several provisions throughout Part II of CAA 1990 which deal with pools. There are also two minor changes. It defines the final chargeable period for pools. A final chargeable period means there may be entitlement to a balancing allowance (see section 56).
334.Subsection (1) means there is a final chargeable period for the main pool for the qualifying activity of special leasing when the special leasing ends. This is not clear in section 61 of CAA 1990 but is what one would expect from the underlying approach in Part II of CAA 1990. It avoids anomalies such as a pool with no end; and allowances which cannot be used against any income whatsoever. See Change 15 in Annex 1.
335.Subsection (2) provides a final chargeable period for a single asset pool when there is a disposal event. But this is subject to the additional provisions pointed to in subsection (3). This is based on parts of sections 24, 31, 34, 37, 79 and 80 of CAA 1990. They provide for the notional trades (pools here) to be permanently discontinued. Most use a common form of words:
without prejudice to section 24(6)(c)(i) to (iii), the [notional] trade is permanently discontinued when the [plant or machinery] begins to be used wholly or partly for purposes other than those of the actual trade
336.Section 24(6)(c)(i) to (iii) of CAA 1990 lists disposal events and has been taken to mean the pool ends with a final chargeable period when such an event occurs. Subsection (2) provides for this. See Change 15 in Annex 1.
Section 66: List of provisions outside this Chapter about disposal values
337.This section sets out provisions elsewhere in Part 2 about disposal values.
Chapter 6: Hire-purchase etc. and plant or machinery provided by lessee
Overview
338.This Chapter makes special provision for expenditure on plant or machinery under a hire-purchase or similar contract which a person does not own. It also deals with expenditure by lessees who are required, under the terms of a lease, to provide plant or machinery which they do not own.
339.Section 67 treats a person entitled to the benefit of plant or machinery under a hire-purchase or similar contract as owning it. It also treats the person as having incurred all the expenditure under the contract when they bring the plant or machinery into use.
340.Section 68 provides disposal values when a person ceases to be entitled to the benefit of a contract and so is treated as ceasing to own it. The disposal value depends on whether or not the plant or machinery has been brought into use.
341.Section 69 excludes fixtures (as defined in Chapter 14) from section 67.
342.Section 70 deals with the special circumstances mentioned in paragraph 338. A lessee who is required to provide plant or machinery under the terms of a lease but does not own it is, subject to certain conditions, treated as owning it. The lessor is then, in certain circumstances, subsequently required to bring a disposal value into account.
Background
343.A person buying plant or machinery under a hire-purchase or similar contract does not own it. So they cannot meet the general conditions for allowances under this Part in section 11.
344.Legislation to enable a person to get plant and machinery allowances for expenditure under hire-purchase contracts was introduced (by FA 1957) at the same time as the general rule that plant or machinery had to belong to a person as a result of the expenditure for them to be entitled to plant and machinery allowances.
Section 67: Plant or machinery treated as owned by person entitled to benefit of contract, etc.
345.This section is based mainly on section 60(1) and (4) of CAA 1990. It treats a person who meets the conditions in the section as owning the plant or machinery. This means they meet the general condition in section 11(4)(b) (that the person owns the plant or machinery).
346.Subsection (3) treats the person as incurring all the capital expenditure under the contract when the plant or machinery is brought into use for the qualifying activity. Subsection (4) treats the person as ceasing to own the plant or machinery when they cease to be entitled to the benefit of the contract if they do not then own it. These have implications for the disposal values given in the next section.
347.This section does not apply to expenditure on fixtures (see section 69) and subsection (3) does not apply to expenditure for finance leasing (see section 229(3)).
Section 68: Disposal value on cessation of notional ownership
348.This section is based on section 60(2) of CAA 1990. It provides the disposal value when a person ceases to be entitled to the benefit of a hire-purchase or similar contract. There is a minor change.
349.Section 60(2) of CAA 1990 makes specific provision for the disposal value when a person ceases to be entitled to the benefit of a contract after bringing the plant or machinery into use for their qualifying activity. Subsection (2) gives the amount.
350.CAA 1990 makes no specific provision for the disposal value when a person ceases to be entitled to the benefit of a contract before the plant or machinery is brought into use. Subsection (3) fills this gap. The disposal value is the same as in subsection (2) except that, as the person was not treated as having incurred all the remaining capital expenditure under the contract, there is no need to take that amount away as a disposal value. See Change 16 in Annex 1.
351.Subsection (5) refers to section 229. That makes sure the disposal value in subsection (3) here does not disadvantage a person to whom a contract is assigned in a transaction which is within Chapter 17.
Section 69: Hire-purchase etc. and fixtures
352.This section is based on section 60A of CAA 1990. It excludes expenditure on fixtures from the special provisions for hire-purchase and similar contracts in section 67.
