PLC - Capital Allowances on Property Transactions

Question 1

Under section 562 CAA 2001, what is required when a property is purchased and part of the price attracts capital allowances?

Answer 1

A just and reasonable apportionment of the purchase price between expenditure qualifying for capital allowances and expenditure that does not.

Question 2

Expenditure on what qualifies in principle for plant and machinery allowances?

Answer 2

Loose plant and machinery as well as fixtures.

Question 3

What is included in a general pool of capital allowances?

Answer 3

Most expenditure on plant and machinery, but not short life assets and, since 2008, assets such as ‘integral features’.

Question 4

What is the current rate of writing down allowances for plant and machinery?

Answer 4

18 per cent with effect from April 2012, calculated on a reducing balance basis.

Question 5

The special writing down allowance of 8 per cent applies to what types of expenditure for capital allowances purposes?

Answer 5

Expenditure on certain thermal insulation, integral features and long life assets.

Question 6

Is there a ‘main purpose’ anti-avoidance rule in relation to 8 per cent writing down allowances under the capital allowances code?

Answer 6

Yes.

Question 7

In what circumstances does a balancing allowance arise when disposing of an asset that attracts capital allowances?

Answer 7

Where the proceeds are less than the tax written down value of the asset (ie a deduction in computing taxable profits equal to the difference).

Question 8

In what circumstances does a balancing charge arise when disposing of an asset that attracts capital allowances?

Answer 8

Where the proceeds exceed the tax written down value of the asset (ie additional taxable income equal to the amount of the excess).

Question 9

When are capital allowances accelerated?

Answer 9

Where the unrelieved expenditure in the main capital allowance pool or a special rate pool is £1000 or less, in which case the WDA can be up to £1000 - effectively accelerating the relief. It does not apply to single asset pools though.

Question 10

To obtain plant and machinery allowances, what two conditions need to be met?

Answer 10

The taxpayer must carry on a ‘qualifying activity’, and the taxpayer must incur ‘qualifying expenditure’.

Question 11

What are the basic characteristics of a qualifying activity for the purposes of claiming plant and machinery allowances?

Answer 11

A trade, profession or business, including the leasing of plant and machinery, an employment or office and managing the investments of a company with investment business.

Question 12

Can a property developer claim allowances on its properties?

Answer 12

Not if they hold the properties as stock instead of using them in carrying on their business.

Question 13

What are the two requirements for ‘qualifying expenditure’ under the UK’s capital allowances code?

Answer 13

(1) The expenditure must be capital expenditure on the provision of plant or machinery wholly or partly for the purposes of a qualifying activity carried on by the person incurring the expenditure, and (2) the person incurring the expenditure must own the plant and machinery as a result of incurring the expenditure.

Question 14

In practice, HMRC accepts that an asset with an expected useful life of at least how many years is sufficiently durable for expenditure to be capital?

Answer 14

2 years.

Question 15

Can an asset be owned in equity and meet the ownership requirement for capital allowance purposes?

Answer 15

Yes - see Melluish v BMI (No 3) [1996].

Question 16

If an asset is bought by one party but installed as a fixture in the building owned by another person, how is the potential ineligibility of both parties for capital allowances rectified?

Answer 16

Rules in Chapter 14 CAA 2001 remove the nexus between ownership and the claim for allowances by deeming the fixtures to be owned by the person incurring the expenditure.

Question 17

How do HMRC define machinery for capital allowances purposes?

Answer 17

HMRC accept the term should be given its normal meaning to include any apparatus that applies mechanical power.

Question 18

Does plant include buildings, structures and land for capital allowance purposes?

Answer 18

Not generally - see Lists A and B, sections 22 and 22 CAA 2001.

Question 19

Does computer software qualify as plant under the capital allowances code?

Answer 19

Yes, it is deemed to be plant by section 71 CAA 2001.

Question 20

Does expenditure on the demolition of plant and machinery itself qualify as plant for the purposes of the UK capital allowances code?

Answer 20

Ye - see section 26 CAA 2001.

Question 21

How did Yarmouth v France (1887) define ‘plant’ ?

Answer 21

”..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 moveable, live or dead, which he keeps for permanent employment in his business.”

Question 22

Does general lighting qualify as plant?

Answer 22

No, it is part of the setting in which a business is carried on (unless the ‘atmosphere’ business use test applies).

Question 23

Are moveable office partitions capable of qualifying as plant?

Answer 23

Yes if there is an intention to move them so they are part of the apparatus of a trade and not solely part of the setting.

Question 24

What is the functional test for determining plant under the UK capital allowances code?

Answer 24

An item can be plant if it plays an essential and active function in the trade being carried on.

Question 25

Can a dry dock qualify as plant?

Answer 25

Yes.

Question 26

Can swimming pools qualify as plant?

Answer 26

Yes.

