Capital Allowances Manual: Main ContentsUpdates to this guidance | Search this Manual

CA10000 IntroductionCA11000 GeneralCA20000 Plant and machinery allowancesCA30000 Industrial buildings allowancesCA40000 Agricultural buildings allowancesCA43000 Flat conversion allowancesCA45000 Business Premises Renovation AllowanceCA50000 Mineral extraction allowancesCA60000 Research and development allowancesCA70000 Know-how allowancesCA75000 PatentsCA80000 DredgingCA85000 Assured tenancy allowances

CA10000 - Introduction: ContentsCA10020 Scope of manualCA10030 Abbreviations usedCA10040 History of capital allowancesCA10050 Where to find the capital allowance legislation

CA10020 - Introduction: Scope of manualThis manual contains guidance about capital allowances.

Capital allowances let taxpayers write off the cost of certain capital assets against

taxable income. They take the place of depreciation charged in the commercial

accounts, which is not normally deductible for tax purposes.

Not every type of capital expenditure qualifies for capital allowances. For example,

expenditure on the following does not qualify:

o commercial buildings (apart from expenditure on buildings qualifying for Enterprise Zone

Allowances, Research & Development Allowances or Business Premises Renovation

Allowances);

o residential buildings;

o land and

o some intangibles, such as trade marks and goodwill.

The capital allowances currently available are given for capital expenditure on:

o the provision of machinery or plant, see CA20000 onwards;

o industrial buildings, qualifying hotels and commercial buildings in enterprise zones,

seeCA30000 onwards;

o agricultural buildings and works, see CA40000 onwards;

o the conversion or renovation of unused space above shops and other commercial

premises into flats, see CA43000 onwards;

o the conversion or renovation of unused business premises in Assisted Areas,

see CA45000onwards;

o mineral extraction, see CA50000 onwards;

o research and development (formerly scientific research), see CA60000 onwards;

o know-how, see CA70000 onwards;

o patents, see CA75000 onwards;

o dredging, see CA80000 onwards;

o constructing buildings for letting under the assured tenancies scheme (but only for

expenditure incurred in 1982 - 1992), see CA85000 onwards.

CA10030 - Introduction: Abbreviations used

ABA Agricultural buildings allowanceAIA Annual investment allowanceATA Assured tenancies allowanceBPRA Business premises renovation allowanceCAA01 Capital Allowances Act 2001CT Corporation taxEZA Enterprise Zone AllowanceFCA Flat conversion allowanceFOTS Flats over shopsFYA First year allowanceIA Initial allowanceIBA Industrial buildings allowanceICTA88 Income & Corporation Taxes Act 1988IT Income taxITA Income tax act 2007ITEPA03 Income tax (Earnings and Pensions) Act 2003ITTOIA Income Tax (Trading and Other Income) Act 2005MEA Mineral extraction allowanceP&M Plant and machineryPMA Plant and machinery allowanceR&D Research and developmentRDA Research and development allowanceSME Small or medium-sized enterpriseSRA Scientific research allowanceTCGA Taxation of Chargeable Gains Act 1992UK United KingdomVAT Value added taxWDA Writing down allowance

CA10040 - Introduction: History of capital allowances

The early years

Until 1878 there were no capital allowances though there were deductions for

expenditure incurred in renewing or replacing existing machinery or plant. In 1878 a

"wear and tear" deduction was introduced. Wear and tear allowance represented the

diminished value of plant and machinery used for trade purposes by reason of wear and

tear during the year. The amount allowed was whatever was considered "just and

reasonable". A similar deduction based on annual value was available for expenditure on

mills and factories. It was called mills and factories allowance. These deductions gave

tax relief for an amount broadly equal to the actual economic depreciation suffered.

The post war system

The Income Tax Act 1945 put in place a system of capital allowances designed to

encourage and assist the reconstruction of British industry after the war.

From 1946 the previous system of wear and tear allowances for plant and machinery

was replaced by a new system of initial allowances, writing-down allowances, balancing

allowances and balancing charges:

o An initial allowance (i.e. first year allowance) of 20% for plant and machinery for the first

year was introduced to encourage investment in new machinery.

o The annual rate of writing-down allowances for plant and machinery was set at 25%,

which was above the rate of depreciation generally considered to be just and reasonable.

o A balancing adjustment (which could be an allowance or a charge) was made when the

asset was sold or ceased to exist to ensure that the overall relief given equalled the

actual reduction in value over the period of ownership.

o The Board of Inland Revenue could fix rates of writing-down allowance for different

classes of plant and machinery. The rates were based on the anticipated normal working

life of plant and machinery in each class. They were published and could be amended, as

required.

Industrial buildings allowances replaced the mills and factories allowance. The main

features were:

o An initial allowance of 10% for new buildings for the first year was introduced to

encourage investment in new buildings.

o The annual rate of writing-down allowance was set at 2%.

o A balancing adjustment (which could be an allowance or a charge) was made when the

asset was sold or ceased to exist to ensure that the overall relief given equalled the

actual reduction in value over the period of ownership.

Industrial buildings and structures that qualified for the new allowances were defined in

the legislation. Shops, offices, hotels and dwelling houses were specifically excluded as

the purpose of the relief was to "help the productive or creative industry that gives

industrial employment and is the foundation of national prosperity: from the point of

view of national prosperity it is the production of things and the export of things and not

the retail distribution at home of things that matters."

Agricultural buildings allowance replaced the special relief given to agricultural

landowners under the old Schedule A rules. The rate of allowance was set at 10% (rather

than the 2% for industrial buildings) following strong opposition from farmers and

landowners to any reduction in the generous relief that they had enjoyed previously.

Investment allowances

An "investment allowance" was introduced in 1954 to encourage investment in new

plant and machinery, mining works, industrial and agricultural buildings, and buildings

and plant used for scientific research. Investment allowances were given in addition to

initial and annual allowances. This meant that businesses could receive allowances over

the period of ownership of more than the asset had actually cost.

The investment allowance was set at a rate of 10% for agricultural and industrial

buildings and 20% for other qualifying assets. Investment allowances continued on and

off at various rates until 1966. Then they were replaced by direct grants administered by

the Board of Trade.

The method of making claims for plant and machinery by reference to a wide range of

different rates of writing-down allowance set out in published lists continued until 1962.

In a move to reduce the burden on business and simplify the process of claiming capital

allowances, the number of rates was then reduced to three (15%, 20% and 25%) and

taxpayers were allowed to pool expenditure within each category for the purposes of

calculating writing-down allowances. This was a considerable simplification, but

difficulties still remained where assets were sold or scrapped, as the pool had to be

unscrambled to calculate the balancing allowance or charge.

The 1971 system

There was a further major simplification in 1971. The number of rates of writing-down

allowance for plant and machinery were reduced to just one at 25%. The rules for

pooling were extended so as largely to eliminate the need for balancing allowances and

charges. This was a considerable simplification and greatly reduced the record- keeping

requirements and the number of computations needed for tax purposes.

1984 reforms

In 1984 the then Chancellor of the Exchequer, Nigel Lawson, started a series of reforms

to create a more neutral, broader based tax system. Initial allowances and first year

allowances were phased out over three years. The 1984 business tax reforms brought

capital allowances closer into line with actual rates of commercial depreciation.

Allowances were set at 25% for plant and machinery, 4% for industrial and agricultural

buildings.

Developments after 1984

Short-life assets: For assets with lives of less than 4 years, the 25% rate for plant and

machinery was recognised as representing less than economic depreciation. To adjust

for this, from 1985 taxpayers have been able to elect to keep specific assets out of the

general pool. If the asset is then sold or scrapped within 4 years a balancing allowance

or charge is made, bringing the allowances given into line with the actual economic

depreciation of the asset.

Long-life assets: In 1996 the then Government introduced a new 6% rate of allowance

for plant and machinery with an expected life of more than 25 years when new. This was

a further step towards greater neutrality of the tax system, bringing allowances more

closely into line with rates of economic depreciation. The rules only apply to businesses

which spend more than £100,000 a year on long-life assets.

Return of incentive allowances

First-year allowance for plant and machinery and initial allowances for industrial and

agricultural buildings were reintroduced on a temporary basis for expenditure incurred in

the year ended 31 October 1993.

