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Why Capital allowance is calculated for tax Purposes?

Capital Allowance is a Government Statute recognition of wear and tear of a fixed asset that is
fundamental to the continuation and that a business cannot do without in the daily business
operations. It assist and benefits businesses to further reduce taxes by writting off a percentage of
costs from taxable profits after deductible expenses. It can be deffered against past and future
taxable profits and is an Investment incentives to businesses.

It is also termed as Tax depreciation. Tax depreciation is not the same as depreciation or amotisation
of a fixed asset where it is determined by individual businesses internally and thus not a deductible
expense as it remains subjective.

The capital allowance may be favourable to certain busineses and not to some, depending on the
government's economic policies and directives for its economic surplus plans.

Capital Allowances have a deep impact by complementing or competing businesses where it can
change the economic purchasing power by boosting profitabilty in certain industries or obsoletion
in other industries that government deems to be a disadvantage for its competitivness.

Benefits to a business are the First Year allowances and enchanced Allowances as in future the tax
rates will be increased thus having a negative impact on businesses profitabilty and cash flow, these
allowances herein are fundamental change to reduce country purchases of natural resources which
are deminishing and prices are flucutating and manipluated may cause havoc in unnesscesary
deficit. Businesses who invest in these energy savings assets, profitability maybe sustained even
though there will be tax increases but in overview, the overall economy will improve its health in
the coming years.

Which Assets Qualify for capital allowance?


Assets that qualify are

Every year the government gives fixed rate decided by parliament for fiscal year budget for
different classes of assets like qualifying Plant and Machinery, Industrial and agriculure buildings,
patents, research and development, cars and certain intergral features.

These are Written down value of Main to special pools are 20% to 10% respectively, First year
allowance a generous 100% for energy and water efficiencies industries in promotion of a greener
envirnoment and 40% for purchases within the tax year. Annual Investment upto 50,000 to assist
many small businesses.

Enchanced Capital Allowances 100% focuses on specific qualifying plant and machinery such as
energy and water savings, low carbon dioxide car emmissions, natural gas and hydrogen refuelling
infrastrucure. Taxable profits herein resulting a loss after writting of ECA can receive tax refund
from HMRC capped at 250,000.
Define Plant & machinery

Machinery is however easier to distinguish than Plant.

The defination of a plant in Yarmouth v France (1887), 19QBD 647, is an asset or an instrument
plays a main role in the permanent function or setting for production of income for the business,
owned by the business, and is used daily in its business. The plant can be tangible or intangible,
fixed or moveable and live animals. It is defined clearly it is not the purchases the business makes
for sales revenue such as stocks, products and services.

The Main tests to define plant are:

Premise test to distinguish if something is part of its premises in which a business is carried on, its
exceptionality that separates it from the premise, the timeframe it is part of the premise, and can the
premise do without for the daily continuation of the business.

In the Wimpy International Ltd v Warland ; Associated Restuarants Ltd v Warland CA 1998, 61 TC
51; [1989] STC 273, was concluded in the premise test that movable items such as wall paintings
and ornaments were considered to be plant because these decorations provided a unique atmosphere
to the business and being exceptional as it would defer from its competitors in the same business
should they be neighbours. These decorations could be moveable and rearraged or changed would
cause a different atmosphere thus this separates it from being part of its premise. Should the
decorations be stripped the business would lose its appeal even regular clients.

However, Intergral Features of a plant such as electrical systems, lifts, escalators and alterations in
s25 CAA2001 defined by statute and caselaw will be given 10% to 20% written down allowance
depending on the pools they are allocated into.

In Odeon Associated Theatres Ltd v Jones CA 1971, 48 TC 257; [1973] CH 288; [1971] 1 WLR
422; [1972] 1 ALL ER 681, The cinemas repair and decorations were not claimable as capital as the
price of the cinemas remained the same despite the run down state it is in initially. Though the
cinemas continously needed maintenance and upgrading in order to provide a cinematic service to
its patrons deeming the expenditure to be revenue nature.

The continuous upgrading of screening projectors, sound systems, seats, were part of the revenue
generation core rather than being exceptional items to its premise. Without a screening projector,
seats, sound systems how would a cinema ticket be sold. Unless if certain items qualify as intergral
features, it would be allowed written down allowances.

Functionality test is to understand how an asset functions as tool in its relation to the business
activities. It provides an active function in the business.

In Dixon v Fitch's Garage Ltd, CH D 1975, 50 TC 509; [1975] STC 480; [1976] 1 WLR 215;
[1975]3 ALL ER 455, a metal canopy that shelters customers and the petrol pumps and gives
lighting were not classified as plant being that though it provides standard shelter for rain and shine,
but its purpose was just a shelter, thus its function was not active.

