TAXline. Tax Practice No 21. Capital Allowances: the new rules. By Steven Bone and Martin Wilson of the Capital Allowances Partnership LLP

Transcription

1 PostScriptPicture TF CMYK eps TAXline Tax Practice No 21 A TAXline supplement edited by Anita Monteith and Jane Moore September 2008 Capital Allowances: the new rules By Steven Bone and Martin Wilson of the Capital Allowances Partnership LLP

2 CAPITAL ALLOWANCES: THE NEW RULES The Tax Faculty team Paul Aplin Chairman +44 (0) Chris Sanger Deputy Chairman +44 (0) Francesca Lagerberg Chairman Technical Committee +44 (0) Frank Haskew Head of Tax Faculty +44 (0) Peter Bickley Technical Manager +44 (0) Neil Gaskell Technical Manager +44 (0) Anita Monteith Technical Manager +44 (0) Jane Moore Technical Manager +44 (0) Philippa Stedman Technical Manager +44 (0) Angela Williams Technical Manager +44 (0) Ian Young Technical Manager +44 (0) Chrissie O Connor Operations Manager +44 (0) Chrissie.O Connor@icaew.com Zoë Jeakins Services Manager +44 (0) Zoe.Jeakins@icaew.com Nina Turner PA/Administrator +44 (0) Nina.Turner@icaew.com Pat Hollamby Technical Administrator & DTP Editor +44 (0) Pat.Hollamby@icaew.com 2 September 2008 CAPITAL ALLOWANCES: THE NEW RULES CONTENTS 1. INTRODUCTION Introduction 1.2 What this TAXline Tax Practice covers 1.3 Summary of new rules and effective dates 1.4 Legislation and other material 1.5 The Tax Faculty 2. PLANT AND MACHINERY ALLOWANCES First-year allowances 2.2 Annual investment allowance 2.3 Main rate of writing down allowance 2.4 Special rate of writing down allowance 2.5 Integral features 2.6 First-year tax credits 2.7 Small pools 2.8 Thermal insulation of buildings 2.9 Fire safety expenditure 3. INDUSTRIAL AND AGRICULTURAL BUILDINGS ALLOWANCES Background 3.2 Timescale for phasing out of IBAs and ABAs 3.3 Balancing adjustments 4. THE JD WETHERSPOON CASE Background 4.2 Premises or plant? 4.3 Incidental expenditure 4.4 Preliminaries and fees The Tax Faculty ICAEW Chartered Accountants Hall, PO Box 433 Moorgate Place, London EC2P 2BJ Tel: +44 (0) Fax: +44 (0) taxfac@icaew.com Web: Copyright. All rights reserved. No part of this work which is covered by copyright, may be reproduced or copied in any form or by any means (including graphic, electronic or mechanical, photocopying, recording, recorded taping or retrieval information systems) without permission of the copyright holder. Published by the Tax Faculty, Chartered Accountants' Hall, PO Box 433 Moorgate Place, London EC2P 2BJ or telephone +44 (0) fax +44 (0) taxline@icaew.com. The Tax Faculty produces a range of technical information. All items published since January 2000 and selected items prior to that date, can be viewed on the website at where the information can be found under the heading Faculty Publications. The views expressed herein are not necessarily shared by the Council of the Institute. Articles and other material are published without responsibility on the part of the publisher or authors for loss occasioned by any person acting or refraining from action as a result of any view expressed therein. Editors: Anita Monteith and Jane Moore Typeset: Patricia Hollamby Printed by: Hobbs the Printers Ltd, Totton, Hampshire 2008 Tax Faculty ISSN

3 1. INTRODUCTION 1.1 Introduction The Government announced a wide-ranging package of business tax reforms at the time of the 2007 Budget. A main stated objective of the package was to promote investment and growth, by lowering the full rate of corporation tax and 'refocusing the tax system for small businesses with more generous and bettertargeted incentives for investment' (Business tax reform: capital allowance changes, published by HM Treasury in December 2007). As a result of this process, the Government subsequently announced, and has now introduced, a major package of capital allowances reforms. These include: The abolition of 50% and 40% first-year allowances (FYAs) for small and medium-sized enterprises respectively. A new 100% annual investment allowance for the first 50,000 of expenditure incurred each year on most types of plant. A reduction in the main rate of writing down allowance (WDA) for plant and machinery from 25% to 20%. The introduction of a special rate of WDA of 10% for certain 'integral features' within buildings. An increase in the rate of WDA for long-life assets from 6% to 10%. A repayable first-year tax credit for expenditure (by companies only) on energy-saving and environmentally beneficial (that is, water conserving) plant and machinery qualifying under the enhanced capital allowances scheme. The ability to write off in full small plant and machinery pools (that is, those with a value of less than 1,000, other than single asset pools). Extending 10% plant allowances for adding thermal insulation to all commercial buildings (not just industrial buildings, as was previously the case). The repeal of the rules that treat certain fire safety works as plant and machinery. The abolition of industrial buildings allowances (IBAs), including enterprise zone allowances and abolition of agricultural buildings allowances. 1.2 What this TAXline Tax Practice covers This TAXline Tax Practice supplement provides comprehensive information about the new capital allowances rules where to find them, how they work, when they apply, how to claim, etc. It includes examples and practical advice, and its emphasis is on guidance for practitioners and their clients in operating within the new system. Part 2 of the supplement considers plant and machinery allowances, and part 3 considers industrial and agricultural buildings allowances. In addition, part 4 contains an analysis of the important recent case of JD Wetherspoon, which has implications for the treatment of capital expenditure under both the old and the new rules. The text is correct as at 21 August Summary of new rules and effective dates Table 1 summarises the new rules and the dates from which they apply: September

4 CAPITAL ALLOWANCES: THE NEW RULES Table 1: The capital allowances changes and effective dates Date Effective basis Rule change 21 March 2007 Balancing events occurring Most IBA balancing adjustments abolished on or after 12 March 2008 Sale of IBA relevant interest Anti-avoidance to prevent artificial arrangements to on or after accelerate IBAs before abolition 1 April 2008 Capital expenditure incurred Abolition of 50% and 40% FYAs for small and (corporation tax) on or after medium-sized enterprises and 6 April 2008 (income tax) 100% annual investment allowance (time-apportioned in transitional period) 10% WDA for integral features and thermal insulation of buildings 10% WDA for long-life assets (new and 'old' expenditure not allocated to a pool; time-apportioned hybrid rate for pool tax written-down value (TWDV) brought forward) Repayable first-year tax credit for plant and machinery qualifying for enhanced capital allowances Repeal of certain plant and machinery fire safety rules Chargeable periods beginning Write off in full plant and machinery pools with a value on or after of less than 1,000 1 April 2008 Chargeable periods ending Reduction in main rate of plant and machinery WDA to (corporation tax) on or after 20% (time-apportioned 'hybrid' rate in transitional and 6 April 2008 period) (income tax) Reduction in IBA writing down allowance by one-quarter, eg to 3% (time-apportioned 'hybrid' rate in transitional period) 1 April 2009 Chargeable periods ending Reduction in IBA writing down allowance by one-half (corporation tax) on or after eg to 2% (time-apportioned hybrid rate in transitional and 6 April 2009 period) (income tax) 1 April 2010 Chargeable periods ending Reduction in IBA writing down allowance by three- (corporation tax) on or after quarters, eg to 1% (time-apportioned hybrid rate in and 6 April 2010 transitional period) (income tax) 1 April 2011 Chargeable periods ending Abolition of IBA writing down allowance (time- (corporation tax) on or after apportioned hybrid rate in transitional period) and 6 April 2011 (income tax) Abolition of enterprise zone IBAs 4 September 2008