First-year allowances (FYAs) were introduced again for expenditure incurred by small

and medium sized enterprises from 2 July 1998 to April 2008; the rate varied over this

period, but was either 40% or 50%. 100% FYAs were introduced for assets purchased by

small and medium-sized businesses in the period 12 May 1998 to 11 May 2002 for use

primarily in Northern Ireland. Subsequently, other 100% FYAs targeted to encourage

particular types of socially desirable investment were introduced for expenditure on:

o ICT by small businesses, between 1 April 2000 and 31 March 2004;

o energy-saving plant and machinery, from 1 April 2001;

o cars with low carbon dioxide emissions, from 17 April 2002;

o plant or machinery for gas refuelling stations, from 17 April 2002;

o plant or machinery for use wholly in a ring fence trade, from 17 April 2002;

o environmentally beneficial plant and machinery, from 1 April 2003

Other new allowances

Two new codes of allowances (not restricted solely to expenditure on plant or

machinery) were introduced in the early years of the 21st century: Flat conversion

allowances (FCAs) were introduced by FA2001. Business premises renovation allowances

(BPRA) were introduced by FA2004, but the scheme did not come into effect until 11

April 2007.

The FA2008 reforms

The capital allowances changes introduced in FA2008 represented the biggest reform of

the capital allowances system since the 1980s. The changes were part of a wider

‘Business Tax Reform’ package, which included a 2% cut in the main rate of corporation

tax. The reforms had three main objectives: (1) to promote investment and growth; (2)

to reduce distortions and complexity and (3) to maintain fairness and refocus the tax

system for smaller businesses. The main capital allowances changes were:

o The introduction of a new Annual Investment Allowance (AIA), which is effectively a 100%

allowance for business expenditure on plant and machinery (apart from cars) up to

£50,000 a year. The AIA applies to businesses regardless of size, and replaced the

previous 40% or 50% FYAS for small and medium-sized businesses only.

o A new small pools allowance, allowing historic and future pools of plant and machinery

expenditure of £1,000 or less to be written-off immediately.

o New payable tax credits for businesses that make losses attributable to investment in

environmentally beneficial plant and machinery.

o The phased withdrawal of industrial and agricultural buildings allowances by 2011.

o Changes to the rates of capital allowances on plant & machinery: from 25% to 20% for

the main pool, and from 6% to 10% for long-life assets in the new special rate pool.

o The introduction of a new classification of “integral features” of a building or structure to

apply to new and replacement expenditure and which will attract 10% allowances in the

special rate pool.

Consolidation

The capital allowance legislation was consolidated in 1990 in CAA90 apart from the

legislation on patents and know-how, which stayed in ICTA88. The legislation was

rewritten in 2000 and all of the capital allowance legislation is now in CAA2001. You can

find CAA2001 and the explanatory notes that go with it on the Intranet or on the Internet

at www.hmso.gov.uk/acts/acts 2001.

CA10050 - Introduction: Where to find the capital allowance legislationThe capital allowances legislation is in the Capital Allowances Act 2001 (CAA01). Before

that it was mainly in CAA90 apart from the legislation about patents and know-how,

which was in ICTA88 Chapter 1 Part XIII.

CA11101 - General: Claims: Types of capital allowanceThere are five types of capital allowance:

o initial allowance (IA);

o annual investment allowance (AIA)

o first-year allowance (FYA);

o writing down allowance (WDA);

o balancing allowance.

Charges under the capital allowance system are called balancing charges.

Capital allowances are broadly intended to give:

o a taxpayer relief for the reduction in value of an asset while he or she owns it (such as

PMA), or

o relief on a particular cost but which may be shared amongst more than one taxpayer

(such as IBA or ABA).

But the reduction in value of the asset concerned or the way in which a cost is to be

shared is normally impossible to predict when capital allowances begin to be given.

Balancing allowances and balancing charges are the mechanism by which adjustments

are made to achieve the broad intentions set out in the previous sentence. As a simple

example, a car that cost £19000 may be sold 3 years later for £12000. The net cost of

the car to the taxpayer is £7000 (= £19000 - £12000). The taxpayer must (in most

cases) treat as a balancing adjustment the difference between the total allowances

made in respect of that car and the net cost of £7000.

o The difference is a balancing charge if the allowances given total more than £7000; or

o the difference is a balancing allowance if the allowances given total less than £7000.

This manual applies to all types of allowance and to balancing charges.

CA11110 - General: Claims: How capital allowances are made

CAA01/S2

Capital allowances are made for a chargeable period CA11510. The amount of WDA for a

chargeable period depends upon the length of that period. For example, if the annual

rate of WDA is 20% the rate of WDA for a chargeable period that is 6 months long is 6/12

x 20% = 10%.

Similarly, the maximum Annual Investment Allowance (AIA) is £50,000 for a chargeable

period of a year. So when the chargeable period is more or less than a year the AIA must

be proportionately increased or reduced. For example, if a chargeable period is 6 months

long, for that period the maximum AIA is 6/12 x £50,000 = £25,000.

The length of a chargeable period does not affect the amount of a first year allowance,

initial allowance, balancing allowance or balancing charge. For example, where the rate

of FYA is 100%, 100% is the rate of FYA for a chargeable period of 1 month and it is also

the rate for a chargeable period of 12 months.

In income tax cases capital allowances for a chargeable period are made in calculating

income for that chargeable period. In corporation tax cases capital allowances are made

in calculating profits for a chargeable period. When you adjust the profits shown by the

accounts to get to the taxable profits deduct capital allowances as if they were an

expense of the business and add balancing charges in the same way as you add back

depreciation.

Example Jim runs the Morristown hotel. He draws up his accounts to 31 December every

year. His accounts for the year ended 31 December 2002 show profits of £48,000. The

depreciation charged in the accounts is £2,000. The capital allowances due are £5,000

and there is a balancing charge of £10,000. His taxable profits for his period of account

1/1/2002 to 31/12/2002 are £55,000 = £48.000 (profits per accounts) + £2,000

(depreciation) + £10,000 (balancing charge) - £5,000 (capital allowances).

CA11120 - General: Claims: How to claim

CAA01/S3

Capital allowances must be claimed. If there is no claim there are no capital allowances.

Most capital allowances are claimed in the tax return. The claims legislation in

TMA70/S42 (income tax) and FA98/SCH18/PARA54 - PARA60 (corporation tax) does not

apply to capital allowances claimed in a return.

The claims legislation in TMA70/S42 (income tax) and FA98/SCH18/PARA54 - PARA60

(corporation tax) applies to

claims for plant and machinery allowances for special leasing CA20040, and

claims by mining concerns to carry back balancing allowances CA39440, and

in income tax cases, claims for patent allowances on non-trading expenditure CA75130.

A capital allowance claim does not need to be for the full amount of the allowance. But

the amount claimed must be specified.

CA11130 - General: Claims: Income taxIn income tax cases capital allowance claims are made in the return (apart from the few

exceptional cases - CA11120). The time limit for making a claim or amending a claim is

the normal time limit for making or amending a tax return. That time limit is the first

anniversary of 31 January following the year of assessment. For example, the capital

allowance claim for 2002/03 can be amended at any time up until 31 January 2005

because 31 January following the year of assessment 2002/03 is 31 January 2004 and

the first anniversary of that is 31 January 2005.

Where a business is carried on in partnership it is the partnership that claims the capital

allowances and not the individual partners. 

Example Rick and Frank are in partnership. They draw up their accounts to 30 June each

year. In the year ended 30 June 2008 the partnership buys a helicopter for £100,000.

Any capital allowance claim on the helicopter must be made by the partnership of Rick

and Frank. It is not possible for either Rick or Frank to claim capital allowances on the

helicopter in his own right.

CA11140 - General: Claims: Corporation taxCapital allowance claims (including amended claims and withdrawal of claims) must be

made in a company's return, or in an amended return, for the accounting period for

which the claim is made (apart from the few exceptional cases - CA11120). The company

may claim less than the full amount available. The amount claimed must be specified.

An amended claim should be made or the claim should be withdrawn by amending the

return.

