15 Capital allowances Introduction taxpayer in respect of ea ances available to a taxpay Dita exp 1. The chapter is concerned with allows called capital allowances, consist ofa iggy My, eT swe eae i Pekan a it ae Hac i .e found in the Capital Allowance Legislation concermed with capital allowances isto be found in the Capital Allowances ac yg PART | - Plant and machinery ~ general conditions 2 a) Allowances are available under this heading if@ person earries on a qualifying activity ayy incurs qualifying expenditure i activity has the following meaning i) a trade, profession or vocation, ii) anordinary Schedule A business, iii) a furnished holiday letings business, jv) an overseas property business, ¥) the management of an investment company, vi). special leasing of plant or machinery, Vii) an employment or office. ©) The general rule is that expenditure is qualifying expenditure if— i) itis capital expenditure on the provision of plant or machinery wholly or party forte purposes of the qualifying activity earried on by the person incurring the expenditure wi ii) the person incurring the expenditure owns the plant or machinery as a result of incu it Qualifying expenditure 3.) Plant and machinery isnot defined in any tax statute and the definition most freauesty referred to is perhaps that contained in a non revenue case, Yarmouth v France 1837 QBD. he case was brought under te Employer Lablity Act 1880, and cnsgeraion cena ‘whether or not a horse was plant and machinery. Inthe course of his judgement. Linley ‘made the following statement: oe 2 a ‘sin ts ordinary sensei includes whatever apparatus is used by a business man fr caring ons business not his stackin trade which he bus or makes forsale, foods and chattels fixed or moveable, live or dead, whieh he keeps for perma employment in his business.’ > que keene for pe : b) Capital expenditure on alterations to an plant, nay be treated as plant and tal ») ‘existing building, incidental to the installation of hinery, where a qualifying activity is earried on. «)_ Expenditure on the thermal insulation ofan industrial building, 4) Fire safety expenditure ©). Personal security expenditure 1) Buildings and structures ~ see below, Plant and machinery — buildings 4. Plant and machinery does not include:b) fixed structures ~ List B ©) interests in land, Note The items included in list to the existing case law criteri List A Buildings 1, Walls, floors, ceilings, doors, shutters, windows and sure 2. Main services, and systems, of water, electricity and gas. ence Waste disposal systems Sewerage and drainage systems 15: Capital alowances Cofeach table may still be claimed as plant and machinery subject List C Assets so included, but expenditure on which is unaffected by the new rules Electrical, cold water, gas and sewerage systems ~ 4) provided mainly to meet the particular requirements of the trade, or )_ provided mainly to serve particular ‘machinery or plant used of the purposes Shafts or other structures in which lif fee Se ena | Ser ec ieetnaroee 6, Frese estems eee aera 2. Manca or sn ume endear ee eee Percent 4. Cookers, washing machines, dishwashers, Sato ae ee ee baths, showers, sanitary ware and similar | equipment; furniture and furnishings | ee ee Sound insulation provided mainly to meet the particular reqinements ofthe trade 7. Computer, tlacommunications and survelllange systems Gneluding their wiring or other links) Refrigeration or cooling equipment 9. Sprinkler equipment and other equipment for cxlingusbing or containing fir; fire alarm systems 10. Burglar alarm systems 1, Any machinery including de viding molive power) not within any other Hem inthis eolunin 12, Strong rooms in bank or building society promos; sates 13, Partition walls, where moveuble and intended tobe moved in the cours of the trade 14, Decorative assets provide forthe enjoyment ofthe puble inthe hotel, restaurant oF Similar trades 15, Advertising hoardings: signs, displays and inilar assets 1915: Captal allowances List © List B \diture which is unafr Structures | Expendi rules Py 1. Any tunnel, bridge, viaduct, aqueduct, ‘embankment or cutting ‘Any way or hard standing, such as @ 2. wwement, road, railway or tramways 45, park for vehicles or containers, oF an airstrip or runway : a 3, Any inland navigation, including @ canal or basin or a navigable river 20. 4. Any dam, reservoir or barrage an {including any sluices, gates, generators ‘and other equipment associated with it) | 99, Any dock Any dike, sea wall, weir or drainage | ditch 7. Any structure not within any other item in this column 23, 24. 25, 26. 2m. 28, 29. 