Policy paper

Statement of Practice 1 (1986)

Published 15 January 1986

Capital Allowances Act 1990 sections 37, 38

1. Several representative bodies have raised with HM Revenue and Customs (HMRC) some practical questions arising out of the new rules for capital allowances on certain short-life machinery and plant which came into effect on 1 April 1986. The new rules enable allowances on machinery and plant for which an election is made to be dealt with outside the main capital allowance pool.

2. In discussions between these bodies and HMRC several areas were identified where businesses and their accountants might find guidance helpful. This note sets out, in broad terms, how they can be dealt with in ways which will be acceptable to local inspectors. In general, inspectors will want to be satisfied that the accounting and other records are adequate to support short-life asset elections and computations and that the new legislation is not being abused.

3. These guidelines are not, however, a substitute for the statutory rules. Their aim is to complement the legislation so that the new arrangements are introduced and continue to operate as efficiently as possible for businesses themselves, their professional advisers and HMRC. The intention is to review the guidelines when the arrangements have settled in and, if necessary, revise them in the light of experience.

Election for short-life asset treatment

4. The rules for making elections are set out in Capital Allowances Act (CAA) 1990 section 37(2). They enable all the machinery and plant acquired in a chargeable period (or its basis period) for which short-life asset treatment is wanted, to be included in an election signed by the taxpayer for that period.

5. In general, inspectors will want to be sure that elections and any supporting material, such as a schedule attached to the election or cross references to schedules or analyses supplied with the accounts, provide sufficient information to minimise the possibility of any difference of view at a later date (for example, on a disposal) about what was and what was not covered by an election for any chargeable period etc and that the assets are not in one of the classes excluded by CAA 1990 section 38.

6. In particular, however, where separate identification of the short-life assets acquired in a chargeable period etc is either impossible or possible but impracticable (for example, similar small or relatively inexpensive assets held in very large numbers perhaps in several locations) then the information on the election about the assets, required by CAA 1990 section 37(2)(b), may be provided by reference to batches of acquisitions. Where large numbers of similar short-life assets are acquired throughout a chargeable period etc it will be acceptable if the costs of those assets for the period are aggregated and shown on the election in 1 sum.

Capital allowance computations

7. HMRC accept that it may not be practicable for individual capital allowance computations to be maintained for each and every short-life asset especially where the assets are held in very large numbers.

8. Where, therefore, the inspector is satisfied that the actual life in the business of a distinct class of assets with broadly similar average lives before they are sold or scrapped is likely to be less than 5 years (that is, the year of acquisition plus the 4 following years) computations in the form set out in example 1 will be acceptable. On this basis a balancing allowance will normally become available for the last year of the agreed life of the assets.

9. Where disposal proceeds can be attributed to assets acquired in a particular year they should be brought into the appropriate column(s) of the computation relating to those assets for the year(s) in which the proceeds are received. If attribution in this way is not possible, disposal proceeds may be credited on a first in, first out basis - that is all receipts from disposals in any chargeable period etc are to be regarded as related to the earliest period for which a short-life asset pool on the lines of these arrangements is in existence.

10. This form of computation is intended primarily for short-life assets costing similar amounts which cannot be identified individually. It is possible however that similar arrangements may be helpful where short-life assets which have a separate identity are acquired in large numbers such that the business does not in fact keep track of them individually and it would not be reasonable to expect it to do so. Where this is the case, computations based on the above principles and along the lines of example 2 will normally be acceptable to inspectors.

11. Given the wide variety of potential short-life assets and the widely varying size and circumstances of individual businesses, other forms of computation may also be acceptable.

Submission of election and computations to inspectors

12. It is suggested that either on the first occasion an election is made or any abridged or simplified computations are submitted to inspectors for the first time, an explanation of the way in which the computations will be or have been put together is provided together with a description of the underlying records on which they are based. Inspectors will want to be satisfied that, together, the elections and the computations provide the correct statutory result and that if, for any reason, questions are asked about individual items (for example, on a disposal several years after acquisition), sufficient information will be available to the business or to its accountants to enable complete and satisfactory answers to be given.

Note: this statement is as it appears in HMRC’s Statements of Practice (March 2009).