5 1.4 Legislation and other material The major changes to the capital allowances rules are implemented by Finance Acts (FA) 2007 and These also make consequential changes to other legislation, most notably the Capital Allowances Act 2001 (CAA 2001), Taxes Management Act 1970 (TMA 1970) (for income tax self assessment) and Finance Act 1998 (FA 1998) (for corporation tax self assessment). Further guidance to FA 2008 is available in the explanatory notes produced by HM Treasury (Bill 89 EN see financebill2008_explanatorynotes.pdf). The HM Revenue & Customs (HMRC) Capital Allowances Manual will also be updated in due course (see The Tax Faculty The Tax Faculty responded to each stage of the consultation process on the capital allowances changes, our comments being published as TAXREP 68/07 and TAXREP 18/08. While we were very disappointed by the lack of help for smaller hotels and farmers following the abolition of industrial and agricultural buildings allowances, we were pleased that our suggestion for writing off small pool balances has been adopted. 2. PLANT AND MACHINERY ALLOWANCES 2.1 First-year allowances First-year allowances for plant and machinery have been introduced on various occasions in the past in order to accelerate the tax relief available, compared to conventional writing down allowances (WDAs). Generally, FYAs have been used to encourage investment in certain types of asset, including in recent years, information and communications technology (ICT) expenditure and energy efficient or environmentally friendly plant. Other than such targeted allowances for particular types of expenditure, FYAs were most recently available for expenditure incurred by a small or medium-sized enterprise as follows: Small or medium-sized enterprises allowances at a rate of 40% for expenditure incurred on or after 2 July 1998 (ss 39 and 44, CAA 2001). Small enterprises an enhanced allowance of 50% for expenditure incurred in the two years beginning 1 April 2006 (corporation tax) or 6 April 2006 (income tax) (s 52(3), CAA 2001). The rates of these FYAs have varied over the years. First-year allowances have been available for expenditure on most plant, except (among others) cars, long-life assets (ie plant with an expected useful life, when new, in excess of 25 years) and plant used for leasing (s 46(2), CAA 2001). HMRC has made it clear that this leasing exclusion applies to fixtures in a let building, so a landlord operating an ordinary property investment business would not normally be able to claim FYAs, irrespective of its size. However, from 1 April 2008 (corporation tax) and 6 April 2008 (income tax) these FYAs are repealed (s 75, FA 2008), and in part replaced by the new annual investment allowance (AIA) (s 74, FA 2008) (see 2.2). In addition, s 76, FA 2008 repeals certain spent FYAs, namely those for: Northern Ireland expenditure incurred on or before 11 May 2002; and expenditure on ICT incurred on or before 31 March First-year allowances will still be available for certain green technologies under the so-called enhanced capital allowances scheme for energy-saving and environmentally beneficial (that is, water-conserving) plant. Furthermore, from April 2008, if such allowances give rise to a loss, that loss may be effectively converted into a repayable tax credit (see 2.6). Transitional rules The full FYA for a small or medium-sized enterprise will still be available for expenditure incurred on or before 31 March 2008 (companies) and 5 April 2008 (nonincorporated businesses) even if the chargeable period overlaps that date. The FYA need not be timeapportioned. However, expenditure incurred on or after 1 April 2008 (companies) and 6 April 2008 (nonincorporated businesses) will not attract a FYA, but only a time-apportioned fraction of the AIA. September

6 CAPITAL ALLOWANCES: THE NEW RULES Example 1 A small company with an accounting period of 12 months ending 30 April 2008 has spent 50,000 on plant. If the expenditure was incurred in March 2008 it would qualify for a 50% FYA (that is, 25,000). If it was incurred in May 2008 (ie, the first month of a new accounting period), the full AIA of 50,000 would be available (albeit that the tax relief would effectively be delayed for a year). However, if the expenditure was incurred in April 2008, there would be no FYA and the AIA would be proportionally restricted to only one-twelfth of the annual amount (that is, 4,167). Given that 1 April 2008 has now passed, the only choice to be made by a taxpayer in these circumstances will be whether to incur expenditure in his or her current accounting period (which will accelerate at least part of the relief, but may involve a time-restricted AIA), or to defer the expenditure until the start of the next accounting period. This will defer the relief for a year, but may mean the full 50,000 AIA can be used. The 'correct' course of action will depend on the taxpayer's individual circumstances, and in particular, whether he or she will incur other expenditure qualifying for the AIA. Cars with low carbon dioxide emissions A 100% FYA is available for all businesses for expenditure on cars with low CO 2 emissions. This was due to expire on 31 March 2008, but has now been extended by five years, to 31 March 2013 (s 77, FA 2008). To qualify as a low emission car it must be registered: between 17 April 2002 and 31 March 2008 and emit not more than 120g/km of CO 2 between 1 April 2008 and 31 March 2013 and emit not more than 110g/km of CO 2 or be electrically propelled. Note that cars under leasing contracts existing at 1 April 2008 are unaffected by the reduction in the qualifying emission level to 110g/km from that date. Gas refuelling stations The 100% FYAs for natural gas and hydrogen refuelling stations were due to expire on 31 March 2008, but have now been extended by five years, to 31 March Furthermore, from 1 April 2008, the relief is extended to include expenditure on refuelling equipment for biogas, which is defined as gas produced by the anaerobic conversion (ie decomposition) of organic matter, to be used for propelling vehicles (s 78, FA 2008). 2.2 Annual investment allowance From 1 April 2008 (corporation tax) or 6 April 2008 (income tax) s 74 and Sch 24, FA 2008 introduce a new AIA, which so far as small and medium-sized enterprises are concerned, replaces the existing 50% and 40% FYAs. The stated purpose of the AIA is to encourage greater levels of investment by reducing the cost of capital. The Government claims that it is a major simplification for the 95% of businesses that invest less than 50,000 a year. In contrast to the FYAs that the AIA is replacing, it will be available to all businesses, regardless of their size or legal form, including: sole traders; companies; partnerships of which all the members are individuals; registered friendly societies; and certain corporate bodies that are not companies, but are within the charge to corporation tax. Also, in contrast to the abolished FYAs, the AIA will be available to landlords, as there is no exclusion from the allowance of expenditure on fixtures in a let building. The AIA provides for a 100% capital allowance for the first 50,000 of expenditure on plant and machinery each year (but not necessarily the earliest purchases). The person incurring the expenditure must own the plant as a result of incurring the expenditure (new s 51A, CAA 2001). The effective value of the AIA each year is therefore limited to 50,000 multiplied by the taxpayer's marginal rate of tax. It should be remembered too that it is merely an acceleration of the relief that would otherwise be available via 'ordinary' capital allowances. 6 September 2008