30. course of the qualifying activity Cases on plant and machinery ‘The following is a summary of some of the eases which have been concerned with the definitone! 5 120 plant and machinery 16. 11. Alteration of land for the purpose g installing machinery or plant “Yet Provision of dry docks Provision of any jetty oF similar provided mainly to carry machinery Provision of pipelines wision of towers used to su eee PPOrt Mong, Provision of any reservoir ineorperai water treatment works edna Provision of silos used for tempora ‘on the provision of storage tanks 7 Provision of slurry pits or silage lange Provision of swimming pool, including d boards, slides and any structure supp them Provision of fish tanks or fish ponds Provision of rails, sleepers and ballast fore railway or tramway ‘Swimming pools Cold stores Any glass house with integral environment controls Movable buildings intended to be moved inthe Plan 1, darrold v John Good & Sons Ltd 1962 CA 40 TC 681. In this case movable metal potting used to divide office accommodation was held to be plant. HLL. 38 TC 391. Knives and lasts which had an averse life of three years, and which were used on shoe machinery, were held to be plant. 3. CIR» Barclay Curle & Co,Ltd 1969 HL. 45 TC 221. The company constroced a dry de® o. Slam Silewad si ctatesre me ents verde minha ogre co 7. Ben Odeeo Ltd v Powlson 1978 CD STC 111. Interest nia on an oil rig were held not to be plant. 11 Interest payments made to nance expe 8. Benson v The Yard Arm Club Ltd 1978 CD, an old Oe Ales eran Ltd 1875 CD STO 480. A matal canopy covering the service areal petrol filling station was held to bea shelier,and'net pian15: Capt afowances 10. Munby v Furlong 1977 CA STC 282. Books purchas a pactee were a O7ZCA STC 282, Books purchased by a barrister to crate a brary in his 11, Hampton v Fortes Autogrill Ltd 1980 CD STC 80. A fase cei Autogril false ceiling constructed to provide lading for electrieal conduit and ventilat was held : eee lee en ion trunking was held not to be plant. P i Soiety + Proctor 1982 CD Decorative serens incorporating the society’s nae were held tobe plo eet cence 18, Van Arkadie v Sterling Coated Materials Ltd 1983. CD STC q ch iterliag, required to tect Reto 95, Aditional costs in pounds fra tebe pact of rmet instalment payments onthe purchase of plant and machinery, wer 14. ‘Thomas v Reynolds and another 1987 CD S' iouin whieh cpvere‘al tenmio courtweseli ote te 'D STC 60. An inflatable dome which covered a te in which the tennis eoaching business was carried on, and n at eee iz the te ching b ied on, and not . Wimpey International Ltd v Warland 1988 CA Expenditure on items of decoration installed in the company’s restaurants was held not to be plant or machinery. 16. Hunt v Henry Quick Ltd: King v Bridisco Ltd CHD. 1992 STC 633. The construction of ‘mezzanine platforms in a warehouse was held to be plant and machinery. 1. Gray v Seymours Garden Centre C.H.D. 1993. The construction of a special horticultural greenhouse was held not to be plant and machinery. Attwood v Anduff C.A. 1997. The expenditure on a purpose built car wash site was held not to be plant and machinery, Shove v Lingfield Park 1991 Ltd CD 2003, Artificial all weather track was held tobe part of the premises and not plant When capital expenditure is incurred 6. The expenditure is taken to be incurred on the date on which the obligation to pay becomes unconditional. However, if payment in whole or in partis not required until more than four months after the date on which the obligation to pay becomes unconditional, then so much of the amount as ean be deferred is taken to be incurred on that date. Example 18, 19, K orders an item of plant from X ple on the following terms: 31.12,2008 plant delivered and invoiced on same date to K. 21,1.2004 due date for payment by K, being the end of the month following date of delivery 33.2004 _K makes payment. The expenditure is deemed to have been incurred on 31.12.2008. Example Lorders an item of plant from ple costing £50,000 as follows: 31.12.2003 plant delivered and invoiced on same date. 311.3004 90% of invoice amount due for payment. 306.2004 balance of 10% due for payment, Lis deemed to have incurred the expenditure as follows: 81.12.2003 90% x £50,000 i.e. £45,000 30,6.2004 10% x £50,000 ie. £5,000 Allowances available 7. The topes of allowances which ean be claimed in respect of expenditure on plant or machinery are: first year allowance chanced epi llowances seriting down allowance Halaman allowance and related balancing charge First year allowance 8 Summary of main features Sammary of mae fone iain reset of quali frst yar expenditure on plan and machinery as follows: qa15: Captal alonances lowance Period of expenditure ; Rateefatioance Po eeg alo medi sie eterpies 50% 1.2004 emall sized enterprises). 