Chapter 10: Capital Allowances Flashcards
10.1 Introduction
When a trader incurs expenditure of a capital nature, such costs are not deducted from trading profits. Instead where businesses employ capital assets for use in their business, they receive capital allowances. This is also available for buildings and structure used by a business, where construction began on or after 29 October 2018. Capital allowances compensate a business for the fall in value of capital assets used in the trade. Capital allowances reduce the adjusted profit for tax.
Capital allowances are given at a specific rate as laid down in the capital allowances act 2001. The rates depend on the type of capital expenditure incurred and the date the costs are incurred.
10.2 Definition of plant and machinery
This is defined in the capital allowances act 2001 and there is also a significant amount of body of case law to define this.
Yarmouth v France 1887 defines plant and machinery as ‘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 goods and chattels, fixed or moveable live or dead, which he keeps for permanent employment in the business’. An asset with which a business operates and not in which the business operates.
HMRC practice is to treat an asset with an expected life of two years or more to be for permanent employment and qualify as plant. If an asset has a life of between 1 and 2 years the treatment is subjective.
Business premises are not plant. The test of whether an item is apparatus used in carrying on a business is the functionality test. If an asset has a function it will be plant and capital allowances can be claimed. If the trader incurs expenditure on part of the setting, it will not be plant.
10.3 Buildings – Section 21 CAA 2001
Buildings are part of the setting in which the business is carried on and will not qualify as plant. Examples are:
• Walls, floors, ceilings, doors, gates, shutters, windows, stairs
• Mains services and systems for water, electricity and gas
• Waste disposal systems
• Sewerage and drainage systems
• Shafts or other similar structures
• Fire safety systems
Expenditure on these items (unless in list C) would be regarded as expenditure on buildings and therefore would not qualify as plant.
10.4 Structures and Land – Section 22 CAA 2001
Under section 22 of the CAA 001 expenditure on the following items do not qualify as plant: • The provision of a structure in list B • Any works involving the alteration of land List B contains the following: • Tunnel, bridge, viaduct etc • Pavement, road, car park • Canal or basin • Dam, reservoirs etc • Docks, harbors, wharfs • Dikes and sea walls
10.5 Section 23 CAA 2001
Section 23 CAA 2001 overrides section 21 and 22. Expenditure on any of these will be treated as plant:
• Thermal insulation of buildings
• Personal security
• Integral features
• Software and rights to software
• List C items
List C items (common ones):
• Partition walls where moveable – court case Jarrold v John Good & Sons Ltd 1962
• Decorative assets provided for the enjoyment of the public in hotel, restaurant or similar trades – court case CIR V Scottish & Newcastle Breweries Ltd 1982
• Swimming pools (including diving boards and slides) – court case Cooke v Beach Station Caravans Ltd 1974
10.6 Plant and Machinery – other Qualifying Expenditure
Expenditure on the following will also be plant and machinery qualifying for capital allowances:
• Altering a building for the purposes of installing plant and machinery
• Demolition costs
• Thermal insultation of buildings
10.7 Integral features
Where an item is classified as an integral feature to a building the expense will qualify for plant and machinery allowances. Integral features include:
• Lifts, escalators and moving walkways
• Space heating systems
• Air conditioning and air-cooling systems
• Hot and cold-water systems (excluding toilet and kitchen facilities)
• Electric lighting and power systems
• External solar shading