7 The AIA may be offset against virtually all expenditure on plant and machinery (excluding cars), including fixtures, the new so-called 'integral features' (see 2.5) and long-life assets. As well as the exclusion relating to cars, the AIA will not be available for expenditure incurred: in the period in which the capital allowances qualifying activity is permanently discontinued; or for certain expenditure incurred in connection with ring fence trades (oil extraction); or where the provision of the plant is connected with a change in the nature or conduct of the trade carried on by a person other than the person incurring the expenditure, and obtaining an AIA is a main benefit of making the change. Further, the AIA is not available in circumstances where the expenditure is deemed rather than actual (typically, where plant was first acquired for a non-trading purpose, and is only later used for the trade or other qualifying activity), or where the plant or machinery concerned was previously used for long funding leasing, or where the plant or machinery was a gift (new s 38B, CAA 2001). The Government's stated intention was to take a 'light touch' approach to the targeting of the AIA so that it would be an effective investment incentive. Therefore, it took what it regarded as a 'simple and broad-based approach', where: singleton companies each receive a single annual allowance (new s 51B, CAA 2001); groups of companies (new s 51C, CAA 2001), companies under common control (new ss 51D-F, CAA 2001), or related companies (new s 51G, CAA 2001), will receive a single allowance, which they may allocate between themselves in any way they wish. That is to say, if a group consists of two companies, one of them may use the whole of the 50,000 AIA a sensible measure which obviates the need to artificially split expenditure between group companies in order to maximise the tax relief. The same approach applies where two or more similar 'qualifying activities' (defined by s 15, CAA 2001 for the purposes of capital allowances) are carried on under common control (new s 51H-J, CAA 2001). The question of whether commonly controlled businesses are engaged in a similar qualifying activity is determined by reference to the well-established international classification system 'NACE' (Nomenclature générale des activités Économiques dans les Communautés Européennes), which divides industries into 17 main classifications (information on these classifications is available on the website of the Office of National Statistics and will be included in the relevant HMRC guidance). These rules aim to prevent the fragmentation of a business to form 'related' businesses and to prevent duplication of the AIA where qualifying activities are under common control. They should apply to only a small minority of businesses, as most taxpayers do not control a multiplicity of related businesses. As the AIA may be allocated between different types of expenditure in any way the taxpayer wishes, it should generally be allocated to expenditure which would otherwise qualify for the lowest rates of relief (for example, in the first instance to 'integral features' or long-life assets, normally qualifying for 10% WDAs). Example 2 A taxpayer incurs the following expenditure: 25,000 on integral features qualifying for 10% WDAs 15,000 on environmentally beneficial (that is, water conserving) plant qualifying for enhanced capital allowances (that is, a 100% FYA), and 75,000 on other plant and machinery additions to the main/general pool qualifying for 20% WDAs. The taxpayer should allocate his 50,000 AIA first to the 25,000 10% integral features, then the remaining 25,000 to the 20% main pool plant, thus preserving the 100% enhanced capital allowance (the AIA does not replace this FYA), so leaving 50,000 of general pool plant qualifying at 20%. Effectively, the taxpayer has converted the 10% allowance on the integral features into a 100% allowance and done the same for the 20% allowance that would otherwise have been available for a third of the general pool plant. September

8 CAPITAL ALLOWANCES: THE NEW RULES Although 50,000 will not purchase much in the way of integral features, this freedom to allocate the AIA operates as a proxy for a de minimis provision, meaning some businesses may be able to dispense with a 10% 'special rate' pool if the amounts of integral features do not exceed 50,000 per year. The AIA may only be claimed in the chargeable period in which the expenditure is actually incurred (new s 51A(2), CAA 2001), so cannot be deferred to a later period (although it may be used to augment a loss carried forward). However, it is possible to claim less than the full amount (new s 51A(7), CAA 2001), although this will rarely be appropriate. The AIA must be claimed within the normal self assessment window to make or amend a capital allowances claim. For corporation tax this is two years after the end of the accounting period when the expenditure was incurred (paras 2 and 81, Sch 18, FA 1998), and for income tax it is one year after the 31 January following the year of assessment (ss 8 and 9ZA, TMA 1970). Prevention of double allowances The same expenditure can qualify only once for tax relief. If, for example, expenditure could qualify for the AIA or the enhanced capital allowances FYA for energysaving or environmentally beneficial plant, the taxpayer must decide which to claim (new s 52A, CAA 2001). Accounting periods more or less than a year Where a business has a chargeable period which is more or less than a year, the maximum AIA is proportionally increased or reduced. Accounting periods overlapping 1 April 2008 Similarly, the AIA is time-apportioned where the chargeable period overlaps 1 April 2008 (corporation tax) or 6 April 2008 (income tax). This is calculated by reference to the precise number of days falling before and after the relevant date. Example 3 A company with a 30 September 2008 year end will be entitled to an AIA for the chargeable period of 25,000 (that is, 183/366 x 50,000). Subsequent disposal Where an AIA is claimed in respect of an asset and that asset is later disposed of (for example, sold, demolished, etc), disposal proceeds must be brought into account (s 61, CAA 2001). After the initial expenditure has been allocated to whichever pool is appropriate, the 'available qualifying expenditure' (defined by s 57, CAA 2001) in that pool is reduced by the same amount. There is no immediate effect on the pool, but the mechanism is then in place which will require the taxpayer to bring in a disposal value on the sale, etc of the asset (new s 58(4A), CAA 2001). Anti-avoidance Anti-avoidance provisions exist to prevent the artificial use of unused annual allowances. These deny a taxpayer an AIA where there is an arrangement which is entered into wholly or mainly to enable that person to obtain an AIA to which the person would not otherwise be entitled (new s 218A, CAA 2001). 2.3 Main rate of writing down allowance For many years, the standard rate of WDA for plant and machinery in the main or general pool has been 25% per annum, on a reducing balance basis. However, for chargeable periods ending on or after 1 April 2008 (corporation tax) and 6 April 2008 (income tax) this has been reduced to 20% (s 80, FA 2008). The Government has stated its belief that this is the 'true' economic rate of depreciation for plant and machinery, a pronouncement met with scepticism by many businesses and commentators, who responded that the real reason for the change was to raise additional taxes. According to the Treasury's own forecasts, the reduction in the main rate of WDA is expected to raise an additional 2.27bn of revenue by April 2010 and will continue to raise additional taxes thereafter. In effect, the rate reduction has entirely funded the 'headline' reduction in the full rate of corporation rate from 30% to 28% and businesses that invest in plant and machinery will subsidise those (including even the largest businesses) that do not. Calculation in year of rate reduction In calculating the rate of WDAs available, the date the expenditure is incurred is irrelevant. If the chargeable period overlaps 31 March 2008 (corporation tax) or 5 April 2008 (income tax) a 'hybrid' rate of WDA is used, determined on the basis of time-apportionment. 8 September 2008

