Chapter 2: Exclusion of double relief

Overview

61.     This Chapter contains provisions designed to prevent allowances being claimed twice in respect of the same expenditure under different Parts.

62.     The Chapter also provides a special rule applying to claims for allowances in respect of fixtures. The general effect of the rules in this Chapter is that different people can claim allowances under different Parts in respect of an asset - for example successive owners. But this does not apply for fixtures. In such cases, one person's claim binds a subsequent claimant.

Section 7: No double allowances

63.     This section is based on part of section 147(1) and (2) of CAA 1990. It prevents allowances from being claimed under one Part if an allowance has been made under another Part in respect of the same capital expenditure.

64.     Subsection (1)(b) extends this and prevents allowances from being claimed under different Parts in respect of expenditure on the same asset.

65.     Before this Act, patents and know-how allowances were dealt with in ICTA rather than CAA 1990. As a result, they are not covered by section 147 of CAA 1990. Subsection (2) replicates this exclusion by excluding Parts 7 and 8 from the rule in this section. In practice, however, this is likely to be of little effect since it is extremely unlikely (even if possible) that expenditure qualifying for allowances under either of these Parts would also qualify for allowances under any other Part. See Note 6 in Annex 2.

Section 8: No double relief through pooling under Part 2 (plant and machinery allowances)

66.     This section is also based on part of section 147(1) and (2) of CAA 1990. It caters for the fact that, if expenditure on plant or machinery has been allocated to a pool, it is not possible to state that an allowance has been made in respect of the expenditure itself even though an allowance may have been made in respect of the pool.

67.     Chapter 5 of Part 2 sets out how expenditure on plant and machinery is pooled to arrive at allowances and charges. See also the commentary on Part 2, paragraphs 93 and 94 below.

68.     Subsections (1) and (2) extend section 7 to deal with cases in which, under Part 2, capital expenditure has been allocated to a pool and an allowance or charge has been made in respect of that pool. In such cases, allowances are not available under any other Part (other than Parts 7 and 8) in respect of that expenditure (or on the provision of a related asset).

69.     Subsections (3) and (4) extend section 7 to deal with cases in which an allowance has been made in respect of capital expenditure under a Part other than Part 2. In such cases, that expenditure (or any expenditure on the provision of a related asset) may not also be allocated to a pool under Part 2.

70.     Subsection (5) makes it clear that this section does not apply to Part 7 or 8. Again, see Note 6 in Annex 2.

71.     CAA 1990 refers to taking "expenditure into account" for the purposes of the plant and machinery rules. This section is more direct in its approach and refers to expenditure being allocated to a pool and allowances or charges being made. However, there is no change effected by use of these different words.

Section 9: Interaction between fixtures claims and other claims

72.     This section is based on section 147(2A), (2B) and (2C) and part of section 147(2D) of CAA 1990. It prevents a person from making a claim under one Part in respect of a fixture if a claim for an allowance has been made under another Part in respect of the same fixture. This applies even if the two claims are made by different persons or in respect of different expenditure.

73.     Subsection (1) provides the rule that prevents a fixtures claim being made if a claim has been made under a Part other than Part 2.

74.     Subsection (2) relaxes this rule if the earlier claim is made under Part 3 or 6 and section 186 or 187 applies.

75.     Subsection (3) provides the mirror image of the rule in subsection (1). If, in respect of an asset, a fixture claim has been made then no person may claim an allowance under any other Part in respect of capital expenditure relating to that asset.

76.     Subsection (4) explains what is meant by "a fixtures claim".

Section 10: Interpretation

77.     This section is based on part of section 147(4) of CAA 1990. It provides the interpretation of terms used in the Chapter.

Part 2: Plant and machinery allowances

Overview

78.     This Part provides for plant and machinery allowances. These can be first-year allowances, writing-down allowances or balancing allowances. It also provides for balancing charges.

79.     Chapters 1 to 3 set out provisions which decide if a person is in a position to claim allowances. Chapter 1 gives first the general rule that a person must have a qualifying activity and qualifying expenditure. It also gives the general rule as to what is qualifying expenditure and some common additional ways a person may be treated as having incurred it. Chapter 2 defines qualifying activities. Chapter 3 makes more detailed provisions as to what is and is not qualifying expenditure.

80.     Chapter 4 identifies expenditure which gives entitlement to first-year allowances. This is called first-year qualifying expenditure.

