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Capital Allowances: Plant and Machinery - Back to Basics

This article appeared in The Tax Journal ("the non-taxing weekly for top professionals" on Monday, 21 September 2009

 

Plant and machinery allowances (PMAs) allow taxpayers to write off for tax purposes expenditure on business apparatus (called 'plant' and 'machinery' - P&M). PMAs have been with us in one form or another since the 19th century and are by far the most commonly claimed type of capital allowance. This article covers basic principles. Unless stated all statutory references are to the Capital Allowances Act 2001.

Rates of relief

PMAs are given at various rates. From April 2008 conventional writing-down allowances are given at 20% per annum on a reducing balance basis (s 56). However, relief is commonly given at other rates set out in Figure 1.

Figure 1

Rate of relief Applies to Statutory reference
10% pa, reducing balance Long-life assets, integral features and thermal insulation added to existing buildings (Note 1) s 33A and s 104A; s 102; s 28
40% 'first-year allowance (FYA), followed by 20% pa reducing balance Expenditure incurred in 12 months from 1st/ 6th April 2009 (Note 2) ss 44, 47 to 49 and 52; FA 2009, s 24
100% FYA Enhanced capital allowances (Note 3) ss 45A, 45H, 52

 

Note 1 - Long-life assets are plant and machinery expected to have a useful economic life when new of at least 25 years. Fixtures in buildings used wholly or mainly as offices, shops, showrooms, hotels or dwelling-houses (or for ancillary purposes) are exempted (s 93). However, many commercial premises are subject to the rules, from care homes to factories.

Integral features are certain prescribed classes of asset, including lifts, air-conditioning, electrical and heating systems.

 

Note 2 - Various exclusions apply: for example, for plant which is leased.

 

Note 3 - Mostly available for energy-saving and environmentally beneficial (that is, water conserving) P&M.

 

Entitlement to claim

Section 11 sets out the general conditions that a taxpayer must satisfy to be entitled to claim PMAs. Fundamentally, these require that the taxpayer:

 

Qualifying activity

The list of permissible 'qualifying activities' is set out in s 15, the most common being:

 

Qualifying expenditure

The definition of 'qualifying expenditure' incorporates several important principles.

 

First, the expenditure must be capital - that is, made `... not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade' (Atherton v British Insulated & Helsby Cables Ltd (192 5) 10 TC 155). In practice, if an asset has an expected useful life of at least two years, HMRC should accept that it is sufficiently durable for the expenditure to be capital. Second, it must be on the provision (including necessary transport and installation costs) of 'plant' or 'machinery', wholly or partly for the purposes of that qualifying activity. And thirdly, the taxpayer must own the plant or machinery as a result of incurring the expenditure. Each requirement is considered below.

 

Ownership

In Melluish v BMI (No 3) Ltd [1995] STC 964 the ownership requirement was held to be satisfied where the claimant was able to show that it was in law, or in equity, the absolute owner of the equipment (that is, the beneficial owner). For chattels, ownership is usually not a problem either because the asset is purchased outright, or it is deemed to belong to the taxpayer by specific legislative provisions, such as the hire purchase rules (s 67). However, for fixtures the situation is more complicated and is dealt with by special  rules that will be covered by a following article.

'Machinery' or 'plant'?

A key point is that PMAs are available for two separate and distinct types of assets - 'machinery' or `plant'. The terms do not mean the same thing, nor are they always interchangeable, as is often thought in practice.

Machinery

'Machinery' is easier to identify than plant. It is not defined in statute or case law, so takes its ordinary meaning, which is typically understood to mean a device or assembly of moving parts which does useful work and often, but not always, has a power supply. It includes machines and electronic devices like computers, as well as quite unexpected assets like door handles with moving parts.

Plant

If, however, the asset in question is not machinery, it is necessary to consider whether it might be 'plant'. This can be difficult because, with very few except ions, plant is generally not defined by statute, so must be identified by applying principles drawn from nearly 150 years of case law.

 

The starting point should be to begin with statute and consider whether the asset is one which, although not obviously qualifying, has for specific policy reasons been perceived as worthy and designated as plant in the legislation - that is:

 

 

In practice, however, these sections are often less useful than at first they seem. For example, the personal security provisions only give limited relief to individuals and partnerships (not companies), on security assets used to meet a 'special threat' to an individual's personal physical security arising by virtue of his trade, profession or vocation.