9 Example 4 A company with a 30 June 2008 year end will be entitled to WDAs for the chargeable period at the rate of approximately 23.75% (that is, 275/366 x 25% plus 91/366 x 20%). Table 2 lists all the possible hybrid rates of WDA for companies for chargeable periods that overlap 31 March (the hybrid rates for unincorporated bodies will be slightly higher, due to the change beginning effective from 6 rather than 1 April). Table 2: Hybrid rates of plant and machinery WDA corporation tax Chargeable period end Hybrid rate of WDA 31 March % 30 April % 31 May % 30 June % 31 July % 31 August % 30 September % 31 October % 30 November % 31 December % 31 January % 28 February % 31 March % Cars costing more than 12,000 Each car costing more than 12,000 (so-called 'expensive cars'), except low emission cars, has its own single asset pool. There is no FYA for such a car. The WDA on a car costing more than 12,000 is restricted to 3,000 a year. If the period of account is not 12 months in length, the WDA will need to be reduced accordingly. Note that the restriction remains 3,000 (s 74, CAA 2001), based on 25% of 12,000. It is not reduced to 20% of 12,000 in line with the rate of WDA. We are expecting the capital allowances regime for cars to be changed next April in line with proposals in the consultation document Modernising tax relief for business expenditure on cars, published by HM Treasury in March 2007 and Budget 2008 Press Notice 01 and Budget Note 11 published in March The proposed rules are based on environmental objectives, as follows: retain the current 100% FYA for cars with CO 2 emissions up to 110g/km; give 20% WDAs via the main plant and machinery pool for cars with CO 2 emissions between 111g/km and 160g/km; and introduce a new pool with a lower rate of WDA than the main pool for cars with CO 2 emissions exceeding 160g/km. 2.4 Special rate of writing down allowance The 'special rate' pool is introduced by s 82 and Sch 26, FA 2008, for certain expenditure incurred on or after 6 April 2008 (income tax) and 1 April 2008 (corporation tax). The definition of 'special rate expenditure' (new Chapter 10A, CAA 2001) includes: a) new expenditure on thermal insulation of buildings under s 28, CAA 2001 (see 2.8); b) new expenditure on integral features under s 33A, CAA 2001 (see 2.5); c) new expenditure on long-life assets under Chapter 10, CAA 2001; and d) 'old' expenditure on long-life assets not previously allocated to a pool, but allocated to a pool in a period beginning on or after April The rate of WDA for special rate expenditure is 10% on a reducing balance basis. For most assets, this represents a significant reduction from the standard rate of 25% previously available. However, for long-life assets the rate has increased slightly, as the previously available WDA was just 6% per annum, reducing balance. For long-life asset expenditure already in a pool existing before the rate change, a 'hybrid' rate of WDA applies to the TWDV brought forward on the basis of timeapportionment (similar to the main rate of WDA). However, for expenditure incurred on or after 1 and 6 April 2008 the full 10% rate will apply for the chargeable period in which the expenditure is incurred, even if that period is a transitional period. September

10 CAPITAL ALLOWANCES: THE NEW RULES Example 5 ABC Ltd has a 30 June 2008 year end and had a long-life asset pool of 30,000 before 1 April It then incurred a further 50,000 on long-life assets in May For the 30,000 pre-existing assets it will be entitled to WDAs for the chargeable period ended 30 June 2008 at the rate of approximately 7% (that is, 275/366 x 6% plus 91/366 x 10%), plus for the 50,000 incurred after the rate change it will be entitled to WDAs of 10%. The impact of the AIA is ignored for the purposes of this example. Where the cost of an asset straddles the relevant date the expenditure before and after the date is treated as being upon separate items of plant and machinery. 2.5 Integral features After a year-long consultation process, FA 2008 legislated for a new category of plant and machinery, to be known as 'integral features' (new s 33A, CAA 2001, introduced by s 73, FA 2008). These were called 'integral fixtures' in the July 2007 consultation document, but Government decided it was more appropriate to change the nomenclature because the assets in question may not always be fixtures. Section 33A, CAA 2001 defines integral features as: a) electrical systems (including lighting systems); b) cold water systems; c) space or water heating systems, powered systems of ventilation, air cooling or air purification (including floors or ceilings comprised in such a system); d) lifts, escalators and moving walkways; e) external solar shading (that is, brise-soleil). However, assets whose principal purpose is to insulate or enclose the interior of a building or to provide a permanent floor, wall and ceiling are excluded. Active façades (ie, typically, cladding systems with two glazing layers separated by a ventilated air cavity) were included in the draft legislation included with 2008 Budget Notice BN07, but omitted from the resulting Finance Bill, as in HMRC's view they are already included within item (c), as part of air conditioning systems. Changes to the list may be made by Treasury Order, for the purpose of including expenditure which would not otherwise qualify for plant allowances, or excluding expenditure if it would otherwise qualify for a higher rate of plant allowances. Integral features assets qualify for WDAs at the 'special rate' of 10% pa (para 2, Sch 26, FA 2008, introducing new s 104A(1), CAA 2001). The rules only apply to expenditure incurred on or after 1 April 2008 (corporation tax) or 6 April 2008 (income tax) and unlike the main rate of WDA and long-life assets, a 'hybrid' rate of relief does not apply. Any pre-existing expenditure in the main pool which would fall into this new 'integral features' class of plant and machinery will remain in the main pool and TWDVs brought forward will continue to receive the main 20% rate of WDA. It will not be necessary to retrospectively review historic expenditure in the main pool and reclassify any as integral features. Repairs and replacements of integral features The new rules apply where expenditure is on the provision or replacement of an integral feature. However, the term 'replacement' is extended by new s 33B, CAA Broadly, if expenditure on an integral feature (including repairs) is more than 50% of the cost of replacing that entire integral feature (for example, the heating system), that expenditure will be treated as being a capital replacement. In essence, the usual process for determining whether expenditure is capital or revenue for tax purposes is reduced to a mathematical comparison. Theoretically, repairs costing 50% of the cost of replacing a heating system could be allowed as repairs, but if that figure were 50.1%, they would automatically be treated as capital. 10 September 2008