Question 27

Do a lab and gymnasium constructed of prefabricated panels qualify as plant?

Answer 27

No, they are treated as buildings and not plant even if the buildings contain plant.

Question 28

Is a petrol station canopy plant?

Answer 28

No - it is not essential for the function of petrol pumps.

Question 29

Are false ceilings plant?

Answer 29

No; they are not necessary for the functioning of any apparatus used for the purposes of a trade.

Question 30

Can a mezzanine floor qualify as plant?

Answer 30

Yes.

Question 31

What did CIR v Scottish & Newcastle Breweries [1982] decide?

Answer 31

The HL decided that the provision of ‘atmosphere’ was part of a hotelier’s trade. As a result, the fittings, decor and murals could qualify as plant even though they also formed part of the setting.

Question 32

What are the four tests used to determine whether an asset is separable plant, or not plant but part of the premises in which the business is carried on, for the purposes of the UK capital allowances code?

Answer 32

(1) whether the item appears visually to retain separate identity (2) the degree of permanence with which it has been attached to the building (3) whether the structure would be incomplete without it; and (4) the extent to which it was intended to be permanent.

Question 33

Is a carwash structure and the tarmac surround premises or plant for capital allowances purposes?

Answer 33

Premises.

Question 34

Is an electricity sub-stantion premises or plant?

Answer 34

Premises.

Question 35

In order for synthetic grass to qualify as plant (and not premises), what characteristics would it require?

Answer 35

Not fixed, can be replaced independently from its base, and is not otherwise a structure.

Question 36

When is capital expendiutre generally deemed to have been incurred for capital allowances purposes?

Answer 36

Subject to exceptions, this is when the obligation to pay has become unconditional (HMRC regard this as usually being on delivery), regardless of whether there is a later date by which payment is required (see section 5 CAA 2001).

Question 37

What replaced first-year capital allowances in 2008?

Answer 37

The annual investment allowance.

Question 38

Does the annual investment allowance include expenditure on a car?

Answer 38

No.

Question 39

Does expenditure incurred in the period in which a qualifying activity is permanently discontinued qualify for the annual investment allowance?

Answer 39

No.

Question 40

Do groups of companies have an annual investment allowance allocated amongst them?

Answer 40

Yes.

Question 41

If expenditure exceeds an individual investment allowance, what is done with the excess?

Answer 41

It can be allocated to pool expenditure qualifying for 8% or 18% allowances.

Question 42

Is it mandatory for writing down allowances to be claimed in the first or any specific chargeable period?

Answer 42

No.

Question 43

What is th current rate of relief for integral features allowances?

Answer 43

8 per cent, unless they were already in the plant and machinery pool before 1 or 6 April 2008 (as appropriate).

Question 44

Are the categories of integral features qualifying for allowances fixed or generic?

Answer 44

Fixed, although amendable by way of Treasury Order,

Question 45

What is the rate of allowances on long life assets under the capital allowances code?

Answer 45

8 per cent but the long life provisions only apply where the total expenditure on such assets is at least £100,000 within a chargeable period.

Question 46

100 per cent enhanced capital allowances apply to what?

Answer 46

Energy saving plant and machinery, and environmentally beneficial plant and machinery.

Question 47

Short life assets can sit in a separate pool so longas the asset has been sold or scrapped by when?

Answer 47

The eighth anniversary of the end of the chargeable period in which the expenditure on the asset was incurred, or else the asset must be transferred to the general pool.

Question 48

From April 2014, businesses must do what in order to qualify for capital allowances?

Answer 48

Pool their expenditure on fixtures within two years after acquisition.

Question 49

From April 2012, purchasers of second hand buildings must do what in order to qualify for capital allowances?

Answer 49

They must agree with the seller the amount of the sale price attributable to the fixtures, and such value must be recorded and formally notifed to HMRC. It is similar to a section 198 election but reflecting an agreed market value.

Question 50

Where a person with an existing interest in land installs fixtures in the construction or the refurbishment of a building, the legislation does what in terms of capital allowances?

Answer 50

It deems the person who incurs the expenditure on plant or machinery to be the owner of the fixture (section 176 CAA 2001).

Question 51

Where a freehold or leasehold interest is acquired with fixtures that were owned or deemed to be owned by the seller, how are the fixtures treated in the hands of the buyer for capital allowances purposes?

Answer 51

They are usually treated as belonging to the buyer.

Question 52

Where a person with an interest in land to which a fixture is attached grants a new lease, can the lessee claim allowances on the fixtures?

Answer 52

In certain circumstances, yes.

Question 53

Where a property buyer incurs expenditure on fixtures in respect of which a former owner of the building has claimed allowances, what is the maximum amount on which allowances may be claimed?

Answer 53

An amount equal to the disposal value required to be brought into account by that former owner, plus any installation costs of the current owner.

