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Finance Act 2012

Section 44 Schedule 11 Expenditure on Plant and Machinery for Use in Designated Assisted Areas


1.Section 44 and Schedule 11 provide 100 per cent first-year allowances (FYAs) for companies investing in plant or machinery for use primarily in designated assisted areas within Enterprise Zones.  To qualify for this new relief, the expenditure must be incurred in the period from when an area is treated as being a designated assisted area and 31 March 2017.

Details of the Schedule

2.Paragraph 1 is introductory and explains that the Capital Allowances Act 2001 (CAA) is to be amended.

3.Paragraph 2 adds expenditure on plant and machinery for use in designated assisted areas to the categories of expenditure, listed in section 39 of CAA, that can qualify for FYAs.

4.Paragraph 3 introduces new sections 45K to 45N into CAA.

Section 45K Expenditure on plant and machinery for use in designated assisted areas.

5.New section 45K(1) sets out the circumstances in which expenditure on plant or machinery constitutes first-year qualifying expenditure.  The conditions are that the expenditure must be incurred:

  • by a company on the provision of plant or machinery for use primarily in an area which is a designated assisted area at that time.   (The restriction of the new FYAs to “a company” means that unincorporated businesses and partnerships of companies, even if the partnership may be a body corporate, are not eligible for these new FYAs);

  • in the period of five years beginning with 1 April 2012;

and -

  • five further conditions (conditions A to E) must also be met.

6.New section 45K(2) sets out the meaning of “designated assisted area”: this means an area which has been designated by an order made by the Treasury, and an area that falls wholly within an assisted area (see new subsection 14). This latter requirement is the first of a number designed to ensure that these new FYAs fallwithin Commission Regulation (EC) No 800/2008 known as the General Block Exemption Regulation (“GBER”) (see new subsection (13) in respect of State Aid. Because they provide a geographically selective benefit, the new FYAs would constitute regional State Aid.

7.New section 45K(3) sets out the circumstances in which an area may be designated by an order.  There are two requirements:

  • the area must fall wholly within an enterprise zone (see new subsection 14), and

  • the Treasury and the responsible authority (see new subsection 14) must have entered into a memorandum of understanding relating to the availability of the new FYAs in the area. (The memoranda of understanding, each of which will include a map of the relevant designated assisted area, will be published on the HM Treasury website.)

8.New section 45K(4) ensures that, where appropriate, the order may have retrospective effect.  So, for example, if the order so provides, the new FYAs may be made available in respect of qualifying expenditure incurred on or after 1 April 2012, even if the order is not made until some time after Royal Assent to Finance Act 2012, say, in late August 2012.

9.New section 45K(5) prevents an area being revoked or reduced in size with retrospective effect.

10.New sections 45K (6) to (10) set out the five further conditions (that is, in addition to those in New section 45K(1)), which also have to be met:

  • conditions A and B restrict the new relief to UK resident companies, which are liable to corporation tax, and that carry on a trade or a mining, transport or similar undertaking (as mentioned in section 12(4) of Income Tax (Trading and Other Income) Act 2005 (ITTOAI) or 39(4) of Corporation Tax Act 2009 (CTA 2009));

  • condition C ensures that the GBER requirement for the expenditure to comprise investment aid, rather than operating aid, is met.  This effectively means that the expenditure must be incurred on setting up a new business, expanding an existing business or on a fundamental change to a product or production process of, or service provided by, a business carried on by a company;

  • condition D focuses the relief on new and unused plant and machinery, which is a GBER requirement; and

  • condition E is that the expenditure is not “replacement expenditure” (as defined in New section 45K(11)), which is also a GBER requirement.

11.New sections 45K(11), (12) and (13) explain the meaning and scope of “replacement expenditure” and also provide for a just and reasonable apportionment where part only of the expenditure is replacement expenditure.

12.New section 45K (14) defines “assisted area”, “enterprise zone” and “the responsible authority”.

13.New section 45K (15) allows the Treasury to amend the definition of “assisted area” by order, if any changes are made to the areas in the UK which are granted assisted area status. The current list of assisted areas is due to be revised by the Commission with effect from 1 January 2014.

14.New section 45K(16) provides that new section 45K is subject to

  • new section 45L (plant or machinery partly for use outside designated assisted areas),

  • new section 45M  (exclusions from section 45K allowances),

  • new section 45N (effect of plant or machinery subsequently being primarily used in an area other than a designated assisted area), and

  • section 46 (general exclusions).

Section 45L Exclusion of plant and machinery partly for use outside designated assisted areas.

15.New Section 45L is an anti avoidance rule to prevent exploitation where the company incurring the expenditure intends to use the plant or machinery outside the designated assisted area, but enters into “relevant arrangements”, designed to meet the “for use primarily in the area” test, where the main, or one of the main, purposes of those arrangements is to obtain the FYA, or a greater amount of FYA.  For example, a bus operator group of companies, that would normally have set up two new companies to operate two new bus fleets of similar size in two different areas (where one is a designated assisted area and the other is not), might seek to exploit the new FYAs by setting up one company and using both fleets alternately in both areas, to contrive the result that both fleets are used just over 50 per cent in the designated assisted area.  In such a case, the part (here, one-half) of the combined fleet which the group intended to use outside of the designated assisted area would be determined on a just and reasonable basis, and the expenditure on that part would be excluded from the FYA.