14.2004 companiog 100% 142900 -31.3.2004 (ICT expenditure ~ small entry rises TE bo01 Energy saving plant and equipment", 112001 — New low emission cars and equipment - 14.2003 - Water saving plant available if it is made by or sole traders and partnerships the FYA is only avai 8 Aly Fol nd on met long Sa ms which a company must meet in order for it actually to quali ny nancial gear re expressed interme of ume ety nal or medium ee. qualifying conditions ina financial year if it meets two or moe y company sets a aan Gy, Companies Act 1985 (In due course this defniny Sligned with the European Union definition.) The criteria are as follows ‘Small company ©) The qualifying condi ‘small or medium sized nitions, [APs to 30.1.2004 APs after 30.1.2004 (a) Turnover: < £28m <$5.8m (b) Balance sheet total: s 14m <£28m (©) Number of employees 50 <50 Medium sized company (a) Turnover: < £11.2m < £22.8m (b) Balance sheet total: < £5.6m <£11.4m (co) Number of employees 250 < 250 For the purposes of first-year allowances, a company need only, in effect, meet two out ft ‘three erterta set Jown for medium sized companies, the distinction between small and medium sized companies having relevanee only in relation to company law. Where the financial year in question is not a period of 12 consecutive calendar months tha the turnover figures are time-apportioned. ‘An individual may claim all or any part ofthe FYA available for the year of assessment. ) A.writing down allowance is not available in the same year as the FYA, 4) The 100% FYA is available for expenditure only by small businesses in the four years fm is ‘April 2000 on information and communication technology equipment such as comster, software and internet-enabled mobile phones. eae Enhanced capital allowances — 100% FYA Energy/water saving plant 122 Enhanced capital allowances (ECAs) are designed to encourage the use of energy efficent ‘equipment by giving «100% allowance on purchase of new plant or machinery on or oer Ig 2001. Only products included on the UK Energy Technology List approved by the Deparment Environment Transport andthe Regions (DETR) will qualify. These fall into thirteco cep + combined heat and power systems; boilers; motors; variable speed drives for liquid and gas movements; lighting: pipe insulation; refrigeration; thermal screens; heat pumps radient and warm air heaters; solar heaters; ‘energy efficient refrigeration equipment, and compressor equipment.15: Capt allowances ‘The allowance which is availabl le to all businesses small, medium and large is extended to assets for leasing, letting or hire purchase on or after the 17th April 2002, Enhanced capital llowances — 100% FYA Low emis: n cars i) itis a low emiss car i.e, emits not more than 120g/km of carbon dioxide, or ii) itis electrically propelled. -_ : 'b) The special capital allowance rules for cars costing more than re removed for low emission/electrically propelled cars, . aad ee ee se Trceoget fal roc a rage te ant tanta toa 2 i ‘These measures apply to expenditure incurred e 2008, and cover assets acquired to be leased, let or hired. eee d Writing down allowance — rate 25% 11, Summary of main features ” A.writing down allowance is available in respect of expenditure incurred in the accounting period which is the basis period, The allowance is available whether or not the plant or machinery is in use in the basis period. The allowance is calculated by reference to the pool of expenditure, as shown in the specimen computation below (paragraph 14), ‘The pool is reduced by reference to the Total Disposal Receipts (TDR) (limited to the original cost) where one of the following events occur. i) ‘The plant or machinery ceases to belong to the taxpayer. ii) The taxpayer looses possession of the plant or machinery in circumstances where it is reasonable to assume that the loss is permanent. ‘The plant or machinery ceases to exist as such as a result of destruction, dismantling ete. iv) The plant or machinery begins to be used wholly or partly for purposes which are other than those of the trade. v) The trade is permanently discontinued. ©) The balance remaining after deducting any proceeds of sale is written down in future years. f) ‘The taxpayer can claim any proportion of the allowance available. ‘@) Ifthe asset has any private use then the 25% allowance is caleulated in the normal way and then reduced accordingly. A separate pool is required for each asset with a private use element. ») ° @) h) A writing down allowance is not available in the year of cessation of trading. i) A.writing down allowanee is nat available in addition to the FYA, Capital Allowances on long life assets — 6% 2, 1. 