11 Example 6 XYZ Limited has decided to overhaul the heating system to its head office. The original system cost 20,000 in Its consultant mechanical and electrical engineer advises that it could either: 1. replace the entire system at a cost of 35,000; or 2. replace the boilers, pumps and some of the thermostatic valves and pipework at a cost of 18,500; or 3. just replace the boiler at a cost of 10,000. The first option will be treated as a capital replacement qualifying for WDAs at 10% pa. The second option will also be treated as a capital replacement qualifying for WDAs at 10% pa (because the works in this case cost more than 50% of the cost of a full replacement, ie 35,000). Note that the original cost of the asset to be replaced (ie 20,000) is irrelevant. However, the third option could be allowed as repairs because it costs less than 50% of the 35,000 full replacement cost. At the time of going to press no guidance had been provided by HMRC about how an integral features 'system' will be defined, or what evidence a business should assemble to show what the alternative courses of action would have been. Minor replacements are unlikely to cause difficulty because they should cost substantially less than replacing the entire integral feature. However, for more substantial works, it is recommended that third party evidence of cost should be obtained. Suitable evidence would include an estimate of the cost of replacing the entire integral feature from an independent specialist property taxation surveyor or quantity surveyor (see or a quotation for those works from the tendering builder(s), or sub-contractor(s)/ supplier(s). Be aware that if the expenditure is capitalised or 'deferred' in the accounts, HMRC's view under normal principles is that the tax deduction is only available when that expenditure is expensed through the profit and loss account (that is, the tax deduction follows the depreciation rate in the accounts). Anti-avoidance Where an asset is disposed of (for example, sold demolished, etc) and that asset was one allocated to the special rate pool, anti-avoidance provisions potentially apply. If the asset is disposed of for less than its 'notional tax written-down value', as part of a scheme or arrangement having the obtaining of a 'tax advantage' (defined by 577(4), CAA 2001 as obtaining an allowance or a greater allowance, or avoiding or reducing a charge) as a main purpose, then that notional written-down value is substituted for the actual disposal value. Notional written-down value is the TWDV that would exist if all writing down allowances that could have been claimed had been claimed in full (new s 104E, CAA 2001). Anti-avoidance provisions also apply to prevent expenditure on existing assets which did not previously qualify for allowances (eg non-qualifying elements of cold water systems) being transferred to a connected person such that a claim would be possible on the whole of the original expenditure (para 15, Sch 26, FA 2008). However, members of a group may elect, under para 16, Sch 26, FA 2008, to transfer a 'precommencement integral feature' such that: a) no balancing adjustment need be made by the transferor; and b) the expenditure may be allocated to the main pool (not the special rate pool) by the transferee. The election must be submitted to HMRC within two years after the date on which the sale takes place (normally the completion date of the sale and purchase). September

12 CAPITAL ALLOWANCES: THE NEW RULES Suggested form of election To: HM Revenue and Customs We hereby elect that para 17, Sch 26, FA 2008 shall apply to the sale and purchase of the assets shown on the attached list, being 'pre-commencement integral features', such that: 1. the assets are treated as sold at a price which gives rise to neither a balancing allowance nor a balancing charge; and 2. the purchaser's expenditure is treated as qualifying expenditure which is not special rate expenditure, and is to be allocated to the purchaser's general pool. For and on behalf of the vendor Secretary For and on behalf of the purchaser Secretary Dated Short-life assets that are integral features Short-life assets were introduced in 1986 to solve a specific problem resulting from the pooling system normally applying to plant and machinery. Finance Act 2008 introduces a change which prevents integral features from being treated as short-life assets. Short-life assets are plant and machinery owned by a business for only a short time. They are not, contrary to common belief, assets with a short useful life, regardless of changes in ownership. They become short-life assets by written election to HMRC (s 83, CAA 2001). For corporation tax, the election must be made within two years of the end of the chargeable period in which the expenditure was incurred and for income tax the deadline is 12 months after the 31 January following the year of assessment in which the period of account ends (s 85, CAA 2001). However, landlords cannot do this, except in limited circumstances, because leased assets are not usually eligible for short-life asset treatment (s 84, CAA 2001). The effect of a short-life asset election is that if the short-life asset is sold or scrapped before the fourth anniversary of the end of the chargeable period in which it was acquired, this is regarded as the 'final chargeable period' for capital allowances purposes (ss 61 and 65(2), CAA 2001). The disposal proceeds are then used to calculate a balancing allowance accelerating all of the remaining tax relief (or more rarely, a balancing charge if the disposal proceeds exceed the TWDV at that time) (s 56, CAA 2001). It is possible to make short-life asset elections for plant and machinery (chattels and fixtures) in buildings, for example: Property refurbishments for any plant and machinery installed during the last two years, which will be stripped out. Property purchased with a view to possible refurbishment for any plant and machinery stripped out before the fourth anniversary of the end of the chargeable period in which the property (and fixture) was acquired. However, for chargeable periods beginning on or after 1 April 2008 (corporation tax) and 6 April 2008 (income tax), it will no longer be possible to treat integral features as short-life assets (para 7, Sch 26, FA 2008). It will still be possible to make short-life asset elections for other plant and machinery assets (that is, chattels and fixtures that are not integral features). 2.6 First-year tax credits Since 1 April 2001 expenditure by all businesses on certain energy-saving plant and machinery has qualified for a 100% FYA (ss 45A, CAA 2001) and from 1 April 2003 the relief was extended to environmentallybeneficial (that is, water conserving) plant (s 45H, CAA 2001). These FYAs for green technologies are often called enhanced capital allowances. To qualify, the plant and machinery on which the expenditure is incurred must be unused (ie not second-hand) and not a long-life asset. It must also be of a type specified by Treasury order and listed on the Government's energy and water technology lists, normally by manufacturer and model (see gov.uk). Sometimes, products must meet complicated 12 September 2008

13 performance specification requirements, for example, combined heat and power (CHP), lighting and pipework insulation. Typical examples of energy-saving equipment include (among others): boilers; CHP; compressed air; heating, ventilating and air conditioning zone controls, and refrigeration. Examples of water conserving assets include (among others): efficient showers, taps, toilets and washing machines; meters and monitoring equipment; and rainwater harvesting equipment. For expenditure incurred on or after 1 April 2008 it is possible for companies (and only companies) to surrender the element of their trading losses attributable to the energy-saving or environmentally beneficial allowances (if any) in return for a cash payment from Government (new Sch A1, CAA 2001, introduced by s 79 and Sch 25, FA 2008). This idea is similar to the repayable research and development and land remediation relief tax credits. Broadly, a company which has a 'surrenderable loss' may claim a first-year tax credit equal to 19% of that loss (para 2(1), Sch A1, CAA 2001). This percentage applies regardless of the size of the company, so there may be instances where it is better not to claim the tax credit, but to carry the loss forward to be set against subsequent years' profit when tax may be payable at a higher rate. The amount of the loss which may be surrendered is the lower of: the amount of the first-year tax allowance (that is, the expenditure qualifying for 100% enhanced capital allowances); and the actual loss. Example 7 If a FYA of 50,000 is deducted in computing a loss of 30,000, the tax credit payable will be 5,700 (that is, 19% of 30,000). However, if a FYA of 50,000 is deducted in computing a loss of 60,000, the tax credit payable is 9,500 (that is, 19% of 50,000). The repayment is subject to an upper limit, which is the greater of (para 2(2), Sch A1, CAA 2001): the total amount of the company's PAYE and Class 1 secondary NIC liabilities for payment periods ending in the chargeable period (para 17, Sch A1, CAA 2001); and 250,000. The first-year tax credit must be claimed in a tax return specifying the plant and machinery to which the claim relates, the amount of expenditure incurred, and the date on which that expenditure was incurred. The claim must be made or amended within the normal corporation tax self assessment window for a capital allowances claim, which is two years after the end of the accounting period when the expenditure was incurred (paras 2 and 81, Sch 18, FA 1998; new s 83ZA, FA 1998 introduced by Sch 25, FA 2008). The company may restrict its claim for the first-year tax credit to only part of the total amount claimable (para 2(3), Sch A1, CAA 2001). The tax credit will usually be paid to the company, although HMRC does not have to make a repayment where the company has outstanding PAYE or NIC liabilities. Or the tax credit may be used to discharge any outstanding corporation tax liability (Part 2, Sch A1, CAA 2001). The repayment does not count as income of the company for any purpose (para 23, Sch A1, CAA 2001). There is also a 'clawback' period, defined as ending four years after the end of the chargeable period for which the first-year tax credit was paid. This applies where a first-year tax credit is claimed in respect of an asset and that asset is then sold before the end of the clawback period. Then the tax credit must be repaid to HMRC and the relevant loss reinstated (Part 3, Sch A1, CAA 2001). Anti-avoidance rules apply to prevent tax credits where arrangements have been entered into which have the claiming of a tax credit as a main purpose (para 28, Sch A1, CAA 2001). September