81.     Chapter 5 deals with entitlement to first-year allowances, writing-down allowances and balancing allowances; and with liability to balancing charges. Before writing-down allowances can be claimed, qualifying expenditure must be allocated to a pool. Entitlement to allowances or liability to charges then depends on the total amount in the pool. There are separate pools for each qualifying activity. Within each qualifying activity there may be a main pool; class pools for long-life assets and for assets leased outside the UK; and a number of single asset pools. Figure 1 summarises the various pools.

82.     Chapters 6 to 16 make additional provisions for particular types of expenditure and for particular circumstances in which plant or machinery is used or subsidised. They modify the requirements of the earlier Chapters. Chapters 8 to 16 require expenditure to be allocated to class pools or single asset pools rather than the main pool for a qualifying activity.

83.     Chapter 17 restricts entitlement to plant and machinery allowances in various circumstances.

84.     Chapter 18 deals with additional VAT rebates or liabilities under the VAT capital goods scheme. This scheme applies to certain expenditure on land and computers.

85.     Chapter 19 sets out how plant and machinery allowances are given effect.

86.     Chapter 20 contains supplementary provisions.

History

87.     Annual allowances for plant and machinery used in a trade were introduced in 1878. In 1907 a rule was added to prevent the total relief given in respect of an asset from exceeding its cost.

88.     In 1945 the first allowances at rates in excess of normal depreciation were introduced to encourage investment.

89.     Since 1971, the legislation has referred to accelerated allowances for the period in which expenditure is incurred as "first-year allowances".

90.     FA 1984 phased out first-year allowances as part of a wide-ranging reform of business taxation. First-year allowances at 40% were re-introduced for one year in 1992-93. In 1997 they were re-introduced for one year at 50% for spending by small and medium-sized businesses only. This was extended, at 40%, for 1998-99 and 1999-2000. In FA 2000 the allowances were made indefinite.

91.     First-year allowances have also been introduced, on a temporary basis, for expenditure by small and medium-sized enterprises on plant and machinery for use in Northern Ireland and by small enterprises on information and communication technology equipment.

92.     Balancing allowances and balancing charges were also introduced in 1945 to bring the total allowances given on an asset into line with the total depreciation over the period the plant or machinery is owned. This is a principle running through Part II of CAA 1990 - and hence this Part.

93.     The calculation of writing-down allowances and balancing adjustments for plant and machinery changed fundamentally in 1971 with the introduction of a statutory scheme of pooling. Expenditure on plant or machinery (less any first-year allowances made) is pooled. Writing-down allowances are then given at a single annual rate on the total of this "qualifying expenditure" in the pool. Pooling simplifies calculations and records. It also removes the need for lots of small balancing adjustments when individual items of plant or machinery are sold, scrapped or otherwise disposed of.

94.     In 1971 all expenditure was allocated to the main pool apart from expenditure on cars above the cost threshold, plant or machinery provided or used partly for a trade and partly for other purposes and plant or machinery subject to a wear and tear subsidy. These exceptions kept separate expenditure on a single item of plant or machinery. More such "single asset pools" were added in later years. So too were "class pools" for all expenditure of a given type. The pools added were:

class pool for leased assets and cars below the cost threshold in FA 1980 (abolished by FA 2000);

class pool for overseas leasing in FA 1982 (which also modified the class pool introduced in 1980);

single asset pools for ships in FA 1985;

single asset pools for short-life assets in FA 1985; and

class pool for long-life assets in FA 1997.

95.     Originally allowances were given only for plant and machinery used in trades. In 1945 the legislation provided also for professions, vocations, employments and offices to be treated like trades with some modifications; and in some circumstances for plant and machinery allowances for lessors. Over the years allowances were extended to other businesses by treating them like trades too - again subject to modifications and conditions.

96.     What counts as plant and machinery has also evolved over the years - partly because of judicial decisions and partly by legislation.

Structure of Part 2

97.     One way in which CAA 1990 copes with the extensions to the scope of plant and machinery allowances is by treating activities such as professions, vocations and property businesses as if they were trades.

98.     Separate pools for expenditure are achieved in CAA 1990 by a similar device. Expenditure incurred for the purposes of a trade (or an activity treated as a trade) is treated as incurred for a separate notional trade.

99.     This works. But it means that what appear to be simple references to a trade may mean something more. For example Part II of CAA 1990 starts with the simple statement in section 22:

(1) Subject to the provisions of this Part, where—
(a)     a person carrying on a trade incurs capital expenditure to which this section applies on the provision of machinery or plant wholly and exclusively for the purposes of the trade, and

(b)     in consequence of his incurring the expenditure, the machinery or plant belongs to him at some time during the chargeable period related to the incurring of the expenditure,

there shall be made to him for that period an allowance ("a first-year allowance") ..

