Overview of Capital Allowances and Tax Setup UK for Capital Allowances on the Plant and Machinery

04 Jan

The capital allowances on the plant and machinery are of great importance when it comes to forming a limited UK company. The study of plant and machinery in this blog has been divided into three parts, out of which we will have a broad discussion of what qualifies for allowances as there are many businesses that are not allowed to get any allowances at all. Finally, the computation of allowances will be discussed to provide the reader with a basic know-how of the capital allowances if they buy a limited company from companies house.

General Overview of Capital Allowances

The availability of the capital allowances can be found on plant and machinery under the setup UK. During the computation of the taxable profits of trade, the subtraction of the capital allowances cannot be done. However, the capital allowances may be attracted. The treatment of the capital allowances is done in the form of expense for trade and their deduction is done upon arrival at the trade profits liable to tax. When the balancing charges or effectively negative allowances arrive at those profits, their addition is done.

The capital expense on plant and machinery makes the qualification for capital allowances. Both the companies and the unincorporated businesses have the entitlement of capital allowances. The rules for both the companies and businesses after they register a business name UK will be discussed in the blog alongside.

In the case of the unincorporated businesses, the computation of the capital allowances is done for the accounting periods. In simple terms, these are the periods for which the trader makes the choice of making up accounts. For the companies, the computation of the capital allowances is done for the accounting periods.

Generally, for the purposes of capital allowances, the expense is deemed to be suffered when the compulsion to make the payment does not remain conditional anymore. Usually, this will be a contract date, but for example, if the payment is due a month after delivering the machine, then it would be considered as the date of delivery. However, the amounts that are due for a duration of above four months once the obligation is rendered unconditional, are deemed to be suffered whenever they fall due.

Qualifying Expense of Plant and Machinery

If the usage of the plant and machinery is limited to a qualifying activity (i.e. trade), then the capital expense on plant and machinery makes the qualification for capital allowances. The definition of 'plant' is not given by the legislation, despite the fact that some particular inclusions and exclusions are provided. The word 'machinery' may contain its normal routine meaning.

The Statutory Exclusions

In general, the statutory rules do not include particular items from treatment as plant, instead of including particular items as plant.

Expense on Buildings

The expense on a building or an asset does not make the qualification as a plant, when the incorporation of the asset is done in a building or the asset is of a kind whose incorporation is normally done into buildings. However, there are some exceptions to this. As an addition to complete buildings, the following assets are considered as 'buildings' and are hence not termed as plant:

  • Mains services, and systems of water, gas and electricity.
  • Shafts or other lifts' structures etc.
  • Ceilings, walls, doors, floors, Windows, gates, shutters and stairs.
  • Waste disposal, and systems of sewerage and drainage.
  • Expense on Structures (a Structure is defined as the fixed structure of any type, other than a building).

The qualification is not made as a plant in the case of expense on Structures and on works that include the alteration of land. However, some exceptions exist.

Over a period of time, the formation of a large body of case law has been done leading to the provision of allowances for plant and machinery on some particular types of expense that might be considered as an expense on building or structure. Hence, the statute provides a list of numerous assets that may still be considered as plant. These include:

  • Any machinery that has not been mentioned in the list.
  • Systems of electricity (lighting inclusive), gas, cold water and sewerage whose provision is done mainly to fulfill some specific trade requirements or mainly to serve specific plant or machinery used for the trade purposes.
  • Powered systems of ventilation, space or water heating systems.
  • Equipment for manufacturing and display.
  • Lifts etc.
  • Washing machines, cookers, cooling equipment or refrigeration, sanitary ware and furnishings and furniture.
  • Sound insulation whose provision is done mainly to fulfill some specific trade requirements.
  • Computer, surveillance and telecommunication systems.
  • Strong rooms in banks or the premises of building society, safes.
  • Assets for decoration whose provision is done for the public enjoyment in hotels, restaurants or similar trades, hoardings for advertising.
  • Swimming pools (driving boards, slides inclusive) and rides' structures at amusement parks.
  • Movable buildings that are supposed to be moved for trade purposes.
  • Dry docks and jetties.
  • Silos whose provision is done for temporary storage and tanks of storage, silage clamps and slurry pits.
  • A tramway or railway.
  • Sprinkler equipment, systems of fire alarm and burglar alarm.
  • Walls for the purpose of partition that can be moved.
  • Glass houses that contain devices that control the growth of plants and its environment in an automated way and these devices are an important part of their structure.
  • Caravans whose provision is done mainly for holiday lettings.
  • Expense for the alteration of land in order to install plant or machinery.
  • Pipelines, underground tunnels or ducts having a primary aim of carrying utility conduits
  • Fish tanks, fish ponds and fixed cages in zoo.

