Background Note
24.Depreciation of fixed assets charged in the commercial accounts of a business is not allowed as a deduction in computing the taxable profits. Instead capital allowances may be given at prescribed rates on certain assets, including plant and machinery. The Annual Investment Allowance (AIA) provides an annual 100 per cent allowance for the first £25,000 (this is the maximum annual allowance from April 2012) of investment in plant and machinery to all businesses. There are also 100 per cent first-year allowances (FYA) available for expenditure on certain types of plant or machinery. Otherwise expenditure on plant and machinery attracts writing down allowance (WDA) at the main rate of 18 per cent per annum or the special rate of 8 per cent per annum (these are the rates that apply from April 2012).
25.Chapter 17 CAA contains anti-avoidance rules that restrict the plant and machinery allowances that may be claimed following certain relevant transactions. A relevant transaction is one in which: • S sells plant or machinery to B, or
B enters into a hire-purchase or similar contract for plant or machinery with S, or
S assigns the benefit of a hire purchase or similar contract for plant or machinery to B
26.Allowances may be restricted where the relevant transaction is • between connected persons (defined in section 214), or
a transaction to obtain allowances (defined in section 215), or
a sale and leaseback (defined in section 216).
27.The anti-avoidance rules are being amended to make them more effective.
28.The ‘sole or main benefit’ test currently in section 215 is being replaced by a new ‘purpose’ test that will apply where the main, or one of the main, purposes of a party in entering into a transaction (or a scheme or arrangement of which the relevant transaction is part) is to enable any person to obtain a tax advantage that would not otherwise have been obtained. The tax advantage may arise to a party to the transaction or any other person.
29.A ‘tax advantage’ is defined in section 577(4) of CAA. The term includes allowances that are ‘greater’ or more favourable because the amount of qualifying expenditure has been artificially increased, because the allowances have been a claimed at a rate that is too high or because they have been claimed sooner than they should have been.
30.Where a transaction, scheme or arrangement has an avoidance purpose then B’s allowances are restricted to, in effect, cancel the tax advantage. To this end, the restriction may be to reduce the rate at which B’s allowances are calculated (if the tax advantage B would otherwise obtain is allowances at a rate that is too high) or to reverse any timing advantage sought by B so that B is, in both cases, in the position that B would have been in without the tax advantage. In other situations B’s qualifying expenditure is restricted to an amount that has the effect of negating the tax advantage. If appropriate more than one restriction may be made to B’s allowances.
31.It is possible that a transaction with an avoidance purpose is also a connected person transaction or a sale and leaseback, in which case the application of the existing rules in section 218 or section 228 must also be considered and the largest applicable restriction made.
32.The ‘purpose’ test and the consequences of entering into a transaction, scheme or arrangement with an avoidance purpose are consistent with the approach used in other purpose tests elsewhere in the Taxes Acts.