100.     This might lead readers not carrying on a trade to conclude they are not entitled to first-year allowances. But later sections in CAA 1990 mean that the "trade" in paragraph (a) does not have to be a trade. It may be another activity treated as a trade.

101.     Similarly readers might take section 24 of CAA 1990 to mean they are not entitled to writing-down allowances if they are not carrying on a trade:

(1) Subject to the provisions of this Part, where—
(a)     a person carrying on a trade has incurred capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of the trade, and

(b)     in consequence of his incurring that expenditure, the machinery or plant belongs or has belonged to him,

allowances and charges shall be made to and on him in accordance with the following provisions of this section.

102.     In fact the "trade" can again be another activity treated as a trade. It may also be a notional trade set up so as to create a separate pool of expenditure. In addition, expenditure which is not on plant or machinery may be treated as if it were under later provisions; or people may be treated as incurring expenditure on plant or machinery they have as a result of a gift.

103.     A different approach is taken to these points in this Act. It:

deals explicitly with the various activities which CAA 1990 treats as or deems to be trades. The term "qualifying activity" is used to refer to these. See section 15.

deals explicitly with "pools" in place of notional trades (or notional qualifying activities as they would have become); and

makes clear to readers coming to Part 2 (possibly for the first time) what is required for entitlement to allowances.

104.     The structure of Part 2 of this Act is accordingly different from Part II of CAA 1990. There are three main blocks of sections:

Chapters 1 to 3 deal with qualifying activities and qualifying expenditure. A person who has a qualifying activity and qualifying expenditure is normally entitled to allowances of some kind;

Chapters 4 to 18 deal with the entitlement to allowances (or liability to charges). The order of this material is a balance between several criteria: for example how often the legislation applies in practice; the benefits of putting similar provisions together; introducing concepts in a logical order; and readers' expectations. There is no one right answer as a different mix of provisions is relevant to different taxpayers, and to different transactions by one taxpayer; and

Chapter 19 then sets out how allowances are given effect.

105.     Another difference in approach in this Act from CAA 1990 is in the use of the term "qualifying expenditure".

106.     Part II of CAA 1990 uses this term to mean the sum of expenditure added to a pool for a chargeable period plus the balance (if any) of expenditure added in earlier chargeable periods. The expenditure added to a pool may be the same amount as the capital expenditure incurred on plant or machinery. But it may also be less. A simple example is if a first-year allowance is claimed. Then the amount which counts as qualifying expenditure in CAA 1990 is the balance left after the first-year allowances.

107.     There is no term in CAA 1990 for the amount of expenditure on which someone can get allowances of one kind or another - first-year allowances and/or writing-down allowances. It is not the capital expenditure incurred as not all capital expenditure qualifies. So Part II of CAA 1990 has repeatedly to refer to expenditure by its characteristics. An example is section 37(1) of CAA 1990.

(1) This section applies where—
(a)     a person carrying on a trade ("the trader") incurs capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of the trade;

108.     In this Act qualifying expenditure means expenditure on which a person may get first-year allowances or writing-down allowances (or both). This is broadly in line with other Parts of this Act which also use the term qualifying expenditure (although what is and is not qualifying expenditure differs from Part to Part). Using the term qualifying expenditure in this way allows simpler references. An example is in section 83.

Plant or machinery in respect of which qualifying expenditure has been incurred is a short-life asset if—

109.     Other terms then follow from this use of qualifying expenditure. The table below is a simplified summary.

in this Act	in CAA 1990
qualifying expenditure (see section 11)	no equivalent term: broadly capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of a trade which belongs to the person incurring it (see section 25(1)(a))
available qualifying expenditure (see section 57)	qualifying expenditure
unrelieved qualifying expenditure (see section 59)	no equivalent term: section 25(1)(b) provides that qualifying expenditure includes "if for the chargeable period immediately preceding the chargeable period in question there was an excess of qualifying expenditure over disposal value, the balance of that excess after deducting any writing-down allowance made by reference thereto".

Chapter 1: Introduction

Overview

110.     This Chapter introduces Part 2 by giving the general conditions for plant and machinery allowances and dealing with some common additional cases.

111.     Section 11 identifies the general requirement for plant and machinery allowances: a person must carry on a qualifying activity for which they incur qualifying expenditure. If a person carries on more than one qualifying activity each is looked at separately to decide entitlement to allowances. These general rules are subject to other provisions which amend or replace them in various circumstances.