Section 70: Plant or machinery provided by lessee
353.This section is based mainly on section 61(4) and (8) of CAA 1990. It provides for the rare circumstances in which a lessee has to provide plant or machinery under the terms of a lease but does not own it. There is a minor change.
354.If the section applies:
the lessee is treated as owning the plant or machinery; but
the lessee is not required to bring a disposal value into account when the lease ends.
355.The latter is an exception to the usual rule in CAA 1990 (and in this Act). Usually cessation of ownership (or deemed ownership) is a disposal event. But in the unusual circumstances dealt with by this section it is the lessor who is required, if the plant or machinery continues in use until the lease ends, to bring a disposal value into account. That is certainly the accepted practice. Subsections (3) to (5) provide that. In doing so they fill in some gaps in section 60(4) of CAA 1990. See Change 17 in Annex 1.
Chapter 7: Computer software
Overview
356.This Chapter makes additional provision for computer software:
computer software is treated as plant for the purposes of Part 2 (section 71); and
the grant of rights to software on which qualifying expenditure is incurred may require a disposal value to be brought into account for which there are additional rules (sections 72 and 73).
Section 71: Software and rights to software
357.This section is based on section 67A of CAA 1990. It treats software and rights to software as plant. This means expenditure on software can qualify for plant and machinery allowances.
Section 72: Disposal values
358.This section is based on sections 24(6A) and 26(1)(ea), (eb) and (ec) of CAA 1990. It makes additional provision (over and above those in Chapter 5) for disposal values for computer software.
359.Subsections (1) and (2) are based on section 24(6A) of CAA 1990. They introduce as an additional disposal event for computer software the grant of a right to use or otherwise deal with software. This does not affect how computer software is subject to the ordinary disposal events. See section 61.
360.Subsection (3) is based on section 26(1)(ea), (eb) and (ec) of CAA 1990. It deals with disposal values for the grant of a right to use or otherwise deal with computer software.
Section 73: Limit on disposal values
361.This section is based on section 26(2AA). It deals with the limit on disposal values for computer software and rights to use or otherwise deal in computer software.
362.The general limit on disposal values is in section 62. This section modifies that to take account of the fact that there may have been earlier disposal values brought into account.
Chapter 8: Cars, etc.
Overview
363.This Chapter makes special provisions for cars (and motorbikes) costing over £12,000. It includes definitions which are used for other sections in Part 2.
364.The Chapter:
requires a single asset pool for expenditure over £12,000 on a car (other than a qualifying hire car) (section 74);
restricts writing-down allowances to a maximum of £3,000 a year (section 75);
restricts writing-down allowances further if part of the expenditure is met by another person, the car is use only partly for the qualifying activity, or there is a depreciation subsidy (sections 76 to 78);
makes additional provision for the disposal value if:
a person ceases to own a car in a transaction within Chapter 17; or
an employee or office-holder has claimed capital allowances for some years and for other years used the administrative fixed profit car scheme instead.
365.Sections 81 and 82 define “car” and “qualifying hire car” for the purposes not just of this Chapter but for Part 2 generally.
Section 74: Single asset pool
366.This section is based on section 34(1) and (2) of CAA 1990. It deals with cars costing in excess of £12,000. Qualifying expenditure on them must be allocated to a single asset pool (if allocated to a pool at all). Section 54 introduces single asset pools.
Section 75: General limit on amount of writing-down allowance
367.This section is based on section 34(3) of CAA 1990. It limits the writing-down allowance on a car above the £12,000 cost threshold to £3,000 a year.
368.Subsection (3) lists other provisions of this Chapter that may limit further the amount of the writing-down allowance.
Section 76: Limit where part of expenditure met by another person
369.This section is based on section 34(3)(b) of CAA 1990. It restricts allowances if part of the expenditure on the car is met by another person or persons.
370.The limit of £3,000 on writing-down allowances is restricted further for both the recipient of the contribution and the contributors (if they are entitled to plant and machinery allowances). Each is limited to a proportion of the £3,000 limit according to how much of the expenditure on the car they met. The total writing-down allowances due to all parties cannot exceed £3,000 a year.
371.Subsections (3) and (4), unlike section 35(1) of CAA 1990, do not create special pools for contributions to expenditure on expensive cars. This is not required because of the way Part 11 handles contributions. See Note 19 in Annex 2, and the related Change 60 in Annex 1.
Section 77: Car used partly for purposes other than those of qualifying activity
372.This section is based on section 34(5) of CAA 1990. It deals with cars that are partly used for purposes other than those of the qualifying activity.
373.There is no disposal event when a car within this Chapter begins to be used in this way. So the single asset pool under this Chapter takes the place of the single asset pool which would otherwise be required by Chapter 15. But the rules in this section are similar to those in Chapter 15 as regards the just and reasonable reduction to any allowances and charges.
374.Subsection (1) provides that no balancing allowance or charge arises when the car begins to be used partly for purposes other than those of the qualifying activity. See Note 20 in Annex 2.