2) Capital allowances are ge on math edarng balance bans. Thi equivalent in value pe of 5 ears or OTe at OF tt saya cf earn, which would be Ce oe Beisel fom eee ee 12315: Capta! atowances ‘The de minimis limit of £100,000 a year also applies ‘dvals provided the individual, or int dovotes substantially the whole of their 3 to individuals and top ‘ase of partnership af eee hig up of ind time to carrying on the busiest member « de minimis limit does not appl 4). The exclusion for expenditure below the de timit Poly ta con seecetiture on wnachinery or plant, nor to expenditure on a share in machinery fOWiny earn gat for leasing or on machinery and plant on which allowangey 2 Dt” toa previous owner at the reduced rate. san a en «) Tha lon life asset is sold for less than its tax written down value in order to ace . Tee ee a ree ten down valve. erate allowances, itis treated as sold for its tax weit ‘Separate pools 13. A separate pool must be kept for the following assets: i) assets with any private use ii) cars costing more than £12,000 each. Separate pool for each car iii) short life assets iv) ears for employees (£12,000) to 14.2000. ¥) Tong life assets Specimen computations 14, Specimen computation with FYA Unrelieved qualifying expenditure brought forward Add qualifying expenditure incurred (not eligible for FYA) Available qualifying expenditure (AQE) Less total disposal receipts (TDR) Writing down allowance @ 25% (AQE) ~ (TDR) Qualifying expenditure eligible for FYA Tess FYA @ 100% / 50% /40% Unrelieved qualifying expenditure earried forward Specimen computation without FYA Pooled plat . Unrelieved qualifying expenditure brought forward Add qualifying expenditure incurred (not cligible for FYA) Available qualifying expenditure (AQE) Less total disposal receipts (TDR) Writing down allowance @ 25% (AQE) — (TDR) Unrelieved qualifying expenditure carried forward Capital allowances and accounts 15. For all businesses the following provisions apply. 1) Capital allowances are available in a ‘chargeable period’ which is the period of acco. 2) Capital allowances are treated as a trading expense of the businesses in the charg and any balancing charge is treated as a trading receipt. This means that the Sches profit for tax purposes is after the deduction of capital allowances. 3) Where the period of account is not a 12 month peri or expanded on a pro-rata basis 124 ie pra ieDCs* the writing down allowance is contratExample C hires a ear for £3,200 pa. whieh if .a. which if purchased would have cos Calculation of hire charge. there gots 4.200» 2000 +(18.000- 12,000 15 1B.a06 ie 3.200% 18 ‘The amount restricted is £3,200 - £9,667 = 2,666.67 3. Note. Where the leasing agree then this element ofthe change sould a chard for items such as repairs and maintenance, Plant purchased by HP 17. With this method of purchase the interest element is ‘eau tothe apt clement, anys ahead a an expense trading, With a) Before the plant is brought in to use, for any instalment due. ») When the plant is brought in to use, for all instalments outstanding, as if the whole of the balance of capital expenditure had been paid on at that date. ° Yad an HP agreement is not eventually completed after the plant has been brought into use, then an adjustment is made which claims back part of the allowance granted. Leased plant and machinery 18. In general a le: of plant and machinery is entitled to the full amount of capital allowances on eligible expenditure, and the rental payments of the lessee are an allowable business expense. Separate pooling arrangements continue to apply to leased assets within the following categories: 2) Motor cars eosting more than £12,000 'b) Assets leased outside the UK other than certain ships, aireraft and containers leased in the course of UK trade. me ©) FYA not available for trade or leasing, Accounting for leased and hire purchase contracts ‘SSAP 21" 19. The statement of Standard Accounting Practice for leases and hire purchase contracts (SSAP 21) does not alter the tax position of the lessee or lessor. Lessees are not entitled to capital allowances in respect of leased plant and machinery. ‘The lessor, by incurring the expenditure and retaining ownership of the assets, will normally be entitled to the capital allowances, For sole traders and partnerships where SSAP 21 may not be followed, the total finance lease rental charged against the profits will be allowed for tax purposes. In this case there is no need to distinguish between