Section 65 and Schedule 13: General Block Exemption Regulation
Summary
1.Section 65 and Schedule 13 amend two enhanced capital allowances to take account of changes made to State aid rules following the introduction of Commission Regulation (EU) No. 651/2014 which replaces Commission Regulation no. 800/2008 “declaring certain categories of aid compatible with the internal market in the application of Articles 107 and 108 of the treaty” (the “General Block Exemption Regulation” or “GBER”). The amendments ensure that these two reliefs continue to satisfy State aid requirements in relation to environmental protection and regional aid.
Details of the Schedule
2.Schedule 13 amends the following sections of the Capital Allowances Act 2001 (CAA):
Section 45DB – exclusions from allowances under section 45DA.
Section 45K - expenditure on plant and machinery for use in designated assisted areas (enterprise zone allowances).
Section 45M – exclusions from allowances under section 45K.
Section 45N – effect of plant or machinery subsequently being primarily for use outside designated assisted areas.
Section 212T – cap on first-year allowances: zero-emission goods vehicles.
Section 212U – cap on first-year allowances: expenditure on plant and machinery for use in designated assisted areas.
3.Paragraph 1 provides for changes to be made to the Capital Allowances Act 2001.
4.Paragraph 2 amends various reference in subsections 45DB(3)(a), 4(a), (11) and (12). It amends the definition of firm in difficulty to refer to an undertaking in difficulty for the purposes of the new GBER. It also updates various existing references so that they correctly cross-refer to the new GBER.
5.Paragraph 3 amends section 45K. Section 45K provides that five conditions, A to E, must be met if expenditure is to qualify for enhanced capital allowances. Condition C at section 45K(8) requires that qualifying expenditure must be incurred on plant and machinery used: (a) for a business of a kind not previously carried on by the company; (b) expanding a business carried on by the company; or (c) starting up an activity which relates to a fundamental change in a product or production process of, or service provided by, a business carried on by the company.
6.Paragraph 3 inserts new subsections (8A) and (8B). These provide that subsection (8)(c) can only be satisfied if the expenditure incurred on the plant and machinery required to change the product, production process or service in question exceeds the depreciation of the plant and machinery being replaced or modernised over the three previous years. This complies with Article 14(7) of the new GBER.
7.For example, a machine used in the existing production process was purchased for £500,000 and had a useful life of 10 years and was depreciated in the accounts on that basis, i.e. £50,000 per year. The new machine must cost at least £150,000 to satisfy new subsection (8A).
8.Paragraph 4(1) provides for various changes to be made to section 45M. Section 45M sets out certain situations when expenditure does not qualify for enhanced capital allowances. The changes exclude certain types of expenditure and provide that expenditure by large businesses in certain enterprise zones must be on new activities only.
9.Paragraphs 4(2) to (4) and (6) make various amendments to subsections 45M(1), (3), (4) and (6) to comply with the new GBER by including a number of additional sectors in which expenditure does not qualify for enhanced capital allowances. These include expenditure incurred on energy generation, distribution or infrastructure and the development of broadband networks. The scope of the existing exclusion on certain activities in the transport sector is also widened.
10.Paragraph 4(5) inserts a new subsection 45M(4A). This provides that the various expressions in subsection (4) take the meaning used in the new GBER.
11.Paragraph 4(7) inserts a new subsection 45M(7A). This complies with Article 14(3) of the new GBER. It provides that qualifying expenditure incurred by large enterprises in enterprise zones that fall within assisted areas that are classified by the European Commission as being Article 107(3)(c) areas only qualifies for enhanced capital allowances if it relates to “a business of a kind not previously carried on by the company”, i.e new activities.
12.Assisted areas fall within either Article 107(3)(a) or Article 107(3)(c) of the Treaty on the Functioning of the European Union (with Article 107(3)(a) areas having a lower per capita gross domestic product than Article 107(3)(c) areas).
13.Paragraphs 4(8) and (9) update and clarify the definitions given in subsections 45M(12) and (15).
14.Paragraph 5 amends section 45N(1), and inserts a new subsection (3A). This ensures that where a large enterprise has claimed enhanced capital allowances for expenditure incurred on plant and machinery in an Article 107(3)(a) area for a purpose under either section 45K(8)(b) or (c), that plant or machinery must be used by the person claiming the allowance (or a connected person) for at least 5 years within such an area.
15.If, within that period, the person begins to use the plant or machinery primarily outside such an area, the allowance will be withdrawn and the expenditure will be treated as never having qualified for enhanced capital allowances. This section is designed to prevent exploitation and satisfy the requirements of the new GBER.
16.Paragraphs 6 and 7 update the references in sections 212T and 212U to the new GBER.
17.Paragraph 8 provides that these amendments take effect from Royal Assent.
Background Note
18.Capital allowances allow the cost of capital assets to be written off against taxable profits. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax.
19.Most businesses are entitled to a 100 per cent allowance, the Annual Investment Allowance (AIA), for their investment in most plant or machinery up to an annual limit, which for the period April 2014 to 31 December 2015 has been temporarily increased to £500,000. For expenditure above that limit, writing-down allowances (WDA) are available. These are given at the main rate of eighteen per cent or the special rate of eight per cent per annum.
20.First-year allowances, which are generally called enhanced capital allowances or ECAs, are available for expenditure on certain types of plant or machinery as an alternative to AIA and WDA. ECAs accelerate the rate at which tax relief is available for capital spending and allow 100 per cent of the cost of an investment to qualify for tax relief against a business’s taxable profits of the year in which the investment is made. They provide business with a valuable cash-flow benefit.
21.Certain ECAs are classified as State aids and have been designed to comply with the GBER. The GBER exempts certain State aid measures from prior notification to the European Commission if various conditions are met. As part of a State Aid Modernisation process the European Commission has revised the existing GBER 800/2008 and a new version 651/2014 took effect from 1 July 2014. The revisions are designed to stimulate economic growth, job creation and other objectives of common interest, without distorting competition. It also reduces the administrative burden for Member States and gives the beneficiaries of aid greater certainty.
22.Whilst similar to its predecessor, the new GBER contains a number of differences which need to be reflected in domestic legislation for zero-emission goods vehicles and enterprise zones to ensure continued State aid compliance.