375.Subsection (4) deals with calculation of unrelieved qualifying expenditure carried forward. In saying that any reduction of a writing-down allowance under this section is to be disregarded, this subsection goes further than section 34(5) of CAA 1990. See Note 21 in Annex 2
Section 78: Effects of partial depreciation subsidy
376.This section is based on section 34(5) of CAA 1990. It deals with partial depreciation subsidies made in respect of cars over the cost threshold. Much as with section 77, it takes the place of Chapter 16 for cars, but otherwise has similar effect.
377.Subsection (3) deals with calculation of unrelieved qualifying expenditure carried forward. In saying that any reduction of a writing-down allowance under this section is to be disregarded, it goes further than section 34(5) of CAA 1990. See Note 21 in Annex 2.
Section 79: Cases where Chapter 17 (anti-avoidance) applies
378.This section is based on section 34(4) of CAA 1990. It deals with cases in which a car is disposed of in a transaction within Chapter 17. The intention when this legislation was introduced was to prevent artificial acceleration of allowances for cars over the cost threshold by disposal events between connected persons.
Section 80: Vehicles provided for purposes of employment or office
379.This section is based on section 27(2A) to (2E) of CAA 1990. It gives plant and machinery allowances to employees and office-holders on a car or cycle they use partly for “business travel”. There is a minor change.
380.The general rule in section 36 is that employees and office-holders have qualifying expenditure only for plant or machinery “necessarily provided for use in the performance of the duties”. This rule is relaxed to include expenditure on cars and cycles partly for use as in subsection (2) – what is generally known as “business use”. This includes a minor change to align the legislation for capital allowances with that for expenses in ICTA. See Change 18 in Annex 1.
381.Subsection (3) limits the balancing allowance an employee or office-holder is entitled to if they have:
in some years claimed capital allowances on a car or cycle; and
in other years made use instead of the administrative arrangements (for example the fixed profit car scheme) which give tax relief without claims.
Section 81: Extended meaning of “car”
382.This section is based on section 36(1)(a) and (b) of CAA 1990. It defines “car” for the purposes of this Part.
383.Other references to car include sections 46 (general exclusion 2 from first-year qualifying expenditure), 84 (short-life assets treatment ruled out) and 96 (cars are not long-life assets).
Section 82: Qualifying hire cars
384.This section is based on section 36 of CAA 1990. It defines “qualifying hire cars”. These are not subject to the provisions of this Chapter.
Chapter 9: Short-life assets
Overview
385.This Chapter provides single asset pools for some expenditure. A person elects for expenditure to be allocated to a pool of this type. Doing so means a disposal event within, broadly, four years gives rise to a balancing allowance (or charge). This gives capital allowances for the net cost of plant or machinery with a life of less than about four years earlier than if the expenditure were allocated to the main pool.
386.Section 83 defines short-life asset and section 84 gives a Table of cases in which treatment as a short-life asset is ruled out.
387.Section 85 deals with the election.
388.Section 86 sets up the single asset pool. Section 87 provides special pooling rules for leased assets.
389.Section 88 prevents avoidance by sale at under value and section 89 deals with the sale of a short-life asset to a connected person.
Section 83: Meaning of “short-life asset”
390.This section is based on section 37(1) of CAA 1990. It introduces the term “short-life asset” and gives its meaning.
Section 84: Cases in which short-life asset treatment is ruled out
391.This section is based on section 38 of CAA 1990. It rules out short-life asset treatment for some types of expenditure on plant or machinery.
Section 85: Election for short-life asset treatment: procedure
392.This section is based on section 37(2) of CAA 1990. It deals with the elections for short-life asset treatment.
Section 86: Short-life asset pool
393.This section is based on section 37(3) and (5) of CAA 1990. It requires single asset pools for short-life assets. It defines the new term “four-year cut-off”. This is used in this Chapter only.
Section 87: Short-life assets provided for leasing
394.This section is based on section 37(6) of CAA 1990. It deals with leased assets that are used other than for a qualifying purpose.
395.Section 84 permits assets provided for leasing to be short-life assets if they:
are cars hired to disabled persons; or
will be used only for qualifying purposes in the designated period.
396.If the plant or machinery starts to be used for what is not a qualifying purpose, the short-life asset pool ends. The expenditure left in the single asset pool goes to the main pool.
Section 88: Sales at under-value
397.This section is based on section 37(10) of CAA 1990. It provides a general rule that disposals of short-life assets at less than market value have a disposal value of their market value. There are exceptions if the disposal is one in which there is a charge to tax under Schedule E or an election is made under section 89.
Section 89: Disposal to connected person
398.This section is based on section 37(8) and (9) of CAA 1990. It allows connected persons to elect for a different treatment if they transfer a short-life asset between them. They can treat it like a sale at a price equal to the amount of the qualifying expenditure left in the pool. “Connected person” is defined in section 575. Both parties must make the election.