capital and interest payments. Where accounts are prepared in accordance ‘with SSAP 21, which means all companies, then for tax purposes the situation is as follows. a) ‘The finance lease expense charged in the accounts is allowed for tax purposes. b) The normal depreciation charge on the asset in the accounts will be allowed as a deduction in computing taxable profits, Balancing charges and allowances: general rules 20, A balancing charge arises when the total disposal receipts (TDR) (limited to the original cost) of | any poolable or non-poolable asset is greater than the amount of available qualifying expenditure (AQE) existing in the period of the sale. Disposal value in the usual case is the amount of the proceeds of sale, or where the asset is lost or destroyed, any insurance or compensation moneys received. In other circumstances, given away, the market price is used. Where plant or cost of demoliti plant is ‘machinery is demolished giving rise to a balancing allowance or charge, the net ion can be added to the amount of unallowed expenditure at the time of the 12715: Capital allowances oar A balancing allowance arises when the amount of available qualifying expenditure (AQE) is greater than the total disposal receipts (TDR) in the following circumstances: a) in the terminal period when trading permanently ceases b) when there is deemed to be a cessation of trade, see below. Deemed cessation 21. For capital allowance purposes certain assets are treated as forming a separate trade to that of any actual trade undertaken so that on a disposal the notional trade is deemed to have ceased This applies to the following categories: a) expensive motor cars ie costing more than £12,000 b) assets used only partially for the purposes of a trade, e.g. a private car ©) short life assets @) ships e) each letting of machinery otherwise than in the course of trade ) the motor car pool (to 5.4.2002) for cars costing less than £12,000 (when there are no Where capital allowances are computed on the basis of a deemed trade, this is assumed to De discontinued when a disposal has to be brought into account in respect of a single item or the Is item in a pool of assets. Example a 1 anded 31st15: Capital atiowances iii) The expe iv) Plant pur ‘Pool and the WD allowance is computed at al before 31.3.2002, ay be summarised as follows. in respect of a disposal o hinery but do not apply to motor cars, leased to non-traders, or a be pooled separately. +r expects to dispose of ar chinery at less than its tax lue, within four years of ‘acquisition, then he or she can g da separate pool created. The of acquisition years from the end ed back to the general written Example | 7, who has traded fo he purchases equi Show the computations «) The plant is sold in the 5) The plant is sold in the ©) The equipment is not sold b Solutic s ‘olution Patso.15: Captal alowarces in fairly large numbe oan itar nature are acquired in fa a 4) Where short i a oat ofthe assets may Be sed and a ‘or returnable containers, ide are stocked in large numbers an {individual identificgis™ {i} Where assets used ina trade are ream ta wracticable, tent fe er possible but not readily pr i Mae ‘inder this heading could be calculators, armusen ‘class of asset retained. Assets. Beate sey ee ‘ond scientific instruments, and videos. The renewals basi Jief on expenditure on pl method of obtaining relief on exp plant and 28. This really ano tater trance vat cutlned above. Infact where the reqechin auitedistint from the cap an doesnot apply. The main points arising "th idopted then the capital allowance syst act aivasinn ‘a de nd no writing down allowance is available with ths bai ener ae ion the cost of the new item, less anything received fo, 2 When an tr irene then Uh ote ening Income Any clement oe Uy is allowed as a dedue dition i cxeleded, and can only be elaimed when itis replaced. Subsequent Teplacenen” ar el win asim bat capital allowance system can ©) Acchange frm the renewals bass tothe normal eapital allowance system can be mage time, but the decision must apply to all items of plant in that class, In the year of tho cyst capital allowances ean be claimed, irespetiv of whether the expenditure ison are. or not : z ‘The renewals bass effectively gives 100% rele the year of expenditure on the repaeenay an asset, PART Il - Industrial buildings and structures 24. Capital allowances are availabe in respect of expenditure on buildings and structures whem building or structure isin use forthe purposes of a qualifying trade as defined in Table hrs a) Table A Trades which are ‘Qualifying Trades’ 1. Manufacturing A trade consisting of manufacturing goods or meterah 2, Processing A trade consisting of subjecting goods or materalsina process. This includes maintaining or repairing goocs or mstris Maintaining or repaving goods or materials ineta qualifying trade if . 