A capital allowance claim for an accounting period may be made, amended or withdrawn

at any time up to 12 months after the filing date for the company tax return for the

accounting period. This means that in most cases the time limit is 2 years after the end

of the accounting period (FA98/SCH18/PARA82).

The time limit is extended if there is an enquiry into the return. Where there is an

enquiry the time limit is:

30 days after the issue of a notice of completion of the enquiry;

when HMRC amend the return following an enquiry 30 days after the notice of

amendment is issued;

when there is an appeal against the amended return 30 days after the date on which the

appeal is finally determined.

Amending a return to make, amend or withdraw a capital allowance claim within the

time limits given for claiming capital allowances does not extend the time limit for

amending a return.

An enquiry into a previous amendment of a return making, amending or withdrawing a

capital allowance claim does not extend the time limit for claiming capital allowances.

An enquiry is restricted to such a previous amendment if:

the scope of the enquiry is limited because the notice of enquiry is issued after the time

that HMRC may commence an enquiry into the whole of the return, and

the amendment giving rise to the enquiry consisted of the making, amending or

withdrawing of a capital allowances claim.

HMRC may extend the time limits for making, amending or withdrawing a capital

allowance claim.

You should not extend the time limit unless circumstances beyond the company's control

prevented it being able to make the claim within the normal time limits.

Do not accept these as circumstances beyond the company's control:

a change of mind.

hindsight showing that a different combination of claims might be advantageous: for

example, the group relief available may be lower than the company expected it to be

when it claimed capital allowances. The company may then want to claim further capital

allowances. But that is not a circumstance beyond the company's control. It could have

claimed sooner.

oversight or error, whether on the part of the company or its advisers.

absence or indisposition of an officer or employee of the company unless:

o the absence or illness arose at a critical time, which delayed the making of the claim.

o in the case of absence, there was good reason why the person was unavailable at the

critical time.

o there was no other person who could have made the claim on behalf of the company

within the normal time limits.

A company may make a capital allowance claim "out of order" - that is, for an accounting

period when a return for a later accounting period has already been made. This capital

allowance claim may reduce the capital allowances due for that later accounting period.

For example, a claim for plant and machinery allowances will reduce the qualifying

expenditure in a plant and machinery pool and so the capital allowances due for later

periods. Where this happens the company has 30 days to make the necessary

amendments to its return for that later period.

If the company does not amend that return within 30 days you may amend it to make it

consistent with the capital allowances available. The company may appeal in writing

against the amendment of the return. The appeal must be made within 30 days of the

issue of the notice of amendment.

There is also guidance about capital allowance claims by companies at CTM98000

onwards.

CA11150 - General: Claims: Tax agreements

CAA01/S565

A person's capital allowance claim may be agreed without an assessment being made.

This is unlikely to be met in practice. But it could happen with, for example, a PAYE

taxpayer.

A person who is entitled to an allowance for a year of assessment may make a written

agreement with the inspector about the extent to which the allowance is to be given

effect for that year. If so the allowance is deemed to have been made for that year even

if no assessment is made. 

If there is no written agreement you should make an assessment. Where no assessment

is made you cannot treat the allowance as made unless there is a written agreement.

CA11160 - General: Claims: Sideways set off of excess capital allowances: Schedule A

ICTA88/S379A (3)

In general Schedule A losses cannot, for income tax, be set off sideways against other

income. However, the part of a Schedule A loss which is made up of capital allowances

can be set off sideways against other income for:

the year in which the loss arose, and

the year after the year in which the loss arose.

You calculate the part of the Schedule A loss made up of capital allowances and

available for sideways set off like this. First, you deduct any balancing charges from the

capital allowances. This gives you the net capital allowances. You compare this figure

with the Schedule A loss. If the net capital allowances are less than the Schedule A loss,

the net capital allowances are the part of the Schedule A loss available for sideways set

off. If the net capital allowances are more than the Schedule A loss the whole Schedule A

loss is available for sideways set off.

CA11510 - General: Definitions: Chargeable period, accounting period and period of account

CAA01/S6

Capital allowances are made for a chargeable period. A chargeable period is:

a period of account (income tax);

an accounting period (corporation tax).

Accounting period has the same meaning for capital allowances as it has for

corporation tax. This means that the definition in ICTA88/S12 applies (see CTM01400

onwards).

This is the basic definition of period of account for income tax purposes.

A period of account is any period for which trading, professional or vocational (shortened

to trading below) accounts are made up.

In any other case a period of account is a tax year. For example, the period of account of

a person who has a Schedule A business is a tax year.

Trading accounts may be drawn up for overlapping periods. If there is an overlap

between two periods of account the period that is in both periods of account is deemed

to fall within the first one only. For example, accounts may be drawn up for the year

ended 30 June 2008 and then the 12 months to 31 December 2008. The period 1 January

2008 to 30 June 2008 is in both periods. It falls within the period of account 1 July 2007

to 30 June 2008. It does not fall within the period of account 1 January 2008 to 31

December 2008.

There may be a gap between the periods for which trading accounts are drawn up. If so,

the gap is deemed to be part of the first period of account. For example, accounts may

be drawn up for the year ended 30 September 2007 and then the year ended 31

December 2008. The period 1 October 2007 to 31 December 2007 is not within any

period of account. It is deemed to be part of the period of account ended 30 September

2007.

A period of account cannot be longer than 18 months. If accounts are drawn up for a

period that is longer than 18 months you should split the period for which the accounts

are drawn up into separate periods of accounts. This is how it is done. The first period of

account is the first 12 months of the period for which the accounts have been drawn up.

The next period of account starts when those 12 months end, and you continue like that

until the whole period for which the accounts were drawn up has been allocated to

periods of account.

Example Dylan sends in an account for the 27-month period 1 January 2007 to 31

March 2009. This is split into 3 periods of account for capital allowance purposes:

12 months from 1 January 2007 to 31 December 2007,

12 months from 1 January 2008 to 31 December 2008, and

3 months from 1 January 2009 to 31 March 2009.

Dylan's capital allowances and balancing charges are calculated for his periods of

account 1/1/07 to 31/12/07, 1/1/08 to 31/12/08 and 1/1/09 to 31/3/09. The capital

allowances for all 3 periods of account are deducted from and any balancing charges are

added to the trading profits for the period 1/1/07 to 31/3/09 to arrive at his taxable

profits for that period.

CA11520 - General: Definitions: Dwelling house

CAA01/S531

There are several references to dwelling house in CAA2001. The term appears in Part 2

(plant and machinery allowances), Part 3 (industrial buildings allowances), Part 3A

(business premises renovation allowances), Part 6 (research and development

allowances) and Part 10 (assured tenancy allowances).

For Part 10 (ATA) only “dwelling house” is given the same meaning as in the Rent Act

1977 (CAA01/S531).

There is no definition of “dwelling house” for the other Parts and so it takes its ordinary

meaning. A dwelling house is a building, or a part of a building; its distinctive

characteristic is its ability to afford to those who use it the facilities required for day-to-

day private domestic existence. In most cases there should be little difficulty in deciding

whether or not particular premises comprise a dwelling house, but difficult cases may

need to be decided on their particular facts. In such cases the question is essentially one

of fact.

A person's second or holiday home or accommodation used for holiday letting is a

dwelling house. A block of flats is not a dwelling house although the individual flats

within the block may be. A hospital, a prison, a nursing home or hotel (run as a trade and

offering services, whether by the owner-occupier or by a tenant) are not dwelling

houses.

A University hall of residence may be one of the most difficult types of premises to

decide because there are so many variations in student accommodation. On the one

hand, an educational establishment that provides on-site accommodation purely for its

own students, where, for example, the kitchen and dining facilities are physically

separate from the study-bedrooms and may not always be accessible to the students, is

probably an institution, rather than a “dwelling-house”. But on the other hand, cluster

flats or houses in multiple occupation, that provide the facilities necessary for day-to-day

private domestic existence (such as bedrooms with en-suite facilities and a shared or

communal kitchen/diner and sitting room) are dwelling-houses. Such a flat or house

would be a dwelling-house if occupied by a family, a group of friends or key workers, so

the fact that it may be occupied by students is, in a sense, incidental.