Chapter 10: Long-life assets
Overview
399.This Chapter provides rules for long-life assets. Expenditure on long-life assets must be allocated to a separate class pool. It is subject to a special rate of writing-down allowances of 6%.
400.Section 90 defines “long-life asset expenditure”. Section 91 defines “long-life asset”. Section 92 provides for this Chapter to apply to only part of the capital expenditure on plant or machinery.
401.Sections 93 to 96 provide that some fixtures, ships, railway assets and cars are not long-life assets.
402.Sections 97 to 100 provide, very broadly, that this Chapter does not apply to expenditure on long-life assets up to £100,000. Some types of expenditure are excluded from this.
403.Section 101 requires a class pool for long-life assets unless the expenditure is allocated to a single asset pool.
404.Section 102 limits writing-down allowances for long-life asset expenditure to 6% a year.
405.Sections 103 and 104 provide anti-avoidance rules. Section 103 provides that long-life assets do not cease to be treated as such when they are second-hand. Section 104 prevents avoidance by artificial acceleration of allowances.
Background
406.Legislation for long-life assets was introduced by Schedule 14 to FA 1997. That inserted Chapter IVA of CAA 1990. At the time of the Budget in 1996 it was stated that the intention was to bring the tax treatment of long-life assets more closely into line with normal accountancy practice.
407.The new rules applied only to assets bought under contracts made on or after Budget day in 1996. Section 38H of CAA 1990 provided the necessary legislation to exclude expenditure incurred before 26 November 1996 or expenditure incurred before 1 January 2001 on contracts entered into before 26 November 1996. The effect of section 38H is maintained in paragraph 20 of Schedule 3 to this Act.
Section 90: Long-life asset expenditure
408.This section is based on section 38A(1) of CAA 1990. It defines “long-life asset expenditure”.
Section 91: Meaning of “long-life asset”
409.This section is based on section 38A(2) and (3) of CAA 1990. It defines “long-life asset”. A long-life asset is an asset with a useful economic life of 25 years or more when new.
Section 92: Application of Chapter to part of expenditure
410.This section is based on section 38A(4) and (5) of CAA 1990. It deals with circumstances in which this Chapter only applies to part of the capital expenditure on plant or machinery. If that happens then the expenditure within this Chapter is treated as expenditure on a separate asset from the expenditure outside it. If necessary, apportionments are made between that part to which this Chapter applies and that part to which it does not.
Section 93: Fixtures etc.
411.This section is based on section 38B(1) of CAA 1990. It excludes expenditure on fixtures in certain types of building from being long-life asset expenditure.
412.The types of buildings are broadly those which do not usually qualify for industrial buildings allowances. So the long-life asset rules in general only apply to fixtures in industrial buildings.
Section 94: Ships
413.This section is based on section 38B(3) of CAA 1990. It excludes expenditure on ships incurred before 1 January 2011 from being long-life asset expenditure.
414.Subsection (2) defines “ship” for these purposes. It covers cruise liners as they are not ships designed primarily for sport or recreation.
415.Subsection (3) takes the definitions of “offshore installation” and “controlled waters” from the Mineral Workings (Offshore Installations) Act 1971. The text of these definitions is given in the explanatory note on section 153.
Section 95: Railway assets
416.This section is based on section 38B(4) of CAA 1990. It excludes expenditure on railway assets incurred before 1 January 2011 and used for a railway business from being long-life asset expenditure.
417.Subsections (2) and (3) define “railway asset” and “railway business”.
418.Subsection (4) extends the exemption to trains used to travel between the UK and another country.
419.Subsections (5) gives “railway” the same meaning as in section 81(2) of the Railways Act 1993. The text of this definition is:
(2.Where it is stated for the purposes of any provision of this Part that railway has its wider meaning, “railway” shall be taken, for the purposes of that provision, to mean:
a railway;
a tramway; or
a transport system which uses another mode of guided transport but which is not a trolley vehicle system, and cognate expressions shall be construed accordingly.
(3.In paragraphs (a) to (c) of subsection (2) above “guided transport, “railway”, “tramway” and “trolley vehicle system” have the meaning given by section 67(1) of the Transport and Works Act 1992.”
420.Section 67(1) of the Transport and Works Act 1992 gives the following further definitions:
“guided transport system” means transport by vehicles guided by means external to the vehicles (whether or not the vehicles are also capable of being operated in some other way)
“railway” means a system of transport employing parallel rails which-
provide support and guidance for vehicles carried on flanged wheels
form a track which either is of a gauge of at least 350 millimetres or crosses a carriageway (whether or not on the same level)
“tramway” means a system of transport used wholly or mainly for the carriage of passengers and employing parallel rails which-
provide support and guidance for vehicles carried on flanged wheels, and
are laid wholly or mainly along a street or in any other place to which the public has access (including a place to which the public only has access on making a payment)
“trolley vehicle system” means a system of transport by vehicles constructed or adapted for use on roads without rails under electric power transmitted to them by overhead wires (whether or not there is in addition a source of power on board the vehicles).”
