Care providers: qualifying care relief: capital allowances
S824-S827 Income Tax (Trading and Other Income) Act 2005
Capital allowances are tax allowances. No tax deductions can be made for:
- the cost of buying or improving items such as a car, equipment or other tools that are used in a business,
- the depreciation of such items, or
- any other losses which arise when they are sold.
Instead, tax allowances called capital allowances can be claimed. These are deducted from profits to arrive at taxable profits, or added to losses to arrive at allowable losses.
Capital allowances are not available where the profits from qualifying care are either exempt or calculated using the simplified method, but they can be claimed where the carer is trading and uses the profit method. As the carer can be exempt or use the simplified method in one tax year and then use the profit method in the following year, or vice versa, special rules are required.
For more information on capital allowances generally, see the Helpsheet HS252 `Capital Allowances and Balancing Charges’ or the Capital Allowances Manual.
Change from profit method to exempt or simplified method
When the profits change from being calculated using the profit method to being exempt or calculated using the simplified method, the capital allowances consequences are as follows:
- Any qualifying expenditure incurred by the carer that has not previously been allocated to a capital allowances pool (`unallocated expenditure’) is treated as allocated to the relevant pool(s) at the beginning of the exempt or simplified method period.
- A deemed disposal event occurs immediately after the beginning of that period.
- The disposal receipts to be brought into account equal the sum of the previously unallocated expenditure and the tax written down value of unrelieved qualifying expenditure brought forward from the earlier period.
- Any subsequent capital expenditure on plant or machinery incurred in a period when the carer’s profits are exempt or calculated using the simplified method is excluded from being qualifying expenditure (‘excluded capital expenditure’).
The effect of these rules is that no balancing charges or allowances arise on the deemed disposal event and no unrelieved qualifying expenditure is available in periods when profits are exempt or calculated using the simplified method.
Change from exempt or simplified method to profit method
When the profits change from being exempt or calculated using the simplified method to being calculated using the profit method, the capital allowances consequences are as follows:
- The carer incurs deemed qualifying expenditure at the beginning of the first profit method period on bringing ‘retained plant or machinery’ into use, the amount being the smaller of market value at that date or the disposal proceeds brought into account on the earlier deemed disposal. Retained plant or machinery refers to plant and machinery that was previously subject to a deemed disposal event but is still owned by the carer and being used in the provision of care.
- The carer also incurs deemed qualifying expenditure at the beginning of the first profit method period on bringing into use any plant and machinery upon which excluded capital expenditure was previously incurred where it is still owned and being used in the provision of care, the amount being the smaller of market value at that date or the actual expenditure incurred.
- Any subsequent capital expenditure on qualifying plant and machinery incurred in the period when the carer’s profits are calculated using the profit method is qualifying expenditure.
- If an actual disposal occurs in a profit method period, the disposal value is limited to the actual expenditure originally incurred by the carer, not any deemed figure brought in as a result of the special rules.
The effect of these rules is that the carer is able to claim capital allowances in periods when profits are calculated using the profit method on broadly the same basis as if this method were used continuously throughout.