The common parts (for example the stairs and lifts) of a building which contains two or

more dwelling houses will not, however, comprise a dwelling-house.

CAA01/S4 & CAA01/S572 (3)(b)

An amount that the payer can treat as a deduction in computing business profits or

which can be allowed as a deduction from the taxable earnings of an employment or

office held by the payer is not capital expenditure.

An amount that is treated by the recipient as a business receipt or employment income

is not a capital sum.

Annual payments from which tax should be deducted under ITA/Chapter 6 Part 15 or

s906 are not capital expenditure or capital sums.

If property is exchanged or if a leasehold interest is surrendered for valuable

consideration the transaction is treated as a sale. Where the consideration is not in

money, the part of it that would have been a capital sum if it had been paid in money is

treated as a capital sum.

The purchase price of an asset sometimes includes VAT. If the VAT is allowable as input

tax (see BIM31500 onwards) it should be deducted from the capital expenditure. In all

other cases, the VAT paid should be included in the capital expenditure.

If expenditure on the provision or construction of an asset was revenue expenditure and

the asset is later permanently appropriated to fixed assets WDAs may be given. The

expenditure that qualifies for WDAs is the original expenditure incurred and not the

market value of the asset at the time of the appropriation. You should not accept that an

asset has been permanently appropriated to fixed assets unless you are satisfied that

any profit on sale would be capital rather than revenue.

CA11540 - General: Definitions: Sale and time of sale

CAA01/S572 & S573

The sale of property includes:

the exchange of property, and

the surrender of a leasehold interest for valuable consideration.

Where there is an exchange of property or the surrender of a leasehold interest for

valuable consideration, net proceeds of sale and sale price include:

the consideration for the exchange, and

the consideration for surrender.

The transfer of the relevant interest other than by way of a sale is treated for the

purposes of CAA01 Parts 3 (IBA), 4 (ABA) and 10 (ATA) as if it were a sale.

The time of sale is the earlier of:

the time of completion, and

the time when possession is given.

For example, if completion is on 15 June but possession is not given until 1 July, the time

of sale is 15 June. This definition does not apply for research and development

allowance.

The net proceeds of sale are what the seller receives. They are not what the seller is

entitled to receive but is unable to receive. If any part of the agreed sale price ultimately

turns out to be irrecoverable ignore it.

This is the Solicitor's advice. “In the case of Tyser v. A-G (1938) 1 Ch 426, the court had

to consider the meaning of "proceeds of sale" in the context of the Estate Duty works of

art provision in FA30/S40 (2). That section, unlike CAA01/S61, contained no reference to

"net", nor did it refer to "proceeds received by the person required to bring the disposal

value into account". Even without such references the Judge held that the meaning was "

the proceeds of sale which reached the vendor or any person on his behalf and for his

use after payment of the proper expenses of sale". The whole basis of the reasoning is

that the phrase must refer to what the vendor receives and has use of.”

If the seller receives part of the sale price and then disposes of his right to receive the

balance the amount he receives for the right to receive the balance is part of the net

proceeds of sale.

Example Robbie sells a computer to Lawrence for £20,000, payable in two equal

instalments. After Robbie has received the first instalment he assigns the right to receive

the second instalment to Garth for £8,000. Robbie's sale proceeds are £18,000.

Only expenses that can be regarded as the proper expenses of sale of the asset should

be deducted in arriving at the net proceeds of sale.

In the IBA, ABA and ATA legislation a transfer of the relevant interest, otherwise than by

way of a sale, is treated as a sale of the relevant interest at market value.

CA11550 - General: Definitions: Dual resident investing company

CAA01/S577 (1)

Use the definition of dual resident investing company in ICTA88/S404 (see CTM34560).

CA11560 - General: Definitions: Market value

CAA01/S577 (1)

Market value is the price that the asset would fetch in the open market.

CA11570 - General: Definitions: Normal time limit for amending an income tax return

CAA01/S577 (1)

The normal time limit for amending a return for the year ending on 5 April is the first

anniversary of the 31 January following that year. For example, the time limit for

amending a return for 2006/07 is 31 January 2009 because 2006/07 ends of 5 April 2007

and so the 31 January following the year 2006/07 is 31 January 2008 and its first

anniversary is 31 January 2009.

CA11580 - General: Definitions: Notice

CAA01/S577 (1)

In the capital allowance legislation and in this manual notice means notice in writing.

CA11590 - General: Definitions: Property business

CAA01/S577 (1)

In the capital allowance legislation and in this manual a property business is a UK

property business or Schedule A business or an overseas property business.

A UK property business is:

every business that a person carries on, and

any transaction which that person enters into,

for generating income from land in the UK.

A Schedule A business is a business whose profits are chargeable under Schedule A.

An overseas property business is a business whose income arises from rents etc. arising

from land outside the UK.

The formal definitions are in ITTOIA Chapter 2 Part 3 (as applied by ITA/S989) (UK

property business), ITA/S989 and ICTA88/S832 (1) (Schedule A business) and

ICTA88/S70A (4) and ICTA88/S832 (1), ITTOIA/ Chapter 2 Part 3 (as applied by ITA/S080)

(overseas property business).

CA11600 - General: Definitions: Parts of assets

CAA01/S571

Treat part of an asset as an asset unless the legislation refers to the whole of an asset.

This is an example of the exception. The legislation about treating a building used partly

as an industrial building and partly for other purposes as an industrial building if the part

used for non-qualifying purposes is less than 25% of the whole (CA32700) refers to the

whole of the building. The exception means that you cannot apply the 25% disregarded

to a part of a building.

CA11630 - General: Definitions: Connected Persons

CAA01/s575, s575A

This is how you decide if one person is connected with another.

Individual

Broadly, two individuals, Mick and Keith, are connected if they are relatives, Mick is

Keith’s spouse or civil partner; or they are related by marriage or civil partnership.

In more detail, Mick and Keith are connected if

a. Mick is Keith’s spouse or civil partner, or

b. Mick is Keith’s relative, or

c. Mick is the spouse or civil partner of a relative of Keith, or

d. Mick is a relative of Keith’s spouse or civil partner, or

e. Mick is the spouse or civil partner or a relative of Keith’s spouse or civil partner.

A relative is a brother, sister, ancestor or lineal descendant. This means that people like

cousins are not relatives for the purposes of this definition.

Example

Bob and Carolyn live together. Bob and David are brothers and Bob and Jesse are

cousins. Carolyn is not connected with David or Jesse while she lives with Bob. If Bob and

Carolyn get married Carolyn becomes connected with David because Carolyn is married

to Bob and David is Bob’s brother. She does not become connected with Jesse because

Jesse is not a relative of Bob’s for the purposes of the definition.

Trustee

A person who is the trustee of a settlement is connected with

1.

a. an individual who is a settler in relation to the settlement,

b. a person connected with such an individual, or

c. a close company whose participators include the trustees of the

settlement, or

d. a company not resident in the UK which would be a close company whose

participants include the trustees of the settlement if it were resident, or

e. any body corporate controlled by a company within c) or d), or

f. if the settlement is the principal settlement in relation to one or more sub-

fund settlements, a person in the capacity as trustee of such a sub-fund

settlement, or

g. if the settlement is a sub-fund settlement in relation to a principal

settlement, a person in the capacity as trustee of any other sub-fund

settlements in relation to the principal settlement.

This is where you find definitions if you need them.

Principal settlement is defined in paragraph 1 Sch.4ZA TCGA 1992.

Settlement is defined in Chapter 5 Part 5 ITTOIA 2005.

Sub-fund settlement is defined in Para 1 Sch.4AZ TCGA 1992

Settlement and settler are defined in s620 ITTOIA 2005.

If a settlement would have no trustees treat any person in whom the property comprised

in the settlement is for the time being vested, or in whom the management of that

property is for the time being vested as a trustee.

Partner

A member of a partnership is connected with

o any other partner in the partnership, or

o the spouse or civil partner of any other partner, or

o a relative of any other partner.

This definition does not apply to acquisitions or disposals of partnership assets pursuant

to genuine commercial arrangements.

Example

David, Stephen and Graham are in partnership. This means that David is connected with

Stephen’s civil partner and Graham’s wife. David is also connected with Stephen’s

parents and Graham’s daughter.