112.     Sections 12 to 14 provide for plant and machinery allowances if a person does not meet the general conditions because:

expenditure was incurred before the start of the qualifying activity in question;

expenditure was incurred for another purpose before the plant or machinery starts to be used for the qualifying activity; or

plant or machinery used for a qualifying activity was a gift.

Section 11: General conditions as to availability of plant and machinery allowances

113.     This section is based in part on sections 22(1)(a) and 24(1)(a) and (b) of CAA 1990. It gives the general conditions for plant and machinery allowances. It uses the terms "qualifying activity" and "qualifying expenditure" which are central to entitlement to allowances under this Part.

114.     Subsection (1) sets out the preliminary requirement for the whole of Part 2. Allowances are available if a person carries on a qualifying activity and incurs qualifying expenditure.

115.     Subsection (2) is a signpost to Chapter 2 of Part 2 which gives the meaning of "qualifying activity".

116.     Subsection (3) sets up separate calculations for each qualifying activity.

117.     Subsection (4) gives the general rule for qualifying expenditure. Subsection (4)(a) uses "wholly or partly" for the purposes of the qualifying activity instead of "wholly and exclusively" used by sections 22(1)(a) and 24(1)(b) of CAA 1990. The use of that term at the start of Part II is potentially misleading. Readers may conclude they are not entitled to plant and machinery allowances if they use an asset partly for other purposes. Yet section 79 of CAA 1990 makes explicit provision for allowances for plant or machinery provided or used partly for a qualifying activity and partly for other purposes. This subsection flags this at the start.

118.     Subsection (4)(b) uses "owns". CAA 1990 refers to plant or machinery which "belongs" to a person in sections 22(1)(b) and 24(1)(b) (and elsewhere). This is a change in the language only. See Note 7 in Annex 2.

119.     Subsection (5) is a signpost to Chapter 3 of Part 2 which contains detailed provisions about plant and machinery and qualifying expenditure.

Section 12: Expenditure incurred before qualifying activity carried on

120.     This section is based on section 83(2) of CAA 1990. It provides for expenditure incurred before the qualifying activity is carried on to be treated as incurred when the activity is started. Without this the expenditure could not be qualifying expenditure. It complements the trading income rule in section 401 of ICTA.

Section 13: Use for qualifying activity of plant or machinery provided for other purposes

121.     This section is based on section 81(1) to (2AB) of CAA 1990. It provides for a person to be treated as having incurred qualifying expenditure if they start to use in a qualifying activity plant or machinery they provided for some other purpose. Without this section such plant or machinery would give no entitlement to allowances.

122.     Section 81 of CAA 1990 also deals with gifts. In this Act they are dealt with in section 14. Dividing the material in this way brings out for readers the distinct ways they may be entitled to allowances.

Section 14: Use for qualifying activity of plant or machinery which is a gift

123.     This section is based on section 81 of CAA 1990. It contains rules for plant or machinery that was gifted to the person carrying on the qualifying activity.

124.     The section is similar to section 13. The plant or machinery received as a gift comes in at market value.

125.     There is no equivalent of the anti-avoidance rules in section 13(4) and (5).

126.     The anti-avoidance rule in section 81(3) of CAA 1990 has been moved to Chapter 17 of Part 2 - see section 213(3).

Chapter 2: Qualifying activities

Overview

127.     This Chapter determines whether or not a person is carrying on a qualifying activity. This is a necessary condition of entitlement to plant and machinery allowances (see Chapter 1 of Part 2).

128.     Section 15 lists the qualifying activities. It also points to provisions in Chapters 3 and 8 of Part 2 which affect particular qualifying activities.

129.     The rest of this Chapter contains definitions of, and further provisions about, particular qualifying activities.

Section 15: Qualifying activities

130.     This section is based on various sections of CAA 1990 which deem the activities listed to be trades. It also makes a minor change.

131.     Subsection (1)(f) makes concerns listed in section 55 of ICTA a type of qualifying activity. The profits of these concerns are charged to tax under Case I of Schedule D by section 55(1) of ICTA but are not trades. As they are taxed under Schedule D they cannot be Schedule A businesses. That means Part II of CAA 1990 does not cater for them. This Act does so by making them qualifying activities. See Change 1 in Annex 1.

132.     Subsection (1)(g) provides for the management of an investment company to be a qualifying activity. It derives from section 28(1) of CAA 1990 which refers to "the management of the business of an investment company". This is new wording but is not a change. See Note 8 in Annex 2.