421.Subsection (6) gives other terms the same meaning as in the Railways Act 1993. These definitions are:
“goods” includes mail, parcels, animals, plants and any other creature, substance or thing capable of being transported, but does not include passengers;
“light maintenance depot” means any land or other property which is normally used for or in connection with the provision of light maintenance services, whether or not it is also used for other purposes;
“station” means any land or other property which consists of premises used as, or for the purposes of, or otherwise in connection with, a railway passenger station or railway passenger terminal (including any approaches, forecourt, cycle store or car park), whether or not the land or other property is, or the premises are, also used for other purposes;
“track” means any land or other property comprising the permanent way of any railway, taken together with the ballast, sleepers and metals laid thereon, whether or not the land or other property is also used for other purposes; and any reference to track includes a reference to–
any level crossings, bridges, viaducts, tunnels, culverts, retaining walls, or other structures used or to be used for the support of, or otherwise in connection with, track; and
any walls, fences or other structures bounding the railway or bounding an adjacent or adjoining property;”
Section 96: Cars
422.This section is based on section 38B(2) of CAA 1990. It excludes expenditure on cars from being long-life asset expenditure.
423.The definition of a car in section 82 means expenditure on cars (and motorbikes) is excluded from this Chapter whether or not the car would be within Chapter 8.
Sections 97 to 100: Monetary limit
424.These four sections are based on sections 38C and 38D of CAA 1990. They provide a de minimis limit. Expenditure is not usually long-life asset expenditure if a person’s total expenditure on long-life assets is less than £100,000 a year. If the limit is exceeded all the relevant expenditure is long-life asset expenditure.
425.Section 98 means the limit is available to:
individuals and partnerships within subsections (1) and (2); and
any company, for the purposes of corporation tax.
426.There is a minor change in section 98(1)(a). It refers to any qualifying activity carried on by an individual. Section 38C(3)(a) of CAA 1990 only refers to trades and professions. See Change 19 in Annex 1.
427.Section 99 gives the £100,000 limit. It also:
increases or reduces the limit if a chargeable period is more or less than a year; and
reduces the limit if a company has associated companies. This reduction is done in the same way that the limit for small companies relief is reduced in section 13 of ICTA.
428.Section 100 sets out when the limit is exceeded. It also provides that all the expenditure on an item of plant or machinery is looked at to see if the limit is exceeded – not just the expenditure which is incurred (or treated as incurred) in a particular chargeable period.
Section 101: Long-life asset pool
429.This section is based on section 38E(1) and (2) of CAA 1990. It requires a separate pool for long-life asset expenditure. If the expenditure does not have to be allocated to a single asset pool this is the class pool for long-life asset expenditure. A separate pool is necessary to apply the 6% rate of writing-down allowances for long-life assets.
430.The rule in section 38E(2)(c) of CAA 1990 which provides that the class pool for long-life assets only ends when the trade ends is in section 65(1).
431.Subsection (2) is drafted on the basis that a qualifying activity of special leasing can have a long-life asset pool. See Note 22 in Annex 2.
Section 102: Writing-down allowances at 6%
432.This section is based on section 38F of CAA 1990. It provides writing-down allowances at 6% a year for long-life asset expenditure. This rate applies to the class pool for long-life assets and to any long-life asset expenditure in a single asset pool.
433.Subsection (2) is drafted on the basis that a qualifying activity of special leasing can have a long-life asset pool. See Note 22 in Annex 2. The 6% rate can also apply to a contributor’s single asset pool. See Note 23 in Annex 2.
Section 103: Later claims
434.This section is based on section 38F(3) and (4) of CAA 1990. It provides that plant or machinery which has been treated as a long-life asset by one person must be treated as a long-life asset by anyone who subsequently incurs qualifying expenditure on it. This broadly means second-hand assets are treated in the same way as they were when new.
435.There is an exception to this. This applies for expenditure that is excluded from being long-life asset expenditure simply by sections 93 to 96. For example, an asset could be a railway asset to a new owner but not the former owner. In such a situation, the new owner’s expenditure would be long-life asset expenditure.
Section 104: Disposal value of long-life assets
436.This section is based on section 38G of CAA 1990. It prevents tax avoidance arrangements designed to accelerate allowances.
437.Subsection (1)(d) refers to “tax advantage”. This is defined in section 577(4).
438.Subsection (3) deals with the “notional written-down value”. This is handled in a different way from section 38G(2) and (3). See Note 24 in Annex 2.
Chapter 11: Overseas leasing
Overview
439.This Chapter reduces or prohibits allowances on qualifying expenditure if:
the plant or machinery is leased during the designated period to a person who is not resident in the UK;
that person does not use the plant or machinery exclusively for earning profits chargeable to UK tax; and
the leasing is not protected leasing.