The partnership of David, Stephen and Graham decides to sell a caravan that it no

longer needs. It advertises the caravan in the local paper. Graham’s daughter sees the

advertisement and buys the caravan. The sale is not a connected person sale because

the sale of the caravan is a genuine commercial arrangement.

Company

A company is connected with another company if

the same person has control of both companies,

a person, Alan, has control of one company and persons connected with Alan have

control of the other,

Alan has control of one company and Alan together with persons connected with Alan

have control of the other, or

each company is controlled by a group of two or more persons and the groups either

consist of the same persons or could be regarded as consisting of the same persons if in

one or more cases a member of either group were replaced by a person with whom the

member is connected.

Example

Robbie controls Cripple Creek Ltd. His sister and brother control Dixie Productions Ltd.

Cripple Creek Ltd. and Dixie Productions Ltd. are connected.

A company is connected with another person if

the person has control of the company, or

the person together with persons connected with them have control of the company.

Example

Don, Glenn and Joe are in partnership so they are connected. Together they control

Desperado Ltd. This means that Desperado Ltd. is connected with Don, with Glenn and

with Joe.

In relation to a company any two or more persons acting together to secure or exercise

control of the company are connected with

one another, and

any person acting on the directions of any of them to secure or exercise control of the

company

The above rules about control for a company also apply to

any body corporate or

unincorporated association apart from a partnership. or

unit trust scheme.

When you apply the rules to a unit trust scheme treat the rights of the unit holders as

shares in the company.

CA11650 - General: Definitions: Control

CAA01/S574

A person controls a body corporate if that person can use the following to ensure that

the body corporate conducts its affairs in accordance with their wishes:

shares in the body corporate or any other body corporate;

voting power in the body corporate or any other body corporate;

powers given to the person by the articles of association of that or any other body

corporate.

Example The issued share capital of Desperado Productions Ltd is one million ordinary

shares. If Henley owns 550,000 of those shares he controls the company.

If Desperado Productions Ltd owns the entire issued share capital of Bitter Creek Ltd,

Henley also controls Bitter Creek Ltd.

Control of a partnership is the right to more than one half of the assets or more than one

half of the income of the partnership.

Example Mark and John are in partnership. This is how they share the profits. Mark gets

75% and John gets 25%. This means that Mark controls the partnership.

When a company is in liquidation it is the liquidator, not the company or its members,

who has control of the assets of the company.

In the legislation about the meaning of connected person CA11630.this definition only

applies where it is expressly indicated to apply.

CA11700 - General: Definitions: Contracts

Under a contract

You may need to decide whether expenditure has been incurred under a contract. Treat

expenditure as incurred under a contract if and only if:

the contract is a legally binding contract, and 

the expenditure is expenditure to which the taxpayer was contractually committed by

that contract.

In pursuance of a contract

Interpret the expression “in pursuance of a contract” like you interpret the expression

“under a contract”. In the case of CIR v Mobil North Sea Ltd (60TC310) the courts took

the view that “in pursuance of a contract” had the same meaning as “under a contract”

and that both expressions should be interpreted in the way set out above. Expenditure

that a taxpayer incurs by exercising an option in a contract is not expenditure incurred

under that contract. It is expenditure that is incurred under the new contract which the

taxpayer enters into when the option is exercised.

Performance of a contract

Performance of a contract occurs when both parties have performed their obligations

under that contract.

Example Barry enters into a contract to buy a guitar for £15,000. Under the contract he

pays a deposit of £5,000, he pays £7,000 when he takes delivery of the guitar and he

pays the balance of £3,000 two weeks after delivery. The supplier performs his

obligations under the contract when he delivers the guitar to Barry. Barry does not

perform his obligations under the contract until he has paid the full amount due. This

means that Barry does not perform his obligations under the contract until he has paid

the final amount of £3,000 and so performance of the contract is when Barry pays

£3,000 to the supplier two weeks after delivery.

Unconditional

Use the concept of “condition” under contract law to decide when a contract becomes

unconditional. The word condition may refer either to:

an event, upon which the contract as a whole is conditional, or

a term in a contract.

When condition refers to a term in a contract, it is described as a

“promissory condition”. There are a number of different kinds of promissory

conditions of which the main ones are:

Condition precedent promissory condition: this term of a contract exists when the

performance by one party of his promise is a condition precedent to the liability of the

other to perform. Suppose George contracts with Andy for Andy to repair his car. Under

the contract, George promises to pay Andy once Andy has finished the repairs. George's

legal obligation to pay Andy does not become unconditional until Andy has completed

the work.

Concurrent promissory condition: this term of a contract arises if both contracting

parties agree that the performance of their respective promises shall be simultaneous.

Such conditions typically arise in contracts for the sale of goods where payment is due on

delivery. We argue that payment is conditional on delivery and visa versa and thus the

obligation to pay becomes unconditional at the time of delivery.

Independent promissory condition: such conditions arise when the parties agree that

each party can enforce each other's promise although he, she or it has not performed

their own. Suppose that Cass contracts with Oliver for Oliver to build a machine. Cass is

required to make payment two months from the date the contract was entered into.

Cass's payment is conditional only on the passage of time and is independent of any

obligation imposed on Oliver.

No specific terms of payment

Where a sale is made without specifying payment terms, the transaction is governed by

Section 28 Sale of Goods Act 1979 which states that “unless otherwise agreed, delivery

of the goods and payment of the price are concurrent conditions, that is to say, the

seller must be ready and willing to give possession of the goods, and the buyer must be

ready and willing to pay the price in exchange of possession of the goods”.

This means that the obligation to make payment arises when delivery is made unless

there is an agreement specifying some other arrangement.

Romalpa contract

A Romalpa contract is a contract under which goods are sold subject to reservation of

title. In a Romalpa type case the supplier fulfils his or her part of the contract at the time

of delivery of the goods. The buyer only fulfils his or her part of the contract when he or

she chooses to make payment. Title in the goods does not pass to the buyer until

payment is made. Even though the buyer has taken delivery of the goods they belong to

the seller until the buyer pays for them.

Hire purchase agreement

A hire purchase agreement is an agreement under which someone (the hirer) hires

an asset and which satisfies one of the following conditions:

under the agreement the asset shall eventually become the property of the hirer, or

the agreement gives the hirer an option to purchase the asset.

Hire purchase agreements are sometimes called lease purchase agreements.

CA11750 - General: Definitions: Expenditure incurred in foreign currency

CAA01/S4 (1), FA96/S80 (5) and FA93/S93

Expenditure incurred in a foreign currency is translated into sterling at the exchange

rate for the date on which it is treated as incurred for capital allowance purposes apart

from pre-trading expenditure.

For example, if expenditure is incurred under a hire purchase type contract all the

expenditure still to be incurred is treated by CAA01/S67 (3) as incurred on the date on

which the asset is brought into use CA23310. This expenditure should be translated into

sterling at the exchange rate for the day on which the asset is brought into use.

Expenditure, which is incurred in a foreign currency before a trade begins, is treated as

incurred on the day on which the trade begins. It should be translated into sterling at the

exchange rate for the day on which it is actually incurred and not at the exchange rate

for the day on which the trade begins.

The amount of expenditure incurred in a foreign currency may be actually laid out on a

date later than that on which it is treated as incurred for capital allowance purposes

("the CA expenditure date"). In that case the buyer may bring an exchange gain or

loss into account in its profit and loss account that reflects, wholly or partly, a movement

in currency rates between the CA expenditure date the payment date. This gain or loss

may also reflect currency movement between the date the expenditure is brought into

account in the company's book (e.g. invoice date or delivery date) and the CA

expenditure date.

The amount of any exchange loss arising after the CA expenditure date should be

deducted from the expenditure on which capital allowances are given.

Sometimes companies draw up their accounts in a currency other than sterling. For

example, a company that trades mainly in Europe may draw up its accounts in Euros. If a

company draws up its accounts in a currency other than sterling it is allowed to make its

tax computations including capital allowances in that foreign currency (see CTM76090).