133.     The final words provide that an activity is only a qualifying activity to the extent that the profits or gains from it are chargeable to tax. They are based on section 83(2A) of CAA 1990. Exceptions to this rule can be found in Chapters 16, 17 and 20 of Part 2.

Section 16: Ordinary Schedule A businesses

134.     This section defines "ordinary Schedule A business" for the purposes of this Part. This term is not used in CAA 1990. It is used in this Act to distinguish Schedule A businesses which are not furnished holiday lettings businesses from those which are.

Section 17: Furnished holiday lettings businesses

135.     This section is based on section 29 of CAA 1990. It defines furnished holiday lettings businesses.

136.     Subsection (3) applies the definition in section 504 of ICTA. This approach is taken here (and in some other places in the Act) in order to:

make clear that precisely the same definition is used; and

avoid duplication of legislation (with the risk that the definitions may diverge if one is amended but not the other by accident rather than design).

137.     The vast majority of readers have access to that legislation. Increasingly they have electronic access (with hyperlinks to such cross-references). But for ease of reference in these notes:

Section 504 of ICTA (Supplementary provisions)

(2) A letting—

(a)     is a commercial letting if it is let on a commercial basis and with a view to the realisation of profits; and

(b)     is of furnished accommodation if the tenant is entitled to the use of furniture.

(3) Accommodation shall not be treated as holiday accommodation for the purposes of this section unless—

(a)     it is available for commercial letting to the public generally as holiday accommodation for periods which amount, in the aggregate, to not less than 140 days;

(b)     the periods for which it is so let amount in the aggregate to at least 70 days; and

(c)     for a period comprising at least seven months (which need not be continuous but includes any months in which it is let as mentioned in paragraph (b) above) it is not normally in the same occupation for a continuous period exceeding 31 days.

(4) Any question whether accommodation let by any person other than a company is, at any time in a year of assessment, holiday accommodation shall be determined—

(a)     if the accommodation was not let by him as furnished accommodation in the preceding year of assessment but is so let in the following year of assessment, by reference to the 12 months beginning with the date on which he first so let it in the year of assessment;

(b)     if the accommodation was let by him as furnished accommodation in the preceding year of assessment but is not so let in the following year of assessment, by reference to the 12 months ending with the date on which he ceased so to let it in the year of assessment; and

(c)     in any other case, by reference to the year of assessment.

(5) Any question whether accommodation let by a company is at any time in an accounting period holiday accommodation shall be determined—

(a)     if the accommodation was not let by it as furnished accommodation in the period of 12 months immediately preceding the accounting period but is so let in the period of 12 months immediately following the accounting period, by reference to the 12 months beginning with the date in the accounting period on which it first so let it;

(b)     if the accommodation was let by it as furnished accommodation in the period of 12 months immediately preceding the accounting period but is not so let by it in the period of 12 months immediately following the accounting period, by reference to the 12 months ending with the date in the accounting period on which it ceased so to let it;

(c)     in any other case, by reference to the period of 12 months ending with the last day of the accounting period.

(6) Where, in any year of assessment or accounting period, a person lets furnished accommodation which is treated as holiday accommodation for the purposes of this section in that year or period ("the qualifying accommodation"), he may make a claim under this subsection, within the time specified in subsection (6A) below, for averaging treatment to apply for that year or period to that and any other accommodation specified in the claim which was let by him as furnished accommodation during that year or period and would fall to be treated as holiday accommodation in that year or period if subsection (3)(b) above were satisfied in relation to it.

(6A) The time mentioned in subsection (6) above is—

(a)     in the case of a claim for the purposes of income tax, the period ending with the first anniversary of the 31st January next following the year of assessment in which the accommodation was let;

(b)     in the case of a claim for the purposes of corporation tax, the period of two years beginning at the end of the accounting period in which the accommodation was let.

(7) Where a claim is made under subsection (6) above in respect of any year of assessment or accounting period, any such other accommodation shall be treated as being holiday accommodation in that year or period if the number of days for which the qualifying accommodation and any other such accommodation was let by the claimant as mentioned in subsection (3)(a) above during the year or period amounts on average to at least 70.

(8) Qualifying accommodation may not be specified in more than one claim in respect of any one year of assessment or accounting period.

(9) For the purposes of this section a person lets accommodation if he permits another person to occupy it, whether or not in pursuance of a lease; and "letting" and "tenant" shall be construed accordingly.

138.     Subsection (4) provides for all necessary apportionments under this Part if only part of accommodation is holiday accommodation.