Section 45M Exclusions from allowances under section 45K

16.New section 45M(1) provides that expenditure incurred by a person is not first-year qualifying expenditure under new section 45K if it falls within sections 45M(2), (4), (6) or (7).  The exclusions in these subsections are GBER requirements.

17.New sections 45M(2) to (5) provide that expenditure does not qualify for new section 45K allowances if the person who incurred the expenditure is, or forms part of, an “undertaking” that is:

  • a “firm in difficulty”;

  • subject to an outstanding recovery order, declaring aid illegal;

  • in the fishery or aquaculture sectors;

  • in the coal, steel, shipbuilding or synthetic fibres sectors;

  • engaged in the management of waste of other “undertakings”;

or -

  • is engaged in:


    the primary production of agricultural products,


    on-farm activities necessary for preparing an animal or plant product for the first sale,


    the first sale of agricultural products by a primary producer to wholesalers, retailers or processers where that sale does not take place on separate premises reserved for that purpose.

18.New section 45M(6) provides that expenditure does not qualify for relief if it is incurred on a means of transport or transport equipment by a person carrying on a qualifying activity in the road freight or air transport sectors. This does not mean that all expenditure incurred by businesses in those sectors is excluded; only their expenditure on means of transport and transport equipment is ineligible for relief.

19.New sections 45M(7) provides that no new section 45K allowances are to be made if a relevant grant or relevant payment is made towards that expenditure, or any other expenditure incurred by any person in respect of the same designated assisted area and on the same “single investment project.”  (See new subsection (12), where “single investment project” is given the same meaning as in the GBER). For example, a company building a new production facility in a designated assisted area cannot receive both the new FYA and any other State aid in relation to, say, either the building costs of the actual facility (as opposed to the plant and machinery to be used in the facility, which would qualify for the new FYAs) or, say, staff training costs, to be incurred on training employees on how to use the new equipment.  If any company can apply for another State aid in relation to the same project, then it will have to decide which State aid is of greater value to it.

20.The GBER at Article 13(10) explains what a “single investment project” is and the preamble at paragraph 41 further explains that the scope of the project should not be construed narrowly and should be assessed independently from ownership. This means that a “single investment project” is not limited to the project of a single company, but includes one carried out by an undertaking or undertakings, for example, a joint venture.  So, if, for example, two companies are involved in the same “single investment project” as a joint venture  and one company receives any form of State aid (other than the new FYA) in relation to the project, then neither company can claim the new FYA, even if one of the companies did not receive any other State aid in respect of that joint venture project.

21.A grant or payment is relevant if it is a State aid (other than a FYA under these new provisions), or if it is declared, by Treasury order, to be relevant.

22.This new subsection 45M(7) and the next, subsection 45M(8), together with the cap on these new FYAs (as provided for in paragraph 7 of this Schedule) are designed to ensure that the new FYA rules are fully compliant with the GBER rules about the cumulation of State aid.  A large, investment project, that received State aid in excess of the cap, would not generally fall within the terms of the GBER, and would have to be separately notified to the European Commission, before any State aid could be granted.  The tax system is not structured to cater for the cumulation of different forms of aid, so, for the purposes of these FYAs, the cap in relation to a large investment project is calculated with reference to the new FYAs alone.  This means that companies with a choice between the new FYAs and other forms of State aid for the same “single investment project” must effectively choose whether to claim the FYA or another State subsidy.  If, however, a company that had claimed the new FYAs in one year, only became aware in the next that another State grant would have been more beneficial, then it could still claim the grant, but then the next subsection 45M(8) would apply and the FYAs would become repayable.

23.New sections 45M(8) to (11) provide that if a relevant grant or payment is made after the making of the new FYA allowance, the allowance is to be withdrawn if the relevant grant or payment is made towards the expenditure. If the relevant grant or payment is made toward any other expenditure incurred on the same “single investment project” (which term has the same meaning as in the GBER) then the relief is only withdrawn if the relevant grant or payment is made within 3 years of the qualifying expenditure being incurred.  Provision is made for all necessary assessments and adjustments to be made for this purpose. In addition, a person who has made a return, who becomes aware that anything in the return has become incorrect because of the operation of this section, must give notice to an Officer of Revenue and Customs of the necessary amendment, within 3 months of first becoming aware of it.

24.New section 45M(12) defines various terms used in new section 45M.

25.New section 45M(13) makes it clear that any reference to State aid in the section is not to be read narrowly, so as to apply only to State aid that is required to be notified to, and approved by, the European Commission. So, for example, State aid that is brought within the terms of the GBER, so that it is exempt from prior notification, is still a relevant grant or payment.

