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Finance Act 2012

Section 41 Schedule 9: Capital Allowances: Restricting the Exception for Manufacturers and Suppliers


1.Section 41 and Schedule 9 removes an exception from the capital allowances anti-avoidance rules that exists for certain transactions where unused plant or machinery is bought or hire purchased from the manufacturer or supplier, but only where the transaction has an avoidance purpose. This is a change from the 12 August 2011 announcement, which announced the outright repeal of this exception (that is, without the current proviso) in relation to expenditure incurred on or after 12 August 2011.  The change now effected by this Section provides that the exception from the anti-avoidance rules will continue for expenditure incurred on or after 12 August 2011, but before the relevant April start date, but only as long as it is not incurred as a result of a relevant transaction with an avoidance purpose, or as a result of a scheme or arrangement that has an avoidance purpose.  (The position in relation to expenditure incurred on or after the relevant April start date is dealt with separately in paragraph 7 of Schedule 9.)

Details of the Section

2.Subsection (1) amends section 230 of the Capital Allowances Act 2001 (CAA) so that transactions with manufacturers or suppliers are no longer exempted from any restriction on the buyer’s allowances made by section 217 of CAA (which denies annual investment allowance or first-year allowances).

3.Subsection (2) provides that the change applies to expenditure incurred on or after 12 August 2011.

4.Subsection (3) provides that, in relation to expenditure incurred between 11 August 2011 and ‘the next amendment date’ (later defined as 1 April 2012, for corporation tax purposes, or 6 April 2012, for income tax purposes) first-year allowances are not denied provided the condition in subsection (4) is met.

5.Subsection (4) sets out the condition, providing that if the amendments made by paragraphs 1 to 7 of Schedule 9 had been in force between 12 August 2011 and the relevant April 2012 start date,  the transaction would not have been caught by the anti-avoidance rule in the revised section 215 and first-year allowances will not be denied.

6.Subsection (5) defines ‘the next amendment date’ and explains that it means the date defined in paragraph 9 of Schedule 9, that is, 1 April 2012 for corporation tax purposes, or 6 April 2012 for income tax purposes.

Background Note

7.Chapter 17 of CAA contains anti-avoidance rules that restrict the capital allowances that may be claimed where person B buys, or acquires under a hire-purchase (or similar) contract, plant or machinery from person S.

8.Allowances may be restricted where B and S are connected, where there is a sale and leaseback between B and S or where the capital allowances were the sole or main benefit which might have been expected to accrue from the transaction between B and S. In these circumstances B’s allowances may be restricted in two ways. Firstly, B will be prevented from claiming annual investment allowance (AIA) or first-year allowance (FYA) (by section 217 CAA). Secondly, B’s qualifying expenditure (the amount on which capital allowances may be claimed) will be restricted (by section 218 CAA).

9.However, where B buys, or hire-purchases, unused plant or machinery from S and S’s business is the manufacture or supply of such plant or machinery then section 230 CAA provides an exception from the anti-avoidance rules. For expenditure incurred before 12 August 2011, the exception was from both section 217 and section 218 so that B was able to claim AIA and FYA and there was no restriction of B’s qualifying expenditure.

10.However, in light of evidence that the manufacturers and suppliers exception was being used to facilitate avoidance, on 12 August 2011 the Government announced that legislation would be introduced in the 2012 Finance Act to repeal the exception from section 217 for expenditure incurred on or after 12 August 2011.

11.As a result, although the amount of B’s qualifying expenditure is not restricted, the anti-avoidance rules can prevent B claiming AIA or FYA in respect of expenditure incurred on or after 12 August 2011 even where the plant or machinery is acquired from the manufacturer or supplier.

12.However in the light or representations made during the consultation period and following the publication of the draft legislation on 6 December 2011 the Government decided that it was not necessary to wholly repeal section 230 from 12 August 2011.  The repeal now applies only to transactions that have an avoidance purpose and normal commercial manufacturer supplier transactions, involving connected parties or sale and leaseback arrangements are not affected...  In summary, for expenditure incurred on or after 12 August 2011 section 230 will continue to provide an exception from the restrictions in both section 217 and section 218 unless the transaction has an avoidance purpose.

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