CA11800 - General: Definitions: When capital expenditure is incurred

CAA01/S5

The normal rule is that expenditure is incurred on the date on which the obligation to

pay becomes unconditional.

A person buying goods is legally required to pay for them on delivery unless there is a

special agreement as to terms of payment. If the buyer is legally required to pay on

delivery the obligation to pay becomes unconditional when the goods are delivered.

If goods are sold subject to reservation of title (a Romalpa contract, see CA11700) the

obligation to pay becomes unconditional when the goods are delivered. The supplier has

then fulfilled his or her part of the contract. This means that the buyer incurs capital

expenditure as soon as the goods are delivered.

The date on which the obligation to pay for an asset becomes unconditional and the date

on which the purchaser is legally required to pay for that asset may not be the same. For

example, the sales agreement may require payment to be made within four weeks of

delivery. If so the obligation to pay becomes unconditional on delivery but the purchaser

is not legally required to pay until four weeks after delivery.

There is an exception to the general rule. If there is a gap of more than four months

between the dates on which the obligation to pay becomes unconditional and the date

on which payment is required to be made the expenditure is not incurred until the date

on which payment is required to be made.

Example 1

Bob buys a car for £15,000. Under the contract he has to pay £12,000 when he takes

delivery of the car and £3,000 one month later. Bob takes delivery of the car on 24 May.

His obligation to pay for the car becomes unconditional on 24 May. He is legally required

to pay for the car in two instalments - £12,000 on 24 May and £3,000 on 24 June. Both

payments are required to be made four months or less after the date on which the

obligation to pay becomes unconditional. Bob therefore incurs expenditure of £15,000

on 24 May when he takes delivery of the car and his obligation to pay becomes

unconditional.

Suppose that Bob buys the car for £15,000 from his brother. Under the contract he does

not have to pay for the car until he has had it for six months. He takes delivery of the car

on 24 May and his obligation to pay for the car becomes unconditional then. He is not

legally required to pay for the car until 24 November, which is more than four months

after the date on which his obligation to pay for the car becomes unconditional. He does

not incur his expenditure of £15,000 on the car until 24 November, the date on which he

is legally required to pay for it.

If some of the expenditure is required to be paid more than four months after the date

on which the obligation to pay becomes unconditional and some is not, split the

expenditure. The part of the expenditure which is required to be paid four months or less

after the date on which the obligation to pay becomes unconditional is incurred on the

date on which the obligation to pay becomes unconditional. The rest is incurred on the

date on which payment is required to be made.

Example 2

As in Example 1 above, Bob buys a car for £15,000. Under the terms of the contract he

has to pay £12,000 one month after delivery of the car and the balance of £3,000 five

months after that. He takes delivery of the car on 24 May and his obligation to pay

becomes unconditional then. He is legally required to pay:

£12,000 on 24 June, and

£3,000 on 24 November.

The first payment is due four months or less after his obligation to pay becomes

unconditional but the second one is not. He incurs expenditure of £12,000 on 24 May

and £3,000 on 24 November.

A milestone contract is a contract that satisfies the following conditions:

The asset which is being constructed under the contract becomes the property of the

purchaser as it is being constructed;

Payment becomes due as and when agreed stages of the work (”milestones”) are

satisfactorily completed.

Milestone contracts are often found where there is a large-scale construction project for

buildings or for major items of machinery or plant such as oil pipelines. In a milestone

contract the obligation to pay normally becomes unconditional when an architect or

engineer who has inspected the work done issues a certificate.

In a milestone contract, the asset becomes the property of the purchaser as it is being

constructed. The obligation to pay for a part of the asset that has been completed

becomes unconditional when the work is certified.

If the part of the asset, which has been completed, becomes the property of the

purchaser before the end of the chargeable period and the work is certified before that

accounting date the normal rules about when expenditure is incurred apply. This means

that the expenditure is incurred when the work is certified. If the part of the asset which

has been completed becomes the property of the purchaser before his accounting date

and the work is certified within one month of that accounting date the expenditure which

is certified is treated as incurred on the accounting date. If the part of the asset, which

has been completed, becomes the property of the purchaser before his accounting date

but the work is not certified until more than one month after that accounting date this

special rule does not apply. The expenditure is incurred when the work is certified.

There are anti avoidance provisions. They apply where both the following conditions are

satisfied:

a. The obligation to pay an amount of expenditure under an agreement becomes

unconditional at an earlier date than would be the case in a normal commercial

contract.

b. The sole or main benefit that might be expected to be obtained from A is that the

expenditure would be treated as incurred in an earlier chargeable period or basis

period.

The legislation applies to both initial and supplementary agreements. In deciding

whether a contract is a normal commercial contract you should find out what the normal

practice is for making contracts for the type of asset concerned and compare it with

that.

Where the above conditions are satisfied the general rule does not apply. The

expenditure is treated as incurred on the date when payment is required to be made.

Example 3

Brian draws up his accounts to 31 July. On 4 July 2004 he orders a sloop for delivery on

15 August. Normally payment would be due on delivery and so the expenditure would

not be incurred until 15 August 2004. The expenditure would be incurred in Brian's

accounts year ended 31 July 2005. However, Brian makes an agreement with the

supplier under which payment is due in full (and so the obligation to pay becomes

unconditional) when the order is placed but the supplier allows a credit period of six

weeks. This means that if the normal rules applied the expenditure would be incurred on

4 July 2004, which is in Brian's accounts year ended 31 July 2004. If the anti-avoidance

legislation is applied the expenditure is incurred on 15 August 2004, in the accounts year

ended 31 July 2005.

You should only consider applying the anti avoidance provisions if the amounts involved

are substantial. You should consult CT&VAT (Technical) before you attempt to apply

them. In your submission you should state the reasons given by the taxpayer for

entering into the contract within rather than a normal commercial contract.

A contract may let the purchaser retain part of the purchase price (a retention) until

certain conditions are satisfied. The obligation to pay the part of the purchase price that

is retained does not become unconditional until the condition that gave rise to the

retention is satisfied.

The rules about when expenditure is incurred do not apply to the following:

expenditure incurred before a trade begins (IBA, know how, machinery and plant, MEA,

patents). Expenditure incurred before a trade begins is treated as incurred on the first

day of trading.

expenditure still to be incurred under a hire purchase etc contract at the time when the

asset is brought into use. Expenditure still to be incurred under a hire purchase etc

contract at the time when the asset is brought into use is treated as incurred on the date

on which the asset is brought into use.

buildings and structures bought unused (ABA, ATA and IBA). Expenditure incurred on the

purchase of an unused building or structure is deemed to be incurred on the date on

which the purchase price becomes payable.

an additional VAT liability or rebate. An additional VAT liability is incurred and an

additional VAT rebate arises on the last day of the relevant VAT interval.

CA11850 - General: Definitions: Tax advantage

CAA01/S577 (4)

A person obtains a tax advantage if that person:

gets an allowance or a greater allowance, or

avoids a charge or gets a smaller charge.

CA11900 - General: Definitions: Additional VAT

CAA01/S546 - S551

The VAT payable on an asset is usually determined by the first use of that asset. The

VAT Capital Goods Scheme adjusts the VAT due in some circumstances if the use of an

asset changes. If the use of an asset is taxable the VAT input tax on it may be reclaimed.

If the use is exempt it may not.

If the mix of use of an asset changes, for VAT purposes, from exempt to taxable a further

amount (called an additional VAT rebate is payable to the taxpayer because more of

the input tax may be reclaimed. If the mix of use of the assets changes, for VAT

purposes, from taxable to exempt a further amount (called an additional VAT liability)

is payable by the taxpayer because too much input tax has been reclaimed.

The VAT Capital Goods scheme applies to computers and computer equipment worth

£50,000 or more and to land and buildings worth £250,000 or more. It covers changes of

use within:

5 years of first use for computers and computer equipment, and

10 years of first use for land and buildings.

Since the only assets affected by the Capital Goods Scheme are computers and

buildings, the allowances most likely to be affected by it are IBA, plant and machinery

allowances and research and development allowance.

The relevant VAT interval is the period that is used to make the computation that

gives rise to the additional VAT liability or the additional VAT rebate.

The chargeable period for which an additional VAT liability or rebate is to be taken into

account for allowances and charges is shown by the following table.