4) the goods or materials are employed in a tradeot undertaking, ae b) the maintenance or repair is carr vaintenanee or repair is carried out by the pe employing the goods or materials, and © the trade or undertaking is not itelf a qalifilg A trade consisting of storing goods or materials 8) which are to be used in the manufacture of otht®* or materials, b) Which are to be subjected, i c of trad? Thich are tobe subjected, in the cours © which, having b duced having been manufactured or prs, Subjected, in the course ofa trade, to pros ‘ot yet been delivered to any purchaser °° @ on their arrival i ir arrival in the United Kingdom l'0™ a outside the United Kingdom, ae 3. Btorage15: Canta atowances Agricultural Sontraeting” A tenia cousiting ot {) Plouhing or cultivating land occupied by another, ) y carrying out any other agricultural operation on land ‘ccupied by another, or = ©) forestry, Botaay is purpose ‘crops’ includes vegetable produce. Working foreign plantations sisting of we tng of working land outside the United Kingdom used for * A ) growing and harvesting crops, b) husbandry, or ©) threshing another's crops, For this purpose ‘crops’ includes vegetable produce and “harvesting crops’ includes the collection of vegetable 7 Produce (however effected), ___A trade consisting of eatching or taking fish or shellfish. Mineral extraction A trade consisting of working a source of mineral deposits. “Mineral deposits’ includes any natural deposits capable of being lifted or extracted from the earth, and for this Purpose geothermal energy is to be treated as a natural deposit. “Source of mineral deposits’ includes a ine, an oil well and a source of geothermal energy. Table B includes electricity, water, hydraulic power, sewerage and transport undertakings where a trade is carried on. ») ° a °) 8) ») Cases of 25. a) ») ‘The expression ‘building or structure’ is not defined, and in general, an extension or addition to a building is treated as ifit were a separate building. A structure embraces such things as: walls, bridges, culverts, tunnels, roads, aireraft runvrays, and factory car parks. Costs of site preparation are included in the cost of a building. ‘Where the taxpayer carrying on a qualifying trade provides a building or structure for the. such a building is deemed to be an industrial building. wean on Gttnibutable to the eost of such premises, then the whole building is treated as an industrial eo dustrial buildings ci i re Se ee at industrial building. 13115: Capital alowances ©) Abbott Laboratories Ltd v Carmody 1963 CD 44 TC 569. An administrative unit which cost {eae than 10% of the whole was held to be a separate building, and thus not an industrial one @) Buckingham v Securitas Properties Ltd 1980 STC 166. A building used for the purposes of wage packeting, and coin and note storage, was held not to be an industrial building, as the coins and notes were currency and not goods or materials. ©) Copol Clothing Co. Lid v Hindmarch 1982 STI 69. A warehouse used to store imported goods ‘was held not to be an industrial building, as it was not located near to a port or airport. 1) Girobank ple v Clarke 1998 STI. The activities in a data processing centre did not amount toa subjection of goods to a process and thus expenditure on the building did not qualify for IBA. Allowances available 26. The following allowances are available in respect of industrial buildings: Initial allowance 20% of expenditure (1.11.92 - 31.10.1993). Writing down allowances - 4% of expenditure (2% for expenditure prior to 7.11.62). Balancing charge ‘This arises where the total allowances given are greater than the “adjusted net cost’. ‘This arises where the ‘adjusted net cost’ is greater than the total allowances given, ‘An industrial building erected after the 6th November 1962 is deemed to have a maximum life of 25 years from the date when first used as an industrial building. After that period no allowance of any kind is available. For buildings erected prior to that date the maximum life is 50 years. Writing down allowance 97. a) Avwriting down allowance of 4% p.a. is given providing that the building is i industrial building at the end of the basis period. ane Balancing allowance b) A full writing down allowance is given unless the basis period is less than 12 months, when © proportion is available. ©) Where a writing down allowance cannot be given, i.e. where the building is not