This article appeared in The Tax Journal ("the non-taxing weekly for top professionals") on Monday 20 December 2010.
Five of the key 2010 changes affecting capital allowances are as follows:
For expenditure incurred on or after 1 April 2010 (companies) or 6 April 2010 (non-corporates) the maximum Annual Investment Allowance (‘AIA’) for expenditure on plant and machinery was doubled to £100,000.
Why it matters: Originally, from April 2008, a new AIA gave an annual 100% capital allowance for the first (but not necessarily the earliest) £50,000 of investment in plant and machinery. This was a compliance simplification and tax relief acceleration measure that acted like a type of de minimis provision. The government believed it would benefit 95% of taxpayers, who were understood to spend less than £50,000 a year on plant.
The increased AIA will provide valuable accelerated relief for many taxpayers. For chargeable periods straddling 1 or 6 April 2010 (the ‘relevant date’) when the maximum AIA increased, the AIA is time-apportioned by considering how much of the period falls before the relevant date, and how much after. See the Example below:
A company with a calendar year chargeable period from 1 January 2010 to 31 December 2010 would calculate its maximum AIA entitlement based on:
The company’s maximum AIA for this transitional period would therefore be the total of (a) + (b) = £87,671.
The First-tier Tax Tribunal published a second decision following and developing the Special Commissioners’ first decision in 2008 (see  SWTI 1292). At the second hearing the tribunal judges considered further two key issues: first, how expenditure on so-called ‘preliminaries’ should be allocated to plant and machinery; and second, when expenditure incidental to the installation of plant into existing buildings may be treated as eligible for capital allowances as part of the cost of the plant to which it is incidental.
‘Preliminaries’ is not a precise term, but is generally understood to mean a building contractor’s costs of administering a project and providing general plant facilities and site-based services (eg site supervision, scaffolding, mechanical plant for general use, site accommodation and temporary power etc). The tribunal judges reinforced their previous conclusion that HMRC is entitled to investigate the figures to see whether a more specific breakdown is reasonable and proportionate, but an overall global apportionment of preliminaries which do not relate to individual items of work, that accords with commercial practice, is legitimate and will normally be appropriate.
The following assets (amongst others) were held eligible as plant under general principles:
Various categories of expenditure qualified as incidental to the installation of plant in existing buildings. These included:
The following assets (amongst others) were held to be ineligible:
Why it matters: Whilst the decision relates to a public house context, many of the issues in contention are commonplace and apply widely to taxpayers generally.
For example, building contracts routinely include preliminaries that must be allocated between qualifying and non-qualifying expenditure. This has been a matter of practical contention with HMRC for many years. The case has, however, been appealed.
For expenditure incurred from 22 October 2010 for most capital allowances purposes (but not assured tenancy allowances) HMRC has adopted a more narrow definition of ‘dwelling-house’. HMRC has concluded that the distinctive characteristic of a dwelling-house is its ability to afford to those who use it the facilities required for day-to-day private domestic existence.
Why it matters: CAA 2001 s 35 prevents plant and machinery allowances being claimed by a landlord if the plant is let in a dwelling-house. Previously, HMRC’s view was that this took its ordinary meaning and was a building, or part of a building, that was a person’s home. This meant, for example, that in a modern student hall of residence context, individual student study bedrooms and en-suites would not be eligible for capital allowances, whereas assets in communal areas of the building would (eg, central boiler plant, lifts, assets in shared kitchens and living rooms etc).
On 29 December 2008 HMRC issued a (now withdrawn) Revenue & Customs Brief 66/08 clarifying its view at that time. In the belief that this amounted to a new concession, almost a ‘cottage industry’ sprang up aggressively marketing capital allowances claims to owners of Houses of Multiple Occupation (HMOs) (that is, typically, buy to let residential properties).
The October 2010 Revenue & Customs Brief 45/10 effectively puts an end to capital allowances claims upon properties such as these because the communal plant in a typical HMO property is precisely that which affords the facilities required for private day-to-day living (that is, heating boilers, cooking and washing facilities etc).
New rules target perceived avoidance, where a company is sold (or its ownership otherwise changes) at a time when the written-down value of its plant and machinery exceeds the value of that plant. The legislation comprises new Chapter 16A of CAA 2001. Where the legislation applies, the amount by which the tax written-down value of a pool exceeds the balance sheet value of the plant in that pool is transferred to a ‘new pool’, and future losses generated by allowances on that new pool may simply be carried forward against subsequent profits of the same trade etc (for example, not group relieved). Nor is it possible to transfer a trade into the lossmaking company in order to generate profits against which the new pool allowances may be used.
Why it matters: The legislation targets instances where the main purpose, or one of the main purposes of the change in ownership was the obtaining of a tax advantage. Normal commercial arrangements should not be affected.
For capital allowances claims made on or after 1 April 2010, the existing error or mistake rules were abolished and replaced by new ‘recovery of overpaid tax provisions’ that specifically prohibit taxpayers rectifying errors or mistakes that relate to capital allowances.
Why it matters: It has been longstanding practice for taxpayers to be able to remedy missed capital allowances claims by using the Taxes Management Act 1970 and FA 1998 error or mistake provisions (albeit, in recent years HMRC has increasingly resisted this). The FA 2009 recovery of overpaid tax provisions put an end to capital allowances error or mistake claims.
It remains permissible to allocate expenditure that qualifies for capital allowances to a pool in a later chargeable period than the one in which the expenditure was actually incurred (as long as the taxpayer still owns the plant at some time in that later period). So the majority of retrospective capital allowances claims are unaffected. The legislative change simply removes some flexibility in the timing of receiving the tax relief.
There are a number of changes ahead in 2011 (and beyond), many of which affect the issues highlighted above. The key change coming, announced in 2010, but taking effect in 2012 is a phased reduction in the main and special rates of writing-down allowances for plant and machinery. From April 2012 the main rate will fall from 20% to 18% and in periods overlapping this date a daily time-apportioned ‘hybrid’ rate is expected to apply. For expenditure incurred from April 2012 the special rate for integral features will also fall from 10% to 8%. However, this is expected to apply to expenditure incurred after April 2012, rather than using a hybrid rate.
Also, before the general election, the AIA became something of a political football. The Conservative party proposed abolishing it and in response the Labour government doubled it, in effect daring the Conservatives to remove an even more valuable relief should they gain power. In the event, the new coalition Chancellor announced in the 2010 Budget that for expenditure incurred from April 2012 the maximum AIA would be cut to £25,000. It is possible that this is simply a phasing-out measure and the AIA will subsequently be abolished.
The government also recently consulted about plans to reform the favourable tax treatment of furnished holiday lettings (FHL) properties. Amongst other measures it will, effective from April 2012, toughen up the qualifying criteria so that the potential FHL property must be available to the public as holiday accommodation for at least 210 days in the year (increased from 140 days) and actually be let for 105 days (instead of 70 days).
View and save Analysis: 2010 Review - Capital Allowances as a PDF file.
Tags for this article: capital allowances, 2010, annual investment allowance, AIA, JD Wetherspoon, preliminaries, incidental expenditure, dwelling-house, error or mistake, recovery of overpaid tax, furnished holiday lettings, FHL
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