440.This expenditure is referred to in this commentary as “affected qualifying expenditure”.
441.Sections 105 and 106 define “leasing”, “overseas leasing”, “protected leasing” and “designated period”.
442.Section 107 allocates affected qualifying expenditure to a class pool (the overseas leasing pool) unless it is long-life asset expenditure or expenditure which must be put into a single asset pool.
443.Section 108 modifies the general rules for disposal values if plant or machinery in the overseas leasing pool is disposed of to a connected person. In those circumstances the section also affects the expenditure that the person acquiring the plant or machinery is treated as incurring.
444.Section 109 provides writing-down allowances at 10% a year (instead of 25%) for pools containing affected qualifying expenditure (other than long-life asset expenditure). So this rate applies both to the overseas leasing pool and to any single asset pools containing such expenditure.
445.Section 110 prohibits allowances on affected qualifying expenditure if the plant or machinery is leased under certain types of lease.
446.Sections 111 to 113 recover any excess allowances from earlier chargeable periods if it only becomes clear in a later chargeable period that the expenditure is affected qualifying expenditure. The amount recovered broadly leaves taxpayers where they would have been if allowances had always been given at 10% on the affected qualifying expenditure. There are special provisions to do this for ships.
447.Sections 114 to 115 recover any excess allowances made for earlier chargeable periods if, in a later chargeable period, circumstances are such that allowances are prohibited. The amount recovered again broadly puts taxpayers back where they would have been if allowances had been prohibited from the start.
448.Sections 116 and 117 provide for certain modifications to these rules if the plant or machinery is let to joint lessees.
449.Sections 118 to 120 deal with certificates and notices that are required in certain cases. Sections 121 to 126 define some terms used in this Chapter.
Background
450.The material in this Chapter is based on Chapter V of Part II of CAA 1990.
451.Sections 45, 47 and 49 of CAA 1990 (together with sections 39(2)(a) and (8)(a), 40(4)(a) and (4)(b)(ii)) deal with “old expenditure”. They are not rewritten in this Act. See Note 77 in Annex 1.
Section 105: “Leasing”, “overseas leasing” etc.
452.This section is based on sections 42(1), 50(1) to (3A) and 83(2A) of CAA 1990. It defines some of the main terms used in this Chapter.
453.Subsection (1)(a) refers to a “ship or aircraft on charter” whereas section 50(2) of CAA 1990 refers to a “ship on charter”. This does not affect the law. See Note 25 in Annex 2.
454.Subsection (3)(a)’s reference to “profits chargeable to tax” uses a different form of words from that in sections 42(1)(b) and 50(3A) of CAA 1990. This does not affect the law. See Note 26 in Annex 2.
Section 106: The designated period
455.This section is based on sections 40(4) and (5) and 50(3) of CAA 1990. It defines the period during which this Chapter can affect qualifying expenditure. Typically that period ends when the person who incurs qualifying expenditure disposes of the plant or machinery or, if earlier, ten years after the person first uses the plant or machinery. But the rules are modified in special cases: for example, if plant or machinery is transferred between connected persons.
Section 107: The overseas leasing pool
456.This section is based on section 41(1)(a) and (6) and part of section 41(2) of CAA 1990. It requires certain affected qualifying expenditure to be put in a class pool (“the overseas leasing pool”).
457.Subsection (2) takes a simpler approach to special leasing than section 42(2)(e) of CAA 1990. It leaves expenditure on plant or machinery for special leasing to be dealt with like expenditure on plant or machinery for other qualifying activities. See Note 22 in Annex 2.
Section 108: Effect of disposal to connected person on overseas leasing pool
458.This section is based on section 41(5) of CAA 1990. It prevents disposals to a connected person being used to get a balancing allowance in respect of an overseas leasing pool. It does so by modifying the disposal value that has to be brought into account in the overseas leasing pool. The person acquiring the plant or machinery is treated as having incurred expenditure equal to the disposal value so as to get the right answer in terms of total allowances over the period of their combined ownership.
Section 109: Writing-down allowances at 10%
459.This section is based on sections 42(1) and (2) and 24(2)(a)(ii) of CAA 1990. It replaces the usual 25% rate of writing-down allowances by a 10% rate. This 10% rate applies to:
the overseas leasing pool; and
any single asset pool if the plant or machinery is used at any time in the designated period for overseas leasing which is not protected leasing (except for long-life assets for which the normal rate for that of 6% still applies).