14 CAPITAL ALLOWANCES: THE NEW RULES Small pools With effect for chargeable periods beginning on or after 1 April 2008 (corporation tax) or 6 April 2008 (income tax), where the TWDV of a plant and machinery pool is no more than 1,000, businesses may claim a WDA equal to the entire value of the pool (new s 56A, CAA 2001, inserted by s 81 FA 2008). This simplification measure is aimed at removing the need to carry forward small pools of expenditure and calculate ever-diminishing WDAs. This applies to the general (20%) pool and to the 'special rate' (10%) pool, but not to single asset pools, like those for expensive cars or short-life assets (new s 56A(1), CAA 2001). 2.8 Thermal insulation of buildings For more than 30 years it has been possible to treat as plant, thermal insulation (to prevent the loss of heat, not cold) added to an existing industrial building occupied for the purposes of a trade or let for such a purpose (s 28, CAA 2001). The abolition of industrial buildings allowances (see part 3) will repeal the legislative definition upon which this relief relies. To remedy this, and simultaneously extend the relief to other commercial building types, the 'industrial' requirement has been removed and the reference to a trade replaced by a reference to a capital allowances 'qualifying activity'. Qualifying activities are defined by s 15, CAA 2001 and include trades, professions and vocations, employments and ordinary property businesses, that is, property investment. So for expenditure incurred on or after 1 April 2008 (corporation tax) and 6 April 2008 (income tax), plant and machinery WDAs will be extended to expenditure on the addition of thermal insulation to all existing buildings used for any capital allowances 'qualifying activity', except residential property businesses (which may instead qualify for the 1,500 per dwelling-house, landlord's energy saving allowance available under s 312, Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) for the following insulation types: cavity wall, loft, solid wall, hot water system, draught proofing and floors). However, capital allowances on all thermal insulation of buildings after 1 or 6 April 2008 will be restricted to the 10% rate available for expenditure added to the new 'special rate' pool (s 71 and para 2, Sch 26, FA 2008). Unlike the main rate of WDA and the rate for preexisting long-life assets, a 'hybrid' rate of relief will not apply. Example 8 Writing off small pools Mr Smith's 2006/07 tax computations show the carried forward TWDV of his main pool to be 2,000. He prepares his accounts to 5 April each year. In 2007/08 he incurs expenditure of 500 on office equipment, and 750 on a heating system. In 2008/09 he incurs further expenditure of 1,100 on additions to the heating system. For the purposes of this example, the impact of the AIA is ignored (one may assume, for example, that it has been used in another business controlled by Mr Smith). Main pool Special rate pool 2007/08 Brought forward 2,000 Additions 1,250 3,250 25% (813) 2, /09 Additions 1,100 20%/10% (487) (110) 1, /10 20% (390) Write off pool (< 1,000) (990) 1,560 Nil 2010/11 20% (312) 1, /12 20% (250) /13 Write off pool (< 1,000) (998) Nil 14 September 2008

15 2.9 Fire safety expenditure Section 29, CAA 2001 has historically given plant and machinery allowances to traders incurring fire safety expenditure 'required' to comply with a notice issued under the Fire Precautions Act 1971 (FPA 1971), or another document specifying steps that might have been specified by such a notice. However, since the original tax legislation was introduced, fire safety legislation has been reformed and now operates on a self assessment basis. The legislation as previously drafted also only applied to taxpayers who had not complied with fire safety requirements and were issued with a prohibition notice by a Fire Authority. It was thus inherently unfair that the relief was potentially available for incurring expenditure when ordered to do so as a consequence of inadequately designing the works, but not when expenditure was incurred voluntarily, as a matter of good practice. From 1 October 2006 the FPA 1971 was repealed. As a consequence, and to address the potential anomaly referred to above, namely that s 29, CAA 2001 as drafted could potentially encourage businesses to delay vital fire safety works until they were ordered to be undertaken, s 29 was repealed for expenditure incurred on or after 1 April 2008 (corporation tax) and 6 April 2008 (income tax) (s 72, FA 2008). Much expenditure will continue to qualify for a revenue deduction and the change does not affect relief for fire safety equipment expenditure that qualifies as plant and machinery in the normal way (for example, fire fighting and warning systems, such as sprinklers and alarms). 3. INDUSTRIAL AND AGRICULTURAL BUILDINGS ALLOWANCES 3.1 Background For most advisers, perhaps the greatest surprise announced at the time of the 2007 Budget was the proposed abolition of industrial buildings allowances (IBAs) and agricultural buildings allowances (ABAs). This was widely reported as an attack on the British manufacturing, hotel and transportation industries, not to mention farming. The withdrawal of the reliefs, effectively with retrospective effect, will cost these sectors dear and, it was claimed, might undermine investor confidence in the UK. Consultation on potential capital allowances reform highlighted the lack of tax relief for most taxpayers' expenditure on business premises under the current system. It was claimed by many commentators that this put the UK at a competitive disadvantage to its main competitors, most of which recognised the strong economic case to allow tax depreciation on the physical structure of buildings as well as providing accelerated rates for faster depreciating assets. Critics of the existing system also highlighted the 'unfairness' of denying relief on expenditure on offices or retail premises, while at the same time maintaining a system of allowances for industrial and agricultural buildings. However, instead of levelling the playing field between different economic sectors by extending buildings capital allowances to sectors outside those that currently qualify for IBAs, ABAs or research and development allowances (RDAs), the Treasury has chosen to withdraw IBAs and ABAs entirely. This has left those industries that currently benefit from the relief much worse off, as well as failing to remedy the lack of relief experienced by other sectors of the economy. The rationale given by the Treasury for the phasing out was that IBAs were 'poorly-targeted' and their abolition would help fund a reduction in the main corporation tax rate. However, smaller companies losing IBAs do not, of course, benefit from this reduction, but will see their tax rate increase to 22%, while individual investors will continue to pay tax at 40%. Although the system of IBAs was discussed in consultation, it was not previously suggested that it would be abolished. Despite this, it is to be phased out by April 2011, a change which, as will be seen below, essentially has retrospective effect. 3.2 Timescale for phasing out of IBAs and ABAs The phasing out will be achieved by reducing the rate by one-quarter each year over four years (on a straight line basis) from April So a business currently claiming 4% pa will see this reduce to 3% from April 2008, 2% from April 2009, 1% from April 2010 and zero from April In each case the key dates are 1 April (corporation tax) and 6 April (income tax). The same one-quarter reduction in the rate also applies if the property was acquired second-hand, such that a rate other than 4% is relevant (s 85, FA 2008). September

