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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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Plant and Machinery Allowance (PMA): First Year Allowance (FYA): expenditure on which available and rates

CAA01/S39, S46, S50 & S52; FA04/S142; FA06/S30; FA07/S36; FA08/S75

The 40% or 50% FYAs for small and medium-sized enterprises (SMEs) were withdrawn in respect of expenditure incurred on or after 1 April 2008 (for CT purposes) and on or after 6 April 2008 (for IT purposes) and were replaced by the Annual Investment Allowance (AIA) CA23080, which is available to businesses regardless of size.

Current FYA schemes

Currently, FYA is available at the 100% rate for expenditure incurred:

  • on environmentally beneficial CA23135 and energy-saving CA23140 technologies, including by energy services providers CA23150
  • zero-emission goods vehicles CA23145
  • plant and machinery for use in a designated assisted area.
  • on cars with car with CO2 emissions of not more than 110gm per km driven CA23153
  • on new plant and machinery installed at a gas refuelling station to refuel vehicles with natural gas, biogas or hydrogen fuel CA23155 and on
  • plant or machinery for use wholly in a North Sea ring fence trade CA23157.

 

Repealed FYA schemes

Previously, FYAs were available for expenditure incurred:

  • for Northern Ireland purposes CA23120 by small or medium-sized enterprises (SMEs) CA23170, between 12 May 1998 and 11 May 2002, at the 100% rate;
  • on information and communications technology (ICT) by small enterprises CA23130 between 1 April 2000 and 31 March 2004 at the 100% rate;
  • by small and medium-sized enterprises (SMEs) at the 40% or 50% rate. As mentioned above, this FYA scheme was repealed in respect of expenditure incurred on or after 1 April 2008 (for CT purposes) and on or after 6 April 2008 (for IT purposes). FYAs under this scheme were normally available at the 40% rate. In certain years, however, there was a temporary exception to this, when the rate for small enterprises only was increased to 50% CA23160. These temporary increases occurred in -
  • the years ended 31 March 2005, 31 March 2007, and 31 March 2008 (Corporation Tax),
  • the years ended 5 April 2005, 5 April 2007 and 5 April 2008 (Income Tax).

Pre-commencement expenditure and FYAs

Normally, expenditure incurred before a qualifying activity begins is treated as incurred on the first day that the person who incurred the expenditure carries on the qualifying activity CA23020 (CAA01/S12). Ignore this rule when you decide whether the expenditure incurred qualifies for a particular FYA in relation to periods before and after that FYA became available (CAA01/S50). So if expenditure that would otherwise have qualified for the particular FYA is not actually incurred between the following relevant dates, it will not be entitled to that FYA when the qualifying activity commences:-

  • For expenditure incurred for Northern Ireland purposes by a SME - the expenditure must have been incurred between 12 May 1998 and 11 May 2002.
  • For expenditure incurred on P&M by SMEs - the expenditure must have been incurred on or after 2 July 1998 and before 1 April 2008 (CT) and 6 April 2008 (IT).
  • For ICT expenditure incurred by small enterprises - the expenditure must have been incurred between 1 April 2000 and 31 March 2004.

Ownership of the asset and partial FYA claims

FYA is only available if the asset belongs to the taxpayer at some time during the chargeable period for which the FYA is claimed.

If FYA is available it can be claimed on part of the qualifying expenditure. If that happens the part on which FYA is not claimed can be added to the pool for that year.

Example

Eric bought an electric guitar on 1 January 2007 for £100,000.

It qualified for FYA at the 40% rate.

He did not want the full £40,000 FYA that was available and claimed FYA of £30,000. £30,000 is FYA of 40% on £75,000 and so the part on which FYA is not claimed is £25,000 (= £100,000 - £75,000).

This means that he was able to add £25,000 to the pool for his 2006-07 chargeable period. The balance of £45,000 (= £75,000 - £30,000 FYA) was added to the pool for the following year.

General exclusions

FYA is not available on expenditure:

  • incurred in the chargeable period in which the qualifying activity is discontinued;
  • incurred on the provision of a car, unless it is a qualifying car with low carbon dioxide emissions CA23153;
  • incurred before 1 April 2013 on the provision of a ship to which the long life asset legislation does not apply CA23730;
  • incurred before 1 April 2013 on the provision of a railway asset to which the long life asset legislation does not apply CA23730;
  • excluded from long life asset treatment by the transitional provisions;
  • incurred on the provision of plant or machinery for leasing unless it is incurred on cars with low carbon dioxide emissions C A 2 3 1 5 3 before 1 April 2013 or on or after 17 April 2002 on qualifying energy-saving plant and machinery CA23140, cars with low CO2 emissions CA23153, or environmentally beneficial plant or machinery CA23135. Where the expenditure is incurred after 1 April 2006 on qualifying energy-saving plant or machinery or environmentally beneficial plant or machinery for leasing FYA is not available unless the plant or machinery is provided for leasing under an excluded lease of background plant or machinery for a building CA23835. This exclusion applies whether the leasing is in the course of a qualifying activity or otherwise, so activities like special leasing are caught. That means that assets in properties let out by the taxpayer are excluded. Treat letting a ship on charter or any other asset on hire as leasing. This exclusion also applies to software acquired on or after 26 March 2003 for licensing or sub-licensing. It does not apply where a person lets another person use software without granting a licence or sub-licence. For example, it does not apply where a person lets another person use software that does no more than allow access to the Internet, order goods or view advertising. In a case like that no rights have been granted and there is no licence or sub-licence.

 

There is a distinction between the leasing or hiring of an asset and the provision of services that involve the use of an asset CA23115.

FYA is not available where an asset has been received as a gift or where an asset is brought into use for the purposes of a qualifying activity having been acquired for something else, including leasing under a long funding lease.

FYA is not available where the asset is provided in connection with a change in the nature or conduct of a business carried on by someone else and the main benefit, or one of the main benefits, that could reasonably be expected from the change is obtaining a FYA. This is anti- avoidance legislation intended to stop a large business that is not entitled to FYA getting round the restriction of FYA to SMEs by parking an asset in a small business. Here is an example of what it is intended to stop.

Example

Garcia Plc is a large business. It wants to buy a new lathe but if it does it will not be entitled to FYA because it is not an SME. Terry, a higher rate taxpayer, buys the lathe for a qualifying activity of operating the lathe, thus obtaining FYA, with fixed supply and sale contracts with Garcia Plc. The lathe is installed in Garcia Plc.’s factory and operated by its workforce on a subcontract basis. The tax saving is shared by Garcia Plc and Terry through the contract price.

The anti-avoidance legislation means that Terry is not entitled to FYA and so the scheme does not work.