460.Subsection (3) differs in some respects from section 42(2) of CAA 1990. The subsection:
applies the 10% rate to all single asset pools including those for expenditure on plant or machinery used partly for the purposes of the qualifying activity and partly for other purposes. These pools are not mentioned in section 42(2) of CAA 1990. See Change 20 in Annex 1;
does not mention special leasing. Section 42(2)(e) of CAA 1990 needs to provide for the 10% rate to apply to special leasing. But the simpler approach in section 107 (see paragraph 457 above) means the 10% rate does still apply in such cases. See Note 22 in Annex 2; and
covers single asset pools generally. This includes single asset pools for contributions. So it is not necessary to mention them explicitly as in section 42(2)(d) of CAA 1990. See Note 23 in Annex 2.
Section 110: Cases where allowances are prohibited
461.This section is based on section 42(3) of CAA 1990. It prohibits allowances in certain circumstances.
Section 111: Excess allowances: standard recovery mechanism
462.This section is based on section 46(1) to (4) and (8) of CAA 1990. It recovers allowances if:
expenditure is allocated to a pool with writing-down allowances at 25%; but
it becomes clear in a later chargeable period that this Chapter applies to that expenditure.
463.The section broadly withdraws the difference between:
any first-year allowances plus writing-down allowances at 25%; and
allowances at 10%.
464.It does so by imposing a balancing charge and requiring a disposal value. In broad terms:
the balancing allowance recovers the excess of allowances made over what would have been made at 10%; and
the disposal value takes out of the pool the residue of qualifying expenditure in the pool on which future allowances would otherwise be made at 25%.
465.But in the next chargeable period it allocates to an appropriate pool the total of the allowances withdrawn and the expenditure taken out of the original pool. The net effect of this is broadly that the expenditure is still relieved in full but at a slower rate – as it would have been if the 10% rate had applied from the outset.
Section 112: Excess allowances: connected persons
466.This section is based on section 46(5), (6) and (8) of CAA 1990. It makes two modifications to section 111 for transactions between connected persons.
467.The first modification deals with the possibility that a transaction gives rise to a balancing allowance to one of the connected persons. This would not otherwise be taken into account in section 111 which (without this modification) looks only at first-year allowances and normal writing-down allowances. With this modification any balancing allowance is taken into account when withdrawing excess allowances.
468.The second modifies section 111 if a transfer was not subject to what are known as the “step in shoes” provisions for capital allowances. These are provisions such as sections 561 in this Act and section 343 of ICTA (see paragraph 1936 below) which broadly allow a successor to take on the entitlement to allowances and liability to balancing charges of a predecessor.
469.The modification:
identifies the expenditure in relation to which section 111 applies. This is necessary as each of the connected parties may have incurred different amounts of expenditure on the plant or machinery. The amount used is that of the first connected person to have taken an allowance in relation to the plant or machinery; then
provides that later transactions between the connected parties are ignored; and finally
provides for a just and reasonable adjustment to the formulae in section 111 if a balancing adjustment has been made to any of the connected persons in respect of the plant or machinery.
Section 113: Special provision for ships
470.This section is based on section 46(7) and (8) of CAA 1990. It deals with the case in which expenditure on a ship has been allocated to a single ship pool by section 127.
471.This section gives priority to sections 111 and 112 over the single ship pool provisions. It ends the single ship pool treatment if, during the designated period, the ship is used for overseas leasing which is not protected leasing (see section 132). It adds any postponed allowances in respect of the expenditure, if they have not been taken by the first chargeable period of such overseas leasing, to the same pool as the amount in section 111(3). The postponed allowances cannot be claimed under the single ship provisions from the first chargeable period of such overseas leasing.
Section 114: Prohibited allowances: standard recovery mechanisms
472.This section is based on section 42(4), (5) and (9) of CAA 1990. It deals with the general case in which allowances are taken on expenditure but, in a later chargeable period, it becomes clear that section 110 applies so that no allowances are available in respect of that expenditure.
473.This section broadly withdraws any allowances by means of a balancing charge and a disposal value. The allowance withdrawn takes account of any allowances withdrawn by section 111 so there is no double counting.
474.Subsection (2)(b) provides that a disposal value is to be brought into account to remove from the pool the qualifying expenditure on which no allowances can be made. There is no explicit provision for this in CAA 1990. See Note 27 in Annex 2.
Section 115: Prohibited allowances: connected persons
475.This section is based on section 42(6) and (7) of CAA 1990. It modifies section 114 if there have been transactions between connected parties which have not resulted in “step in shoes” treatment for capital allowances. It is similar to section 112.
Section 116: Mitigation of regime
Section 117: Recovery of allowances in case of joint lessees
476.These sections are based on sections 43 and 44 of CAA 1990. They deal with expenditure on plant or machinery if at some time in the designated period:
the plant or machinery is leased to joint lessees who use it for the purposes of qualifying activities but not for leasing;
one of the lessees is not resident in the UK and does not use the plant or machinery exclusively to earn profits chargeable to UK tax; and
the leasing is not protected leasing.
477.These sections are likely to affect relatively few people. They are broadly meant to cater for unusual cases in which this Chapter might otherwise lead to results not intended.