16 CAPITAL ALLOWANCES: THE NEW RULES For example, if a property was acquired second-hand with say 10 years of its 25-year IBA life left to run, such that the current claim is 10% pa, this will reduce to 7.5%, then 5%, then 2.5%, then nil. Where an accounting period overlaps a change in the available rate, a time-apportioned rate must be applied. For example, a company with an accounting period of 12 months ending 30 September 2008 will be able to claim a WDA for that year, on new expenditure, of 3.5% (183/366 x 4% plus 183/366 x 3%). This principle applies for every period up to and including The final result of these various changes will be that for chargeable periods beginning on or after April 2011, any unrelieved balance of expenditure will simply be written off and will not attract tax relief. This will substantially increase future tax bills for affected businesses (s 84, FA 2008). Example 9 John and his brother spent 4m on constructing a factory in 2007/08, expecting that the whole of this expenditure would attract tax relief via IBAs over the next 25 years. At their marginal tax rate of 40%, this would be worth 1.6m over time. Instead, they will begin claiming allowances at the expected 4% pa, but will then see this gradually reduced to 1% for 2010/11, before allowances cease altogether. In April 2011, the residue of expenditure (that is the unrelieved part of the original cost) will be 3.6m, which will then be written off without relief. So in future years, the brothers will pay total additional tax of 1.44m. The phasing-out rules do not apply to WDAs available in respect of expenditure in an enterprise zone. However, in the 2008 Budget, it was announced that enterprise zone IBAs (which primarily provide a 100% incentive allowance) would also be withdrawn from 1 April 2011 (corporation tax) and 6 April 2011 (income tax). In all cases, where a business's chargeable period spans the relevant date the amount of WDA will be timeapportioned. Furthermore, where a business disposes of a building within seven years of first use, the business will potentially be liable to a balancing charge (that is, a 'clawback'). One effect of the abolition of IBAs is that it will be more important than ever to maximise plant and machinery allowances, as for most taxpayers this will be the only way of obtaining any tax relief for expenditure on property. It may also be worth considering reviewing recent years' IBA claims and where possible, switching expenditure from IBA treatment to plant and machinery. This is likely to be relatively straightforward for open tax returns (for example, those still within the statutory window to amend a capital allowances claim). It is otherwise only possible if the property is sold, and even then the claim must be based on an apportionment of the seller's residue of expenditure (that is, the TWDV amount not yet written off). Also, if any industrial buildings WDAs have not been claimed in previous years it may be possible to submit claims to remedy these, or similarly to consider reversing any previously disclaimed WDAs. There are some artificial arrangements designed to accelerate IBAs to ensure they are claimed in full before abolition (for example, using numerous group companies with different year ends and repeated intragroup sales of properties). However, these are ineffective, except in the rarest of circumstances, because of a variety of tax technical and commercial reasons and antiavoidance was introduced to prevent them for most sales taking place on or after 12 March 2008 (new s 313A, CAA 2001 introduced by s 87, FA 2008). 3.3 Balancing adjustments For balancing events (ie the sale or demolition, etc of an industrial building) occurring on or after 21 March 2007, a taxpayer's IBA claim for the purchase of a second-hand building will be based on the vendor's TWDV (and the sale of an existing industrial building will not, as previously, give rise to a balancing charge, that is 'clawback', or allowance) (s 36, FA 2007). 16 September 2008

17 Example 10 ABC Limited built a factory in 1987 for 5m and claimed industrial buildings allowances at 4% per annum. It sold the building to DEF Limited on 20 March 2007 for 6m. As it has sold the building at a profit, it suffered a clawback of all the allowances it had previously claimed, being 4m (20 years at 200,000 pa). DEF Limited could claim IBAs on 5m, over the remaining five years of the building's 25-year tax life, ie 1m per annum. If the sale had taken place one day later, on 21 March 2007, ABC Ltd would not have suffered a clawback, and DEF Ltd's claim would have been limited to just 200,000 per annum (effectively inheriting the claim from ABC). Transitional provisions apply, which mean the old rules and treatment apply to transactions on or after 21 March 2007, in pursuance of a 'pre-commencement contract'. This is defined as a written contract in existence at 21 March 2007, which is unconditional or where all conditions have been met, and which is not varied in any significant way after 21 March 2007 (s 36(7), FA 2007). 4. THE JD WETHERSPOON CASE 4.1 Background In June 2007 the Special Commissioners heard an appeal in connection with an enquiry into the capital allowances claims of JD Wetherspoon, a major pub owner and operator (JD Wetherspoon plc v HMRC SpC 657). The decision was published in December This case does not just affect pub owners, but is also relevant to other property investors and owneroccupiers incurring expenditure upon plant. It concerns several of the key practical difficulties commonly encountered when preparing and agreeing propertyrelated capital allowances claims, namely: whether fixtures are plant or machinery; whether certain works are alterations to an existing building incidental to the installation of plant or machinery (that is, qualifying under what is now s 25, CAA 2001); to what extent 'indirect on-cost' expenditure on contractor's preliminaries and consultants' professional fees can be allocated on to the builder's direct costs. The decision focused on two sample pub fit-outs in Glamorgan (previously a theatre) and Hampshire (previously two high street retail units). JD Wetherspoon and HMRC failed to agree on whether more than 120 types of expenditure qualified for plant and machinery capital allowances. The Commissioners decided it would be impractical and of limited value to consider every item in the inadequate time available, so they concentrated on a small number of items and addressed points of principle. It is understood that the decision is likely to be appealed. 4.2 Premises or plant? The first question considered whether certain assets were part of the 'premises' in which the business was carried on and performing simply and solely the function of housing the business (which cannot be plant), or 'apparatus' with which the business was carried on (which is plant). The Commissioners picked one asset from the many under dispute, with the intention of using it to establish general principles that could be applied to other assets. They chose plywood panelling, veneered to look like oak, and attached to the pub walls with softwood battens. The Commissioners held that this panelling was not plant. The taxpayer said that its intention was to create a 'front room' atmosphere, which was cosy, warm and interesting, and the panelling was provided to create a 'richer and more inviting atmosphere than traditional painted walls' (that is, it was provided for decorative purposes to create atmosphere or 'ambience' in a similar manner to the assets in IRC v Scottish & Newcastle Breweries Ltd [1982] STC 296). However, despite accepting that the panelling 'was an embellishment to create ambience' (and therefore could not simply and solely perform the function of housing the business, so could not be 'premises'), the Commissioners nevertheless considered the four factors proposed by Hoffmann J in Wimpy International Ltd v Warland 61 TC 51 to establish whether it was more appropriate to regard the panelling as being part of the premises, rather than having retained a separate identity, as shown in Table 3: September