being used for a qualifying trade, then a ‘notional allowance’ is neverthel 7 building is in no way affected. \eless computed, and the life of the18: Capta allowances and charges ig has boen used for a qualifying trade throughout the period of ownership, justment arises if the proceeds of sale are greater or smaller than the prior to the sale. original cost less any allowances given by Whe arises, this cannot exceed the value of the total allowances given. ©) The all toa purchaser or a secondhand building are based on the residue of expendit ‘charge, minus balancing allowance, restricted where necessary to the p ining tax life of the building.Disposal after non-qualifying trade use 29. If building has not been used for a qualifying purpose throughout the period, then a balancing adjustment is calculated by reference to the ‘adjusted cost’ of the building. The latter is equal to the original cost less any proceeds of sale, adjusted for any periods of non-qualifying use. The comparison is made between the following: i) the actual capital allowances given (ignoring all notional allowances) and ii) the adjusted net cost i.e. (original cost ~ proceeds of sale) x Penegs oF industrial use Sale proceeds > original cost = BC equivalent to allowances given. Sale proceeds < original cost = a) BC where actual capital allowances > adjusted net cost. b) BA where actual capital allowances < adjusted net cost.Notes é The allowances available to the purchaser would be based on the ial of the residue of expenditure less the balancing allowance, restricted pe es ry Purchase pricy Residue - Balancing allowance i.e. 72,000 - 3,429 = 68,5 Restricted to purchase price £60,000 Pee ee ae aa ii) Where the building is sold for more than its original cos sing the actual allowances given, which in the above example would be £8,000. ley iti) The age of the building on 31 Dec 2004 is seven years and its unexpired life is therefore 1g years, Writing down allowance 82: a i.e, £3,993 p.a. available to purchaser. 1 Enterprise zones 30. These are areas of the country designated by the Department of the Environment, for which special provisions apply. So far as capital allowances are concerned the main features are: ) Eligible expenditure includes the construction, extension or improvement of industrial ang commercial buildings within the zone. Thus all commercial buildings, offices and hotels are included, but not dwelling houses. b) An initial allowance of 100% is available but a reduced amount can be claimed. ©) Ifthe building is sold within 25 years of its first use, then the normal balancing adjustments» apply. 4) The allowances apply to expenditure incurred within a 10-year period beginning with the day on which the site is first designated as an enterprise zone. PART Ill - Other assets Conversion of parts of business premises into flats 81, Rates of allowance initial allowance 100% of expenditure writing down allowance 25% 134oo 15: Capa atowances fay 2001 ate acetal allowances ‘nas introduced for expenditure incurred from the 24th " roperties in traditional shoppig erste? Of vacant or underused space above shops and commercial Lakiaes ‘PPing areas to provide flats for rent. The allowances are available a) the property was built before 1980, hi b most ofthe found oora falls within certain rating categories at the time the conversion work Services, and premise oPS; certain offices including those used for financial and professional | ees and promis te fr mel ad ahr pins fl od is 4) apart from any extension required to provide access ) each new flat is self-contained, with its own external acces: jan four rooms: excluding the kitchen and bathrorn and ene seated has ne more than 1) The rules governing the alk code, with cert iif E " lowance code, wit ain modifications and simplifications: there vill be no balancing charge if'a balancing event (e.g. a sale of the property, the flat ceasing to Hotels. c 5 le for expenditure incurred, in respect of what is called a ‘qualifying hotel’. This is a hotel which provides accommodation in a building of a permanent. nature, and which complies with the following. . sh ofered consists whol or maya etngreeas a ‘The following allowances are available: 4% of expenditure p.a, based on initial cost. Balancing adjustments A balancing charge or allowance ean arise in similar circumstances to that for industrial buildings. Ifa building ceases to be a qualifying hotel, other than by sale or destruction, for a period of two ‘years, then a sale is deemed to take place at the end of that period, at the open market price. Dwelling houses let on assured tenancies 88. Capital allowances are