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HMRC internal manual

Capital Allowances Manual

Plant and Machinery Allowances (PMA): buildings and structures: expenditure on integral features: integral feature replacements - more examples

CAA01/S33A, S33B

In the main, where an asset such as a lift, or a system such as an electrical system, begins and ends, in order to determine whether more than 50% of it has been replaced (when the integral features provisions will apply) is essentially a question of fact.

The integral feature rules seek to define ‘replacement’ in a fairly basic and straightforward way: that is, as expenditure on replacing the whole or the bulk of a particular asset within a 12-month period.

The expectation is that most businesses will know whether they plan to replace the whole or the bulk of (say) an expensive asset, such as a building’s electrical system, when they incur the initial tranche of significant expenditure, and that a rolling programme of minor repairs over an extended period would, in most cases, clearly not fall within the ambit of the ‘over-50%-in-any-12-months’ definition.

Example 1

Company Z leases 3 floors of a multi-storey office block as its business premises. One electrical system, which meters and bills Company Z for the total electricity it uses, services the 3 floors occupied as one entity. Company Z decides to replace the wiring and electrical equipment on the ground floor only. In terms of area covered and any other common sense measure, the cost of replacing the system on one floor roughly equates to one third of the cost of replacing the system on all 3 floors. This expenditure does not exceed 50% of the cost of replacing the whole system and so it does not constitute expenditure on the ‘replacement’ of an integral feature for capital allowances purposes.

Example 2

Jonathan designs, makes and sells jewellery. He incurs expenditure on repairing or replacing parts of the central heating system in his large studio/shop. The expenditure he incurs on the system may be summarised as follows:

### Date ### Repair cost ### 12months cumulative expenditure ### Replacement cost ### % of original replacement ### 50% exceeded?
1 April 08 £10K £10K £60K 16.66% No
1 Sept 08 £20K £30 £65K 50% No
1 Dec 08 £5K £35K (08-09) £65K 58.33% Yes
1 Jul 09 £10K £35K (1/9/08 to 31/8/09 £65K 53.8% (of 1/9/08 cost) Yes
Totals £45K   £65K 75%/or 70% Yes

This example shows that as at 1/9/08 Jonathan had not incurred ‘replacement’ expenditure on his CH system because, at that point, the expenditure did not amount to more than 50% of the replacement cost as at the date when the initial expenditure was incurred. However, because he incurred a further £5,000 on the system within the year (1/4/08 to 31/3/09) this brought his total expenditure to over 50% of the original replacement cost, so that all the expenditure incurred in that year constitutes ‘replacement’ expenditure. However, the total he incurred in the 12-months from 1/9/08 to 31/8/09 also amounted to more than 50% of the replacement cost at 1/9/08, so the expenditure of £10K in July 09 also comprises ‘replacement’ expenditure. Jonathan has, in fact, incurred expenditure on replacing either 70% or 75% of his CH system (depending on the valuation base) so it is likely that he would be aware that the replacement rules would be likely to apply. In many cases too, it is quite likely that a business would decide to ‘go the whole hog’ and replace the whole system, rather than 70-75% of it, but this example illustrates how the rules might apply.

When this happens - that is, when the integral features rules apply because of the fact that expenditure in aggregate over a 12-month period exceeds 50% of replacement cost - then CAA01/S33B(5) lets any assessments or adjustments of assessments be made as are necessary to ensure the tax treatment is correct.