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HMRC internal manual

Capital Allowances Manual

HM Revenue & Customs
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PMA: Qualifying expenditure: Annual Investment Allowance (AIA) qualifying expenditure: restrictions on entitlement - general

CAA01/S38A and S38B, S51A to S51N

Restrictions on AIA entitlement

A person’s entitlement to an AIA for each of his or her qualifying activities may be restricted where he or she:

  • controls a company which carries on more than one qualifying activity, or a group or groups of companies, or ‘related’ singleton companies CA23088
  • controls ‘related’ unincorporated businesses CA23089
  • incurs expenditure on plant or machinery provided or used partly for other purposes (see example 1 below)
  • receives or is likely to receive a partial depreciation subsidy in respect of the expenditure (see example 2 below)
  • enters into a transaction with a ‘connected’ person or enters into an arrangement to obtain an AIA to which he would not otherwise be entitled (see under ‘Anti-avoidance’ below).

Use of asset partly for other purposes

Example 1

Fred runs an unincorporated business of leasing caravans and mobile homes to holidaymakers. His accounting period runs from 6 April to 5 April each year. In 2010-11he buys a new caravan for £150,000, which he hires out for 90% of the year, but uses privately for his own and his family’s holidays for 10% of the year. Fred has not bought any other plant and machinery in 2010/11 and claims AIA in respect of his new caravan. His AIA must be reduced to an amount that is ‘just and reasonable’ to reflect the private use, so Fred claims a reduced AIA of 90% x £100,000 = £90,000 (CAA01/S205). In 2011 - 2012 Fred buys a cottage in Devon as a holiday home and so stops using the caravan privately. He now uses the caravan wholly for the purposes of his business.

Year 2010-11 Expenditure less total allowances £ Allowances claimed (due to Business use (90%)) £ Allowance disallowed (due to Private use (10%)) £
Expenditure on caravan 150,000    
Less AIA for 2010-11 (100,000) 90,000 10,000
Balance (in single asset pool) 50,000    
Less WDA at 20%      
Amount claimed (10,000)
99,000 1,000
  Balance in single asset pool
  Year 2011-12   (Business use100%) ( Private use Nil)
  Balance of unrelieved      
Expenditure b/fwd 40,000
  Less WDA at 20%  
Amount claimed (8,000)
8,000 Nil      
  Balance to c/fwd at end 2011-12 32,000    
Year 2012-13  
Balance b/fwd 32,000
Less WDA at 18% (5,760)
Amount claimed 5,760
Balance to c/fwd 26,240

Partial depreciation subsidy

A person who has a qualifying activity may receive a payment to cover depreciation of an asset used in that qualifying activity, which may reduce his or her entitlement to an AIA.

Example 2

Ginger is an employee who works from home. She purchases a computer, printer and fax machine for £3,000 to use wholly for the purposes of her work. Her employer decides to pay her a partial depreciation subsidy of £1,000 to cover part of the depreciation of these assets. Ginger claims an AIA on her expenditure, but this must be reduced to a ‘just and reasonable’ amount to reflect the partial depreciation subsidy.  So her claim is for an AIA of £3,000 - £1,000 = £2,000 (CAA01/S209-212) CA27500

Anti-avoidance rules - no AIA

There are anti-avoidance rules in Chapter 16 Part 2 CAA01 CA28800. The rules designed specifically to deny an AIA in certain circumstances are as follows;

  • Connected persons transactions: if a person incurs expenditure in a transaction with a connected person CA28800, no AIA is due (CAA01/S214 & S217). There is an example of a connected person transaction (where brothers attempted to exploit the legislation to obtain more allowances than was intended) at CA28100. This anti-avoidance rule prevents such exploitation and denies an AIA in all cases where the parties to the relevant transaction CA28200 are connected.
  • Transactions to obtain allowances: (see CA28300) - either where the ‘sole or main benefit’ of the transaction appears to have been the obtaining of an AIA (CAA01/S215 & 217) or where ‘one of the main purposes’ of the arrangement was to obtain an AIA to which the person would not otherwise be entitled (CAA01/S218A). The latter, somewhat less stringent, test was introduced in FA08, specifically to protect the valuable AIA from attempts at exploitation.
  • Sale and leaseback arrangements: (CAA01/S216 & S217 see CA28300)
  • Additional VAT liabilities: where an AIA is prohibited on expenditure under any of the above anti-avoidance rules, then any additional VAT liability arising in respect of that expenditure will similarly be denied any AIA (CAA01/S241).
  • Property loss relief (s.127 ITA 2007): This legislation is to disallow property loss relief against general income (in terms of Chapter 4 of Part 4 of the Income TAX Act 2007) to the extent that the loss is attributable to the AIA. The restriction applies to losses arising as a result of relevant tax avoidance arrangements entered into on or after 24 March 2010 and where the legislation applies, the loss will be treated as attributable to the AIA before anything else, including other capital allowance. In this context ‘relevant tax avoidance arrangements’ means arrangements where the main purpose or one of the main purposes is the obtaining of a reduction in tax liability by means of property loss relief against general income, and ones to which the person claiming the relief is party.