available in respect of expenditure incurred on or after the 10th March 1982, and before the Ist April 1992, on the construction of buildings consisting of or including dwelling houses let on assured and certain other tenancies. To qualify, a dwelling house must be let on a tenaney which is for the time being an assured tenaney within the meaning of Section 66 of the Housing Act 1980. Rates of allowance Writing down allowance 4% of expenditure. Balancing adjustments a balancing chargefallowance can arise. Agricultural buildings and works 34. Allowances are available on capital expenditure incurred in respect of agricultural or forestry land. Capital expenditure includes expenditure on contraction of farmhovne, farms o forestry buldngs, cottages, fonceso other works aa tar netrage, water and cletia natallations, broiler houses and aaa eae ued for the tensive rearing of veto Wher nmenaitarets on afarmbouse then not more than a third ofthe expenditure ean quali as tn agricul building raat for supa allowances the person incorting the expenditre must have the ‘relevant eae ould natu an owner o tenant farmer ‘The agricultural or forestry land must be in the UK. 135= patent rights 7. The main provisions relating to this type of capital expenditure areas follows: 2) A separate pool of expenditure on the purchase of patent rights is created. a) A aiting down allowance of 25% is availabe for chargeable periods computed on the basis of WDV = 25% x(AQE - TDR) previous period ‘on the purchase of ; 5s balance of pol from |AQE = available qualifying expenditure = { eating expenditure patent rights ‘TDR = total disposal receipts _ proceeds of sale Himited to the eost of bequisition «) Where the basis period is less than 12 months’ duration, (e.g. on a commencement oF cessation) then the 25% is reduced in proportion. @) Abalaneing charge arises where: “EDR (restricted to cost of acquisition) > AQE ©) Abalancing allowance arises on the permanent cessation of trade, where: "TDR (restricted to cost of acquisition) < AQE Where the procouds of sale exceed the original cost of acquisition, then the excess is sti? snere thle bo income tax as Schedule D Case VI income in accordance with the provisions of chargeable toi The assessment can be spread over six years beginning with the year of assessment in whose basis period the sale took place. NBWe¥, 14.2002 companies are taxed in accordance with Chapter 23. ® the intangible assets provisions, see15: Captat alowances Know how ean ‘any industrial information and toqhy, ow jeden by Se 452 CAA 2001 £2 EA. aerials rin the working gf 38, Know how is defined by Pc ofa busine he ne AQE : 2) A balencng allowance arises where AQE > TDV on the permanent discontinuation oa rj, NB Wool 1.12002 companies are taxed in accordance with the intangible assets Provisions zy Chapter 23. Research and development allowance 89. Allowances for capital expenditure on research and development related to a trade carried on y, taxpayer are provided by See 437-445 of the CAA 2001. 4) ‘Research and development means activities that fall to be treated as research and dovelopment in accordance with normal accounting practice. b). Expenditure on research and development includes all expenditure ineurred for: 4) carrying out research and development, or ii) providing facilities for carrying out research and development. But it does not include expenditure incurred in the acquisition of rights in research and development, or rights arising out of research and development. ©) ‘Normal accounting practice’ means normal accounting practice in relation to the accounts f companies incorporated in a part of the United Kingdom. 4) Capita expenditure under this heading would include buildings and plant and machines it not lan ©) The amount ofthe allowanee is 100%é of capital expenditure. Balancing adjustments can arise when assets representing research and development expendi, cease to be used for such purposes and either they are sold or destroyed. seen NB The Finance Act 200 introduced a shame for RED tax eres or small and medium ie companies, based on the total cost oftheir research and development expendit o Se + Student self-testing question ‘has been trading for many’ years with an accounting period endin a respect the gear to 90h Sone 2000 healing data relaag rn sear em 0c June Ka eset 1. Pool ofexpenditure bf Ist July 1999 £ Plant and machinery Motor car (private we 2079 VW Pom 2 1.899 New machine cost 500 30.9.99 Office furniture cost 30 1.1.00 nd-hand motor car for sales representative cost 5,000 80.5.00 Second-hand erane eost 92 3. LEOL” BMW fr Treat se 907) eon 2701 Sale YW cor ned by “hoon 138