Question 54

Aside from the 2012 rules requiring the parties to notify HMRC of a market value apportionment of the price between a building and any fixtures, can the parties still agree an apportionment of the price under section 198 CAA 2001?

Answer 54

Yes.

Question 55

When must any section 198 CAA 2001 election be made by?

Answer 55

Within two years of the date that the buyer acquired the building or took the grant of the lease.

Question 56

To what must a section 198 CA 2001 election be attached?

Answer 56

Each party’s tax return for the first period affected by it.

Question 57

What do section 198 CAA 2001 elections now need to distinguish between?

Answer 57

Integral features attracting allowances of 8% and standard fixtures attracting 18% allowances.

Question 58

If a seller cannot claim integral features allowances because something did not qualify for them when it was acquired, can a buyer of the building to which they are integral claim integral features allowances?

Answer 58

Yes.

Question 59

How are the rules for capital allowances adjusted to deal with hire purchase contracts?

Answer 59

All capital expenditure (as opposed to the hire charge) under the agreement is deemed to be incurred when the asset is brought into use (section 67 CAA 2001), even though the instalments extend beyond the period when the asset is first brought into use.

Question 60

Which act reformed the taxation of finance leases?

Answer 60

FA 2006, the provisions now being consolidated within CAA 2001.

Question 61

Post FA 2006, how are finance leases now treated?

Answer 61

As financing arrangements. FA 2006 introduced the term “long-funding leases”, whereby the lessee is taxed as if it had borrowed money to buy the asset, and so it is now the lessee and not the lessor who is entitled to claim allwances and an interest deduction in respect of the lease payments. The lessor is taxed on rental receipts.

Question 62

Have property leases been affected in the same way as finance leases by the FA 2006?

Answer 62

No, because in most cases the lessors benefit from a major carve out in the legislation which exempts ‘background plant and machinery’ from the new rules. Allowances on these items continue to be available to lessors.

Question 63

When were industrial building allowances finally withdrawn?

Answer 63

April 2011.

Question 64

Are there targeted anti-avoidance rules for capital allowances?

Answer 64

Yes.

Question 65

Expenditure after what date potentially qualifies for business premises renovation allowances?

Answer 65

10 April 2007.

Question 66

What rate of relief applies to expenditure qualifying for business premises renovation allowances?

Answer 66

100 per cent first year capital allowances.

Question 67

What sort of expenditure qualifies in principle for business premises renovation allowances?

Answer 67

Capital costs incurred in converting or renovating ‘qualifying business premises’ located in designated disadvantaged areas that have been vacant for at least a year, to bring them back into business use.

Question 68

Assuming a qualifying site exists, what can business premises renovation allowances not be claimed on?

Answer 68

The costs of acquiring land, extending business premises or developing land next to the business premises.

Question 69

What relief is available in terms of business premises renovation allowances if the 100% initial allowance is not claimed?

Answer 69

A writing down allowance of 25% of the residue of the qualifying expenditure is available (on a straight line basis).

Question 70

AFter how many years, providing there is no disposal, does a BPRA-qualifying building avoid balancing charges or balancing allowances?

Answer 70

The first seven years after the building is brought back into use.

Question 71

When has the availability of business premises renovation allowances been extended to?

Answer 71

April 2017.

Question 72

What are flat conversion allowances?

Answer 72

A 100% allowance to enable property owners and occupiers to claim up-front tax relief on the whole of their capital spending on the renovation or conversion of vacant or uder-used space above shops and other commercial premises to provide flats for rent.

Question 73

In what two circumstances will capital allowances affect the calculation of a capital gain?

Answer 73

If the asset is sold at a loss or if the asset is a wasting asset.

Question 74

How does the tax legislation prevent a taxpayer having the benefit of both an allowable loss on the disposal of an asset and capital allowances claimed during its ownership?

Answer 74

The allowable loss on the disposal is effectively reduced by the amount of the capital allowances claimed.

Question 75

What is a wasting asset for the purposes of TCGA 1992?

Answer 75

An asset which has a predictable life which does not exceed 50 years. This definition does not however include attached fixtures.

Question 76

Is tax relief usually available for capital losses on a wasting asset?

Answer 76

No - it is exempt from capital gains/ corporation tax unless capital allowances were or could have been claimed on a wasting asset

Question 77

Chattels are exempt from tax where the proceeds on sale are less than what?

Answer 77

£6000 (see section 262 TCGA 1992).

Question 78

How can a section 198 CAA 2001 election advantage a seller?

Answer 78

Depending on the circumstances, it can effectively convert what would otherwise be an unuseable capital loss into a balancing allowance for capital allowances purposes.

Question 79

How does the VAT capital goods scheme interact with the current capital allowances regime?

Answer 79

Where the annual CGS adjustment results in an additional VAT liability, this is treated as additional qualifying expenditure for capital allowance purposes.