18 CAPITAL ALLOWANCES: THE NEW RULES Table 3: Plywood panelling premises or plant? Factor Decision Suggests premises or not Visually retained a The panelling did appear visually to retain a Not premises separate identity? separate identity. Degree of permanence The panelling was clearly capable of being Not premises attached? removed; indeed similar panelling has been removed... and reused. There is no reason to believe that removal would cause more than surface damage to plaster. Incompleteness of The structure of the rooms was clearly not Not premises structure without it? incomplete without the panelling (that is, the structure was complete without the panelling). Extent to which it was The panelling was not likely to be removed Implication not clear intended to be permanent? after only a short period. See Note below Note: The fourth finding appeared to be based on surmise rather than evidence (none was referred to in the decision) and it is not entirely clear what Justice Hoffmann meant by this consideration in Wimpy. An asset has never failed to be plant simply because it was permanent. Indeed the leading authority on the meaning of plant, Yarmouth v France (1887) 19 QBD 647 defines it as 'whatever apparatus is used by a businessman for carrying on his business which he keeps for permanent employment'. Therefore, a logical interpretation is that this factor merely aims to suggest that a relatively short period of use indicates an asset has prima facie not become part of the premises. On balance these four factors therefore also appeared to point strongly to the panelling not being premises. However, the Commissioners ignored this and invented their own test which asked whether the panels were 'an unexceptional component which would not be an unusual feature of premises of [this] type' (that is, if timber wall panelling is often found in pubs, it must therefore be part of the premises!). This test seems wholly inappropriate and when applied to many common assets gives results which appear unequivocally wrong (for example, pubs typically contain furnishings and fittings such as bar counters, which would be part of the premises by this test), or which have long qualified and are now specifically treated as plant by statute (for example, heating systems). The decision is not binding, and for the reasons outlined above is likely to have little impact on existing practice. 4.3 Incidental expenditure The second issue related to alterations to existing buildings incidental to the installation of plant or machinery, which s 25, CAA 2001 deems to be part of the cost of that plant. The Commissioners considered the assets set out in Table 4: 18 September 2008

19 Table 4: Incidental expenditure in JD Wetherspoon Asset Wipe-clean kitchen tiling Lavatory partitions and doors/cubicles Drainage system Decision Not incidental to the kitchen plant (that is, the cookers and other equipment) because the tiles did not have sufficient nexus to that plant (however, splash backs to sinks and the immediate surrounds of lavatory basins might be incidental to that plant). Incidental to the toilet sanitary ware, which could not be used without partitions or cubicles. Incidental to the toilet and kitchen plant (but in any case should qualify as plant under basic principles, as a trade specific sewerage system, like the cold water tanks and pipe work in Wimpy). 4.4 Preliminaries and fees In addition to a builder's direct labour, materials and small plant (ie tools) costs, the overall price of a building project normally includes the indirect 'on costs' of contractors' preliminaries and consultants' professional fees. Preliminaries comprise the items of the builder's expenditure that cannot easily be attributed to individual items of work, but may relate to the project as a whole, such as site management (eg supervisory staff), mechanical plant (eg cranes, dumpers etc.), and site accommodation (eg offices, canteens, washing facilities etc). Professional fees may include the architect, project manager, quantity surveyor and various engineers and other consultants. It was common ground (which the Commissioners agreed with) that capital expenditure on the 'provision' of plant (in accordance with what is now s 11, CAA 2001) could include expenditure on preliminaries and fees attributable to that provision. However, JD Wetherspoon and HMRC disagreed about how much of these costs should be allocated onto the builder's direct costs. On the matter of preliminaries HMRC accepted that the following specific costs were pro rata allocable to plant: site supervision and management; scaffolding; site accommodation, power, fuel, water, telephone, lighting and safety. On the remaining preliminaries the Commissioners held that the following specific preliminaries were allocable pro rata: project insurance site security mechanical plant contractor's general attendance (that is, temporary works and equipment to be used by subcontractors) site cleaning building control officer attendance, and extensions of time (that is, costs relating to extra time added to the project completion date, like supervision and site accommodation). More generally, they reached a sensible conclusion that where such indirect costs may be attributed or apportioned to the direct cost of a qualifying or nonqualifying asset, they are part of the cost of that asset (and any allocation should be as accurate as is reasonably possible). However, where there is a multiplicity of items, a detailed assessment is a timeconsuming exercise that cannot be more than an exercise of judgement, so is not necessary and a pro rata apportionment is reasonable in principle. The same general approach was held to apply to professional fees. However, HMRC agreed that structural engineers' fees should be proportionally allocated to those items of expenditure that related to the alterations and amendments of the existing building. September

20 The Authors Steven Bone and Martin Wilson, partners in The Capital Allowances Partnership LLP ( are leading specialist capital allowances advisers, writers and speakers. They have many years' practical experience, gained in both the accountancy and surveying professions, of protecting taxpayers by efficiently maximising their capital allowances claims in a low-risk way. They provide support to other tax advisers and advise taxpayers directly, including investors and business occupiers in commercial sectors of all sizes and types, smaller entrepreneurial and family-run firms, wealthy individuals and major companies. Steven Bone Martin Wilson Steven Bone Steven is a Fellow of the Royal Institution of Chartered Surveyors and Member of the Association of Taxation Technicians. He has extensive experience of writing, lecturing, and providing hands-on capital allowances advice to property occupiers and investors, including preparing claims for construction projects and purchases of second-hand property and negotiating on behalf of taxpayers with HMRC and the Valuation Office Agency. (Contact: steven.bone@cap-allow.com or ) Martin Wilson A Chartered Accountant, Martin is recognised as a leading UK capital allowances expert. He is the longstanding author of many of the published capital allowances works referred to by other tax advisers, which reflect the combination of technical expertise and commercial practicality that Martin brings to a project. For many years Martin has advised many leading property occupiers and investors on their capital allowances issues, as well as wealthy individuals; both UK and overseas. (Contact: martin.wilson@capallow.com or ) The Tax Faculty ICAEW Chartered Accountants Hall PO Box 433 Moorgate Place, London EC2P 2BJ Tel: +44 (0) Fax: +44 (0) taxfac@icaew.com Web: TECPLM7651