However, in O'Culachain v McMullan Brothers, HC(I) 1990, [1991] 1 IR 363, being a petrol station
canopy, besides being the standard canopy that provided shelter, it had an exceptional function to
the business as customers from distances would be able to see the petrol station and its services
from the flashy advertisement of its station name and services on the canopy.
The latter case defines the canopy to be an active tool used in the petrol station advertising and
awarness of its services intentionally, which is more than just a shelter.

Business use test looks at assets such as passive items like decorations, lightings and creation of
ambience could be classified as plant depending on its fundamental role in the nature of the
business.

Assets are used for decoration, CIR v Scottish & Newcastle Breweries Ltd, 55 TC 252 such as
paintings and light fittings were claimed as plant because it provided a setting for which the
business was carried on, being decorable ornaments in the hotel created a unique atmosphere that
distingusihes it from its competitors. It would also determine if the customers would prefer to visit
this hotel to stay or dine or the same hotel with ambience or without.

However some cases that failed to be classified such as lightings as plants in J Lyons & Co v
Attorney General, Ch D 1944, 170 LT 348; [1944] 1 All ER 477, The Finance Act 2009 has
classified these items as part of the intergral features of a plant.
Q4 Deductible expenses.

For Expenses be deductible against its profits, it must be incurred wholly and exclusively sole for
the business purpose and activity that is clearly tied to revenue generation. It must be deductible by
statute. A duality test and remoteness test must be conducted should an expense have a business and
personal purpose incurred together, though Dual purpose expenditure is only deductible if it can be
proved its was incurred for revenue and apportioned it separating from the personal use.

In light of Bewary Company, the concerns are on the repairs and maintenance of the plant and
machinery and intergral features which is of capital nature, improves the assets whereas revenue
expenditure where the plant and machinery needs to be maintenanced for the production of
manufacturing security systems which it sells to the customers.

In the case of O'Grady v Bullcroft Main Collieries Ltd, KB 1932, 17TC 93, The old chimney is part
of the structure was torn down and a new chimney was built in its place proving the same function
as the old chimney. Thus the expense was not deductible as it was not the repairing or mending of
the old chimney.

As for Bewary situation on remoteness test on if the repair and maintenance expense are deductible,
would depend on the machine and its permanent function to the revenue nature of the business. For
example;

Bewary Cardsmark Machine which manufactures swipe cards with embedded security PINS
packaging with the Swipe Card Access Lock systems.

Bewary Swipe
card Access
Doors Security
System. Price
4,000
The regular maintenance such as lubrication, cleaning, rubber worned out are expense deductible as
the final product is part of its security access system which is for sale. However to specially build
floors for the machine is not as its part of enchancement or improvement of its functionality of an
asset.
Duality Test for the one of the Director's Car having business and personal use.

The Car is classified as Plant and Machinery under Main pool and is allowable for capital
Allowance. The personal usage amounts to 25% that is not allowable. The Director activities
includes meeting clients, entertainment and travelling from home to work and clients locations.

The mileage claims for business use and petrol, car maintenance, road taxes will be disputable if
there is no clear line between personal and business.

In the test for duality, Newsom v Robertson, CA 1952 33 TC 452 [1953] 1 CH 7 [1952] 2 ALL ER
728 failed to qualify as deductible expenses even though he did substaintial work from home was
the main place of his work was in the barrister chambers. Moreover, he did not have business
meetings and entertainment in addition, his home was kept private, and its function separates clearly
that its was not an office for business activities. Thus his claiming of expenses travelling from home
to work and back was not deductible

In the case Sargent v Barnes, CH D 1978 52 TC 335 [1978] STC 322 [1978] 1 WLR 823 [1978] 2
ALL ER 737, the stopovers of collecting work related materials were not expense deductible as it
did not satistfy the conditions for wholly and exclusively, as the journey was from work, stopover
and to his residence.

In comparision with Horton v Young, CA 1971 47 TC 60 [1972] CH 157 164 [1971] 3 ALL ER 412,
the subcontractor ran his business from home, as in his tools and office operated in his home,
meeting with contractor discussing major issues such as pricing. On the way to the site, he fetched
other bricklayers. The expenses was deductable fully because he ran his office in his home, where
major business activities were held, therefore the claims were treated as his travels were between
office and site. His stopovers were not merely a convienient route to the site, but he had a exclu,sive
purpose to travel to a destination was solely to pick up the workers for the revenue activity.

In remoteness test, mileage claims and car expenses borne by tax payer personally or Bewary?
Pook v Owen, HL 1969, 45 TC 571; [1970] AC 244; [1969] 2 ALL ER 1, mileage allowance were
considered taxable benefit in kind, however it was not taxable in this case as the Doctor is on
standby for emergencies, though he did not conduct any consultation from his home, it was
considered as his work place as the term 'on call for emergencies' in his contract meaning that the
call from the hospital could be wee hours in the morning when he was asleep.

As for the increased car expenses related to the work, the Doctor was allowed a deduction for this
and it was wholly and exclusively for the purpose of the work.