26.New section 45M(15) states that the Treasury may, by order, make such provision to amend new section 45M as appears to them appropriate to give effect to any future amendments to, or instruments replacing, the particular European Regulations, Guidelines, Directive or Treaty, listed in this new subsection.

Section 45N Effect of plant or machinery subsequently being primarily for use outside designated assisted area.

27.New section 45N(1) of this new section requires that the plant or machinery, in relation to which the new section 45K FYAs have been claimed, must be primarily used by the person claiming the allowance (or a connected person) for at least 5 years within the relevant designated assisted area. If, within that 5 year period, the person claiming the allowance, or a connected person, begins to use the plant or machinery primarily outside that area, the FYAs must be withdrawn, as if the expenditure had never qualified for the new FYAs.  This section is included both to prevent exploitation of the new FYAs and also to satisfy the GBER State aid requirements in relation to regional aid.

28.New sections 45N(2) and (3) define ‘relevant time’ and ‘relevant period’.

29.New sections 45N(4) to (6) provide that all such necessary assessments and adjustments are to be made for the purpose of withdrawing the relief.  In addition, a person who has made a return, who becomes aware that anything in the return has become incorrect because of the operation of this section, must give notice to an Officer of Revenue and Customs of the necessary amendment, within 3 months of first becoming aware of it.

30.Paragraph 4 adds new section 45K to the list of provisions to which the general exclusions in section 46 apply. These general exclusions provide that expenditure is not FYA expenditure if, for example, it is incurred on the provision of a car, or on plant or machinery for leasing, or in the chargeable period in which the qualifying activity of the business is permanently discontinued.

31.Paragraph 5 adds expenditure on plant and machinery for use in designated assisted areas to the Table of FYAs, and their respective rates, in section 52(3) of CAA, and sets the rate of these new FYAs at 100 per cent.  It also provides an addition to section 52(5), to the effect that the new FYAs are subject to new “section 212U (cap on first-year allowances: expenditure on plant and machinery for use in designated assisted areas)”.

32.Paragraph 6 changes section 52A to make it clear that not only can a person not claim an annual investment allowance and a FYA in relation to the same expenditure, but also a person cannot claim a FYA under two or more of the provisions listed in section 39 in respect of the same expenditure.

33.Paragraph 7(1) introduces new section 212U into CAA.

Section 212U Cap on first-year allowances: expenditure on plant and machinery for use in designated assisted areas

34.New section 212U(1) and (2) cap the amount of expenditure incurred on plant or machinery, primarily for use in a particular designated assisted area that can qualify for the new FYAs, at a maximum of €125 million per person (“the investor”), or at a maximum of €125 million for any such expenditure, incurred by any person, in respect of the same “single investment project”.  The cap on the new FYAs, is expressed in terms of a “single investment project”, in order to ensure compliance with the GBER in relation to the cumulation of aid, and in recognition of the fact that the GBER does not provide a general exemption for large investment projects.

35.New section 212U(3) provides how expenditure incurred in a currency other than the euro is to be converted into Euros for the purposes of the €125 million cap.

36.New section 212U(4) provides that the Treasury may by regulations increase the cap.

37.New section 212U (5) defines terms used in new section 212U and provides that the term “single investment project” has the same meaning as in the GBER.

38.Paragraph 7(2) makes a minor consequential amendment to the heading to Chapter 16B.

39.Paragraph (8) provides that the amendments made by the new Schedule have effect for chargeable periods ending on or after 1 April 2012.

Background Note

40.The proposal to introduce Enterprise Zones was announced at Budget 2011. The main benefits for businesses in the new zones comprise simplified planning and business rates discounts.  The Budget statement also announced that the Government would work with Local Enterprise Partnerships (LEPs) to consider introducing enhanced capital allowances (in other words, first-year capital allowances (‘FYAs’) in Enterprise Zones in assisted areas.

41.In an HM Treasury Press Notice on 17 August 2011, the Government announced its decision to proceed with the enhanced capital allowances (that is, FYA) proposal.  On 26 August 2011, HM Treasury wrote to LEPs providing details of the proposed design of the new 100 per cent FYAs scheme, and seeking bids from the LEPs, based on that design. In addition, the letter outlined the criteria against which the bids would be judged.

42.The Government announced that it would make 100 per cent FYAs available in various designated assisted areas, within specific English enterprise zones in 2011, as well as in an additional zone in Humber, which was announced in February 2012.  At Budget 2012, the Government further announced that it would also make 100 per cent FYAs available in a designated assisted area of the London Royal Docks enterprise zone, in three Scottish enterprise zones (in Irvine, Nigg and Dundee) and in Deeside in Wales.  A full list of current zones and designated assisted areas delineated by maps will be published on the Treasury website in due course.

43.The standard rates of writing-down allowances for businesses’ qualifying  capital expenditure on plant or machinery are either 18 per cent or 8 per cent per annum (the rates that will apply from April 2012), depending on the nature of the asset.  100 per cent FYAs therefore provide business with a valuable tax-timing benefit.

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