SituationChargeable period in which additional VAT liability is incurred or rebate arises

VAT liability or rebate included in a VAT returnPeriod which includes the last day of the VAT

return period

VAT assessment madePeriod which includes the date on which the

VAT assessment is made

An additional VAT liability or rebate has not been included

in a VAT return or assessed before the trade is treated as

permanently discontinued for tax purposes

Period which includes the date on which the

trade is treated as permanently discontinued.

CA20000 - Plant and Machinery Allowance (PMA): Contents

CA20005 Introduction

CA21000 Meaning of plant or machinery

CA22000 Buildings & structures

CA23000 Qualifying expenditure

CA23100 First year allowances

CA23200 Writing down allowances and balancing adjustment

CA23300 Hire purchase

CA23400 Computer software

CA23500 Cars

CA23600 Short life assets

CA23700 Long life assets

CA23800 Long funding leases

CA24000 Overseas leasing

CA25000 Ships

CA26000 Fixtures

CA27000 Assets used partly for qualifying activity

CA28000 Anti-avoidance

CA28900 Anti-avoidance: finance leaseback

CA29000 Partnerships and successions

CA29200 Miscellaneous

CA29300 How allowances and charges are made

CA20005 - PMA: Introduction: ContentsCA20006 Outline

CA20010 Qualifying activities

CA20015 Employment or office: Employment or office - the ‘necessarily’ condition

CA20020 Property business

CA20025 Furnished holiday lettings business

CA20030 Overseas property business

CA20040 Special leasing

CA20050 Management of an investment company

CA20060 Restricted meaning of ‘on the provision of’

CA20070 Professional fees and preliminaries

CA20075 Sampling as a basis of claim - fixtures

CA20080 Parts and shares

CA20006 - PMAs: Introduction: OutlineDepreciation of fixed assets charged in the accounts is not allowed as a deduction in

computing taxable profits. Capital allowances may be given instead. Plant and

machinery allowances give relief at prescribed rates for the depreciation of fixed assets

that are plant or machinery.

In order to qualify for PMAs, a person must:

be carrying on a qualifying activity CA20010, and

incur qualifying expenditure. Qualifying expenditure is capital expenditure on the

provision of plant or machinery CA21000 wholly or partly for the purposes of the

qualifying activity. Normally the person must own the asset as a result of incurring the

expenditure.

The range of qualifying activities for PMA is very wide. It broadly covers all taxable

activities other than passive investment, including a trade, profession, vocation, office,

employment or Schedule A business.

The range of assets that qualify as plant and machinery is also very wide. Broadly it

covers all fixed assets used in the business other than intangible assets apart from

computer software, land and buildings. The main difficulty in determining whether an

asset qualifies as plant or machinery comes with assets incorporated into buildings.

Normally, the taxpayer must also own the plant or machinery as a result of incurring the

expenditure. There are exceptions to this condition, however, in particular for

fixtures CA26000.

There are two main types of PMA - first year allowance (FYA) and writing down allowance

(WDA).

FYA is only due in certain circumstances. It is a special allowance given at a higher rate

than the normal WDA for the chargeable period in which the expenditure is incurred. Any

expenditure left unrelieved qualifies for WDAs for subsequent periods.

WDAs are calculated using the pool basis. A pool may cover a single asset or a class of

assets. Pooling works by keeping a running total of the unrelieved expenditure on the

assets in the pool. WDA, normally at 20%pa, is given on the current total. This is known

as the reducing balance basis.

Example Bennett & Darcy Ltd. runs a transport business. It draws up accounts to 31

December each year. Its pool of expenditure at 31 December 2008 is £32,000. In the

year ended 31 December 2009 it buys a lorry for £8,000 at a time when FYA is available

at the 40% rate and claims FYA on it. It also sells a lorry for £4,000 in that year. This is

Bennett & Darcy Ltd.'s CA computation for the year ended 31 December 2009.

Cost of lorry £ 8,000

FYA @ 40 % £ 3,200

Balance carried forward £ 4,800

Pool brought forward £32,000

Disposal £ 4,000

£28,000

WDA @ 20% £ 5,600

Pool carried forward £22,400*

*The pool brought forward at 1 January 2010 is £27,200 (= £4,800 + £22,400).

There are single asset pools, class pools and the main pool, which contains all

expenditure that does not go into a single asset or class pool. Expenditure on some

assets is kept separate from expenditure on all other assets and does not go into the

main pool. It is dealt with in single asset pools. These include assets used partly for

purposes other than the qualifying activity, short life assets and cars costing more than

£12,000 (but only where the expenditure was incurred before 1/6 April 2009). There are

two class pools; one for special rate expenditure and one for expenditure on plant &

machinery for overseas leasing. Certain expenditure must be allocated to the special

rate pool and will attract WDA at 10% rather than 20%. Special rate expenditure includes

expenditure on thermal insulation, integral features, long life assets and cars with CO2

emissions exceeding 160g/km driven bought on or after 1/6 April 2009. Where a person

carries on more than one qualifying activity, PMAs are calculated separately for each

activity with a separate pool or pools for each of them.

CA20010 - PMAs: Introduction: Qualifying activities

CAA01/S15

In order to qualify for PMA, a taxpayer must incur capital expenditure on the provision of

plant or machinery wholly or partly for the purposes of a qualifying activity carried on by

the taxpayer.

The qualifying activities for PMA are:

trade;

an ordinary property business;

furnished holiday letting business;

overseas property business;

profession or vocation;

mine, quarry or canal or other concern giving rise to profits from land charged to tax as a

trade under ITTOIA/S12 (4) or under Case I Schedule D in accordance with ICTA88/S55;

management of an investment company;

special leasing business;

employment or office.

CA20015 - PMAs: Introduction: Employment or office - the “necessarily” condition

CAA01/S20 & CAA01/S36

Where the qualifying activity is an office or employment, there is an additional condition

that must be satisfied for expenditure on the provision of an asset (other than a motor

car) to qualify for PMA. The asset must be necessarily provided for use in the office or

employment.

The CA legislation about employments does not apply to divers and dive supervisors in

the North Sea.

Expenditure incurred by an employee on a motorcar or other vehicle qualifies for PMAs

up to and including 2001/02. The necessarily condition did not apply to motorcars. If a

motorcar was provided partly for use in the office or employment and partly for private

use, PMAs were restricted in proportion to the qualifying use. Up to 2001/02, an

employee or office holder who bought a car, other road vehicle or a cycle had the choice

of claiming capital allowances or taking part in the Fixed Car Profit Scheme. There are

special rules for calculating a balancing allowance where an employee has taken part in

the Fixed Car Profit scheme for some chargeable periods and claimed PMAs for

others CA23550.

Expenditure by employees on motorcars does not qualify for PMA from 2002/03 onwards.

From 2002/03 an employee is entitled to claim statutory authorised mileage relief in

respect of qualifying business travel and so they cannot claim PMAs.

CA20020 - PMAs: Introduction: Property business

CAA01/S16 & CAA01/S35

A property business is an ordinary property business or an overseas property business.

Where the qualifying activity is an ordinary or overseas property business (or special

leasing of plant or machinery - CA20040), expenditure incurred on the provision of plant

or machinery for use in a dwelling house does not qualify for PMA.

Expenditure incurred on an asset that is provided partly for use in a dwelling house and

partly for other purposes should be apportioned. The part apportioned to use for

purposes other than use in a dwelling house qualifies for capital allowances.

The term ‘dwelling-house’ is not defined and therefore takes its ordinary meaning

- CA11520. You should treat any building, or part of a building that affords the facilities

required for day-to-day private domestic existence as a dwelling house. In most cases

there should be little difficulty in deciding whether or not particular premises comprise a

dwelling house, but in difficult cases the question is essentially one of fact.

A block of residential flats is not a dwelling house, although the individual flats in it will

be dwelling houses.

A lift or central heating system serving the common parts of a building which contains

two or more dwelling houses will not comprise part of either dwelling house. A central

heating system serving an individual residential flat does not however qualify for PMA.

Expenditure on a central heating system serving the whole of the building containing

two or more dwelling houses should be apportioned between the common parts should

be apportioned between the common parts, which part qualifies for PMA, and the

residential flats or individual dwelling houses which do not.