The items that fall in the mentioned exclusions list will only make qualification as plant if they fulfill the definition of plant as established by the case law. This is described later in the text.

Land or Interest in Land

The land or an interest in land does not make a qualification for plant and machinery. For this purpose, the buildings, assets and structure are excluded from the definition of land. The assets here are installed or fixed to land in a manner that it becomes part of the land for purposes generally legal in nature.

Statutory Inclusions

Some particular expenditure is particularly deemed to be expense on machinery and plant. The items mentioned below are deemed to be on machinery and plant:

  • The expense that has been incurred by a trader for compliance with regulations of fire for a building that they occupy.
  • The expense incurred by a trader for meeting statutory requirements of safety for sports ground.
  • The expenditure by a trader on thermal insulation of a building being used for the purposes of trade.
  • The expense by a partnership or individual and not by a company, on the assets of security whose provision has been done to meet a particular threat to the security of an individual that occurs entirely or mainly because of the specific trade under consideration. The dwellings, cars, aircraft and ships are particularly excluded from the definition of an asset used for security.

Whenever a disposal takes place, the sale proceeds for the mentioned items are deemed to be zero, so no balancing charge can occur.

Expense on Computer Software

The capital expense on computer software (including programs and data) makes a qualification as the expense on plant and machinery irrespective of the fact that if the supplication of software is done is done in a tangible form (for example disk) or its transmission has been done through electronic means and also irrespective of the fact that if the acquisition of the software is done by the purchaser or if he only contains the license to use the software.

The proceeds of the disposal are brought under consideration in a usual manner, except that if the taxation of the grant fee of license is done as income of the licensor, no disposal proceeds are considered for the computation of capital allowances of the licensee.

In the case where a person has incurred expense making a qualification for capital allowances on computer software (or the authority to use the software), and acquires a capital sum in exchange for permitting some other person to make use of the software, then that sum is considered as the proceeds of a disposal. However, the cumulative total of the proceeds of a disposal is not permitted to be more than the original price of the software, and any proceeds exceeding this limit are not considered for the purposes of capital allowances (although they may result in chargeable gains).

If it is expected that the software will have a useful economic life of not more than 2 years, the treatment of its cost may be done in the form of revenue expense. After forming a limited UK company, there may be a case in which the rules for the intangible fixed assets override the rules for computer software, but unless the company makes an election otherwise.

Case Law for the Definition of Plant

There exist various cases on the definition of plant. The original definition of plant as described by case law (applicable in the case to a horse) says that “whatever apparatus a businessman uses for carrying on his business once he register a business name UK: not his stock in trade that he purchases or makes for sale; but all the goods and chattels, live or dead, fixed or mobile, that he keeps in the business for permanent employment (Yarmouth Case 1887).

The original definition has been refined by subsequent cases and have been concerned largely with the difference between plant being actively used in the qualifying business and the setting in which the non-qualifying business is carried on. This is referred to as the functional test. The enacting of some of the decisions has been done now as a part of the statute law, but they still remain relevant as examples of the involved principles.

The entire cost for the installation and evacuation of a swimming pool was allowed to the owners of a caravan park. The CIR Case 1969 was followed: the function of giving buoyancy and enjoyment was performed by the pool to the persons making use of the pool (Cooke case 1974) (the covering of actual item now done by statute).

A barrister became successful in making his claim for his law library: ‘Plant involves the tools of a man to carry out his trade. It is extended to what is used by him day by day in the course of his profession. It is not limited to the physical things like the chair of a dentist or the table of an architect. (Munby case 1977).

The partition of the office was permitted. Since it was mobile, its consideration was not done as part of the setting in which the business was carried on (Jarrold case 1963) (the covering of actual item now done by statute).

The consideration of a ship being used as a floating restaurant was done as a ‘structure in which the business was carried on instead of the employed apparatus’ (Buckley case). The acquisition of any capital allowances could not be done (Benson case 1978). The same decision was made with respect to the stand of the spectator of a football club. No action was performed by the stand in the actual carrying out of the trade of the club (Brown case 1980).

At a service station located on motorway, false ceilings contained ducts, conduits and apparatus of lighting. Their qualification was not done as no function was performed by them in the business. They were solely a part of the setting in which the conduction of business was done (Hampton case 1979).

The light fittings, murals and décor can be considered as plant. A company carried on business in the form of hoteliers and operators of the premises with license. The items’ function was to create an atmosphere conductive to the well-being and comfort of its customers (CIR Case 1982) (assets for decoration used in hotels etc. whose covering is now done by statute).

On the contrary, it has been stated that when the provision of an attractive floor is done in a restaurant, the fact that the function of making the restaurant attractive to customers, performed by the floor, is not sufficient to give its reference as plant. It performs its function as premises, and hence, the price does not make qualification for the capital allowances (Wimpy case 1988).

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