Tag Archives: capital allowance

Manufacturers are applauding a key change to the tax regime for capital allowance claims that gives a substantial cash boost to companies that invest in the most up to date machinery.

As part of the chancellor’s plans, in the near future companies will be able to claim tax allowances under the ‘short life assets election scheme’ within eight years, as opposed to the current four years.

It is thought that this move is intended to increase competitiveness in the sector, and to increase the frequency of ‘made in Britain’ labels.

The extended time frame will give businesses buying expensive machinery a return of several tens of thousands of pounds if they have disposed of a new machine costing a few hundred thousand pounds within eight years.

Andrew Churchill, managing director of JJ Churchill, a manufacturer of Aerospace components, described the move as a “highly positive step”.

He told the FT adviser: “At a time when many companies in manufacturing are coming under a lot of pressure move offshore (to low cost countries) having more of an incentive to invest provides one more reason for such businesses to stay in the UK.”

It is likely that manufacturers will also be pleased by a number of other announcements from George Osborne. Namely, that there will be an extension in research and development tax credits for small businesses and that 21 ‘enterprise zones’ will be established around the UK to assist manufacturing businesses.

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In a separate article, we noted that persons engaged in qualifying activities can claim Plant and Machinery Allowance (PMA) on expenditure they incur for providing plant or machinery for carrying on the qualifying activity. In this article, we look at what are included under qualifying activities.

CA20010 lists qualifying activities for claiming PMA:

• 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.

To qualify for PMA under the last item above, employment or office, the asset must be “necessarily” provided for use in the office or employment. Expenditure incurred by employees on motor cars or other vehicles does not qualify for PMA from 2002/03 onwards. The rule now is that employees can claim statutory authorized mileage relief for qualifying business travel and not PMA on the vehicle.

Expenditure incurred for the provision of plant and machinery in a building used as a dwelling house does not qualify for PMA. A block of flats, however, is not a dwelling house as such; but the individual flats are. Expenditure that can be apportioned as intended for the common areas of the block are eligible for PMA claims.

Though dwelling houses are not eligible for PMA, property used for commercial letting of furnished holiday accommodation in the UK & EEA is eligible. To qualify, however, the property must:

• Have been available for commercial letting for at least 140 days during the year,
• Have been actually let to members of the public for at least 70 days and
• Not have been let to the same occupant continuously for more than 31 days except under abnormal conditions.

These letting conditions are due to increase from April 2012.

We will look at the details of other qualifying activities in a separate article.

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David Stanley Redfern

Manufacturers are applauding a key change to the tax regime for capital allowances that gives a substantial cash boost to companies that invest in the most up to date machinery.

As part of the chancellor’s plans, in the near future companies will be able to claim tax allowances under the ‘short life assets election scheme’ within eight years, as opposed to the current four years.

It is thought that this move is intended to increase competitiveness in the sector, and to increase the frequency of ‘made in Britain’ labels.

The extended time frame will give businesses buying expensive machinery a return of several tens of thousands of pounds if they have disposed of a new machine costing a few hundred thousand pounds within eight years.

Andrew Churchill, managing director of JJ Churchill, a manufacturer of Aerospace components, described the move as a “highly positive step”.

He told the FT adviser: “At a time when many companies in manufacturing are coming under a lot of pressure move offshore (to low cost countries) having more of an incentive to invest provides one more reason for such businesses to stay in the UK.”

It is likely that manufacturers will also be pleased by a number of other announcements from George Osborne. Namely, that there will be an extension in research and development tax credits for small businesses and that 21 ‘enterprise zones’ will be established around the UK to assist manufacturing businesses.

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In a separate post, we looked at capital allowances that are allowed as a deductible expense for computing taxable income. We noted that capital allowances allow long-term expenditures, such as on buildings, plant & machinery and furniture, to be written off as expenses over their expected useful lives. We noted in particular that computing capital allowances on buildings is a complex exercise that accountants are not typically equipped to handle well.

The complexity of capital allowance claims on buildings might make people think that these involve taking advantage of some loophole in law which might be resisted by tax authorities.

Let us look first at what the term loophole means.

In the context of law, it typically involves wording that can be interpreted in an ambiguous manner allowing people to interpret it in their favour and avoid complying with the intended legal obligation. It can also involve an omission while drafting the law that enables people to circumvent it by taking advantage of the omission in some way.

Capital allowance claims are not based on any such loop hole. It is based on specific provisions of the law intended to encourage investment in capital assets. Based on established law dating back to 1878, it confers a right on taxpayers which they can claim in a straightforward manner and without recourse to any devious practices.

In fact, thousands of capital allowance claims on buildings have been made and paid out. The goal should be to prepare a detailed report that will clearly list the items and the reasons why these items are eligible for capital allowance. In addition to being accurate, the report should also ideally be in a format approved by HM Revenue & Customs.

This is a task for surveyors and valuers, and also requires familiarity with the complex provisions of capital allowance regulations as they apply to buildings.

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