478.An example might be a letting of machinery to a partnership between a person in the United Kingdom and a person overseas for use in a construction contract carried on by them outside the United Kingdom. If the partnership is on a 50/50 basis the owner of the plant or machinery might get allowances on 50% of the expenditure under the normal rules. The other 50% would be subject to sections 109 (with writing-down allowances at 10%) and 110 (allowances prohibited). The actual split of the expenditure is based on the extent to which it appears that, over a certain period, the profits of the lessees will be chargeable to UK tax. Without these sections the 10% rate of allowances or the prohibition on allowances would apply to the whole of the owner’s expenditure.
479.Because the expenditure which is split is in fact on a single item of plant or machinery there are consequential provisions dealing with the corresponding split of disposal values on a disposal of the plant or machinery.
480.These sections only allow part of the expenditure to be treated for the duration of that lease as being on plant or machinery which is not used for overseas leasing. So if the plant or machinery is used at some other time during the designated period for overseas leasing which is not protected leasing the whole of the expenditure will be subject to the 10% rate or the prohibition on allowances and these sections will be of little or no relevance.
481.If:
the joint lease continues at the end of the designated period; and
the profits of the joint lessees chargeable to United Kingdom tax are less than originally anticipated,
there is a provision for downwards adjustment of the part of the expenditure subject to the normal provisions.
482.And if at some time during the joint lease none of the lessees uses the plant or machinery to earn profits chargeable to United Kingdom tax, all of the expenditure becomes subject to the 10% rate or the prohibition on allowances.
483.Section 117(1) includes the words “the plant or machinery (or as the case may be)” which do not appear towards the end of section 44(2) of CAA 1990. Without these words, section 44(2) is not entirely consistent. See Note 29 in Annex 2.
484.Section 43(5) of CAA 1990 is not necessary now and has not been rewritten. See Note 28 in Annex 2.
Sections 118 to 120: Certificate and notices
485.These sections are based on sections 44(2) and 48 of CAA 1990.
Section 121: Meaning of “short-term leasing”
486.This section is based on section 40(1) to (3) of CAA 1990. It defines when plant or machinery is used for short-term leasing.
Section 122: Short-term leasing by buyer, lessee, etc.
487.This section is based on parts of sections 39(1), (3), (4) and (10) and 40(5) of CAA 1990. The common theme is that the plant or machinery is being used for short-term leasing by any of the various persons mentioned in this section. This is the first of five sections dealing with when plant or machinery is used for a qualifying purpose.
Section 123: Ships and aircraft
488.This section is based on section 39(6) to (8) of CAA 1990. It gives additional circumstances in which a ship or aircraft is used for a qualifying purpose.
Section 124: Transport containers
489.This section is based on section 39(9) of CAA 1990. It gives additional circumstances in which a transport container is used for a qualifying purpose.
Section 125: Other qualifying purposes
490.This section is based on sections 39(1), (2), (5) and (10) and 40(5) of CAA 1990. It treats plant or machinery as used for a qualifying purpose when the plant or machinery is used by certain persons otherwise than for leasing.
Section 126: Minor definitions
491.This section is based on section 50(3) to (4A) of CAA 1990.
Chapter 12: Ships
Overview
492.This Chapter contains provisions relating to plant and machinery allowances and balancing charges arising in respect of expenditure on ships. Within the Chapter there are two main sets of provisions. These provide entitlement to:
postpone first-year and writing-down allowances arising on ships; and
defer balancing charges arising on the disposal of certain ships.
493.The first set of provisions deals with pooling of expenditure and postponement of allowances. These provisions allow first-year and writing-down allowances to be “stockpiled” and taken in subsequent chargeable periods. In order to achieve this:
sections 127 to 129 deal with the allocation of expenditure to single asset pools (“single ship pools”), the circumstances in which expenditure on ships must not be allocated to a single ship pool, and an election for expenditure to be allocated to a different pool;
sections 130 to 131 allow taxpayers to postpone allowances for single ship pools and to take them in future chargeable periods; and
sections 132 to 133 deal with disposal events in respect of single ship pools.
494.The second set of provisions deal with deferment of balancing charges:
section 134 introduces the deferment rules;
sections 135 to 139 set out when, how and how much of a balancing charge can be deferred;
sections 140 to 145 set out how to attribute new expenditure on ships with deferred balancing charges. They include rules attributing older balancing charges to older expenditure, the procedure for varying an attribution and the rules which apply if some of the conditions for attribution cease to be met;
sections 146 to 150 identify what counts as expenditure on new shipping; and
sections 151 to 154 identify ships which qualify for the deferment rules;
sections 155 and 156 allow the deferment rules to operate across a change in the person carrying on the qualifying activity and give “connected persons” a special, wider meaning for the purposes of the deferment rules.
495.Sections 157 and 158 provide for the Chapter to be given effect and apply the provisions of ICTA which decide if companies are members of the same group.