CA20025 - PMAs: Introduction: Furnished holiday lettings business

CAA01/S17

A ’furnished holiday lettings business’ is a qualifying activity for PMA. A furnished holiday

lettings business is one that consists of the commercial letting of furnished holiday

accommodation in the United Kingdom. It may be part of a larger ordinary property

business. The term the ‘commercial letting of furnished holiday accommodation’ has the

same meaning as in ITTOIA/S322 to S328 for income tax and ICTA88/S504 for

corporation tax.

Where only part of an ordinary property business consists of furnished holiday lettings,

the furnished holiday lettings are a separate qualifying activity. PMAs are calculated and

given separately on the furnished holiday lettings business and the rest of the ordinary

property business.

CA20030 - PMAs: Introduction: Overseas property business

ICTA88/S832

An overseas property business is one whose profits are assessable under Case V

Schedule D in accordance with ICTA88/S65A or ICTA88/S70A. The same rules apply to an

overseas property business as to an ordinary property business. Where a taxpayer

carries on an ordinary property business and an overseas property business, PMAs are

calculated and given separately on each business.

CA20040 - PMAs: Introduction: Special leasing

CAA01/S19 & CAA01/S35

Where plant and machinery is leased out, the leasing is usually part of some other

qualifying activity, for instance a trade (which may be a trade of leasing or some wider

trade that includes leasing), an ordinary property business, a furnished holiday letting

business or an overseas property business. Where it is leased out other than in the

course of some other qualifying activity, the leasing is described as "special leasing" and

is a qualifying activity for PMA. The qualifying activity starts when the asset is leased out

and ends when the lessor permanently ceases to lease the asset out.

If the taxpayer also leases out some other asset other than in the course of some other

qualifying activity, or recommences to lease the same asset after a permanent

discontinuance, that is treated as a separate special leasing. PMA are calculated and

given separately on each special leasing.

Example Jason is a professional musician. He owns a yacht for the private use of

himself, family and friends, which he sometimes charters out. The profits from chartering

out the yacht are taxed under Case VI of Schedule D. The chartering out of the yacht is a

special leasing. PMA on the yacht are calculated separately from ones relating to his

profession as a musician.

Jason buys a powerboat, which he also leases out occasionally. PMA are calculated

separately on the yacht and the powerboat.

Special leasing - life assurance company

You should treat the hiring out by a company carrying on life assurance business of an

investment asset other than in the course of an ordinary property business or an

overseas property business as special leasing.

Special leasing - exclusion of assets let for use in a dwelling house

Where the qualifying activity is a special leasing, there is an additional condition that

must be satisfied for expenditure on the provision of an asset to qualify for PMA.

Expenditure incurred on the provision of plant or machinery for use in a dwelling house

does not qualify for capital allowances.

The term "dwelling-house" is not defined and therefore takes its ordinary meaning. You

should treat any building, or part of a building, that affords the facilities required for day-

to-day private domestic existence as a dwelling house, see CA11520.

CA20050 - PMAs: Introduction: Management of an investment company

CAA01/S18

Management of an investment company is a qualifying activity for PMA. The term

"Investment Company" has the same meaning as in ICTA88/S130. It is a company:

whose business consists wholly or mainly in the making of investments, and

the principal part of whose income is derived from the investments that it makes.

A savings bank or other bank for savings is treated as an investment company unless it

is a successor to a trustee savings bank for the purposes of the Trustee Savings Bank

Act 1985.

When you decide whether an asset is provided for the purposes of the management of

an investment company you should be guided by how you treat revenue costs like

repairs and running expenses. If the revenue costs of an asset are treated as a

management expense then expenditure to buy that asset is qualifying expenditure

provided that it meets the normal conditions for being plant or machinery.

Writing-down and balancing allowances for any accounting period are given by

deduction from income for that period and any excess allowances become management

expenses, which can be offset against total profits for the same period or carried forward

as excess management expenses to future periods. Balancing charges are taxed as

income of the business.

CA20060 - PMAs: Introduction: Restricted meaning of "on the provision of"The condition that the qualifying expenditure must be incurred "on the provision of plant

or machinery" should be interpreted narrowly. The case of Ben-Odeco Ltd. v Powlson,

52TC459 showed that remote or indirect expenditure does not satisfy this condition, and

therefore does not qualify for PMA. Transport and installation costs of plant or machinery

satisfy this condition however and can therefore qualify for PMA.

Ben-Odeco Ltd borrowed a large amount of money to finance the construction of a oil-

drilling rig and charged the commitment fees and the interest to capital. It claimed

capital allowances on the commitment fees and interest on the loan as part of the cost

of the rig. The House of Lords refused the capital allowance claim because the

commitment fees and interest were not expenditure on the provision of the rig. They

were expenditure on obtaining funds with which to acquire the rig.

CA20070 - PMAs: Introduction: Professional fees and preliminariesProfessional fees, such as survey fees, architects' fees, quantity surveyors' fees,

structural engineers' fees, service engineers' fees or legal costs, only qualify for PMA as

expenditure on the provision of plant or machinery if they relate directly to the

acquisition, transport and installation of the plant or machinery.

Where professional fees are paid in connection with a building project that includes the

provision of plant or machinery, only the part, if any, which relates to services that can

properly be regarded as on the provision of plant or machinery can be qualifying

expenditure for PMA. In determining how much of a combined fee relates to such

services, the services to which the fee relates will need to be analysed. It is not

appropriate simply to apportion the fee by reference to the building costs of the plant

and machinery and of other assets as that will commonly overstate the extent to which

the services relate to the provision of the plant and machinery.

You should adopt the same approach to preliminaries. These are indirect costs incurred

over the duration of a project, which will often include demolition works and site

preparation, as well as the construction of a building. Items like site management,

insurance, general purpose labour, temporary accommodation and security are

preliminaries.

CA20075 - PMAs: Introduction: Sampling as a basis of claim - fixturesWhere a taxpayer incurs significant expenditure in a chargeable period on a number of

properties that contain fixtures that qualify for PMA, it may be possible to arrive at the

amount of qualifying expenditure for those fixtures by means of sampling. For example,

sampling may be appropriate where a company acquires a number of similar sized retail

units and fits them out in their ‘corporate style’ to create a standard type of shop.

Sampling is acceptable in principle, both as a method for preparing PMA claims and in

checking them.

It is not possible to provide hard and fast rules on the method of sampling to be adopted

as the facts and circumstances of each case will be different. However, if sampling is

appropriate, statistically acceptable sampling methodologies must be adopted.

You should discuss with the taxpayer the size of the sample, and the expenditure

included in the sample, which will depend on identifying the relevant population. These

discussions should take place before a PMA claim is prepared or checked using a

sampling method. Appropriate cases may be agreed without reference elsewhere but

the Revenue’s Analysis and Research team may be able to advise on sample sizes and

techniques, where necessary.

You should not agree, in advance, claims for future years based on an earlier year’s

sample. However, you may decide to examine claims by means of enquiries to identify

variances in accounting systems and spending patterns from those previously examined.

If there is little variance it may well be that no further enquiry would be necessary into

that claim.

Similarly, you cannot automatically roll forward an earlier sampling methodology to

similar projects in later years. However, you should be able to judge the extent of

sampling required in the later years in the light of work done on the earlier project. The

relevance of earlier sampling work to later expenditure may be affected by changes in

the underlying statutory provisions and related case law.

If the bulk of expenditure has been incurred before the end of the chargeable period

then sampling discussions can begin between you and the taxpayer then. However, you

must not agree the extent of sampling before the beginning of a chargeable period.

The above guidance applies only to fixtures. It does not apply to chattels.

CA20080 - PMAs: Introduction: Parts and shares

CAA01/S270 & CAA01/S571

A part of an asset is treated as an asset for the purposes of the plant and machinery

legislation.CA11600.

The plant or machinery legislation applies to a share in plant or machinery in the same

way as it applies to a part of plant or machinery. A share in plant or machinery is treated

as used for the purposes of a trade so long as, and only so long as, the plant or

machinery is used for the purposes of a trade CA29210.