Buildings and structures

If the asset does not qualify under statute, it is necessary to establish whether the statute prevents it from being plant. Since November 1993 the legislation has attempted to achieve this by defining 'buildings' and 'structures' which cannot be plant.

 

Section 21 defines a 'building' as including the following assets which are in, or are connected with, a building (asterisks denote integral features):

 

 

For further information on this, please see Part 2 of this Back to Basics article, to be published in a future issue of The Tax Journal. Section 22 defines a 'structure and other asset' as works involving the alteration of land; various civil engineering works like tunnels, bridges, embankments, cuttings, reservoirs, piers and jetties etc; as well as a fixed structure of any kind, other than a 'building' (as defined by s 21).

 

However, to further complicate matters, ss 21 and 22 are subject to s 23 , which comprises a long list of assets that are unaffected by ss 21 and 22 . Section 23 does not ensure such assets automatically qualify as plant as is commonly thought (although many often are plant); instead it ensures they are not buildings or structures, so could be plant - but it is still necessary to meet the case law tests discussed below (although when the case law tests are applied the assets are normally found to be plant, as they are the very assets that established the case law tests in the first place).

 

Section 23 lists many types of asset, including amongst others:

 

 

Case law tests

If an asset is not prevented from being plant by statute, the definition deriving from case law must be considered. The fundamental definition of plant arose in Yarmouth v France (1887) 19 QBD 647:


'...  in its ordinary sense, it includes whatever apparatus is used by a businessman for carrying on his business - not his stock- in- trade which he buys or makes for sale; but all his goods and chattels, fixed or variable, dead or alive, which he keeps for permanent employment in his business'.

 

However, in practice this definition is not very helpful in identifying plant, so several more precise case law tests have arisen.

Premises test

Perhaps the most useful test resulted from the decision in Wimpy International Ltd v Warland [1989] STC 273 and is known as the 'premises' test. The aim is to identify whether the asset in question is part of the premises in which the business is carried on and performs simply and solely the function of housing the business (which cannot be plant), rather than apparatus with which the business is carried on (which may be plant). The terms 'premises' and 'setting', which are often used interchangeably, in fact have different legal meanings and are not mutually exclusive, so although the setting is generally not plant, it can sometimes be so (see the 'functional' test below).

 

In identifying the `premises' Mr Justice Hoffmann proposed four factors to be taken into account. They are questions of fact and degree, not absolute hurdles:

 

 

Determining the dividing line between the premises and business apparatus is sometimes very indistinct. For example in Jarrold v John Good & Sons Ltd (1962) 40 TC 68 1, where moveable partitioning was held to be plant, Lord Justice Ormerod said 'the dividing line between what is "plant" and what is not is a narrow one, and the facts of this particular case come near to that dividing line'.

 

Another test sometimes mentioned is known as the 'completeness' test (that is, if the asset would be needed to complete the building, it is not plant), but this is really no more than the third consideration incorporated into the premises test above.

Functional test

Following the definition in Yarmouth v France perhaps the most fundamental plant test to pass is whether the plant performs a function as apparatus in the taxpayer's business, and case law includes several instances where entire large assets have been held to be plant, even though they are also the setting. Examples include a dry dock in CIR v Barclay Curle & Co Ltd (1969) 45 TC 221 (which lifted and lowered ships for repair), a swimming pool in Cooke v Beach Station Caravans Ltd [1974] STC 402 (which attracted customers), and a silo in Schofield v R&H Hall [1975] STC 353 (which handled grain).

Business use test

The final test, which came to greatest prominence in CIR v Scottish & Newcastle Breweries Ltd [1982] STC 296 considers whether the asset performs a particular function as apparatus in the context of the 'nature of the particular trade being carried on, and the relation of the expenditure to the promotion of the trade' - that is, whether the asset functions as apparatus in that taxpayer's particular business (recognising that identical assets may be plant in one business and not in another). The issue under consideration in that case, where decorative lighting and other deccor were successfully claimed as plant by an hotelier, was the providing of 'ambience'. In HMRC's view the business use test is 'basically the same as the functional test'.

Conclusion

It can be seen that even the 'basics' of plant and machinery allowances are more complicated than they at first seem. The next article will move on to outline the additional rules applicable to fixtures. 

 

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