PMA: FYA: First-year tax credits: calculation of the clawback
CAA01/Sch.A1 para 24 to 27
If a company disposes of an item of tax-relieved P&M within the clawback period then HMRC will make a clawback assessment. However, a company will not be subject to a clawback assessment as long as it still owns tax-relieved P&M that cost (equal to or) more than the amount of loss surrendered for a first-year tax credit.
On 1 October 2010 a company spends £200,000 on various items of energy saving P&M and claims FYA on the full amount. It makes a loss, after deduction of the FYA of £50,000, which it surrenders for a first-year tax credit of £9,500. In the year to 31 December 2012 the company sells half of this energy-saving P&M. Although this disposal is in the clawback period there will not be a clawback assessment as the company still owns tax-relieved P&M that originally cost £100,000 - more than the loss surrendered of £50,000.
So, where a company buys several items of qualifying P&M but does not, or cannot, claim a first-year tax credit in respect of the total expenditure then it will not have to nominate the items in respect of which it is claiming tax credits. HMRC will only issue a clawback assessment where the original expenditure on the tax-relieved P&M that the company has kept is less than the loss surrendered for a tax credit.
The amount of the tax credit clawed back is 19% of the restored loss. The amount of the restored loss is calculated using the formula:
(LS - OERPM) - (OE -DV) - ARL
LS = the loss surrendered
OERPM = the original expenditure on tax-relieved P&M retained after the disposal
OE = (cumulative) original expenditure on tax-relieved P&M disposed of
DV = (cumulative) disposal value of tax-relieved P&M disposed of
ARL = losses already restored following an earlier disposal
If the formula gives a negative answer the restored loss is nil.
This formula ensures that tax credits are not clawed back to the extent that the company still owns tax-relieved P&M and also restricts the clawback where the company has made a loss on the P&M disposal. If a company scraps an item of plant, receiving nothing on disposal, then there will be no clawback of tax credits in respect of that item.
There are examples showing the calculation of the restored loss.
Where a tax credit is clawed back, the loss position of the company is restored to the position that would have existed if (that portion) of the tax credit claim had not been made. So, although tax credits will have been recovered from the company, the losses it originally surrendered for the tax credit will be reinstated.
On 1 October 2010 a company spends £200,000 on various items of energy saving P&M and claims FYA on the full amount. It makes a loss after deduction of the FYA of £50,000 which it surrenders for a first-year tax credit of £9,500. In the year to 31 December 2012 the company sells all this plant and machinery for £170,000. The restored loss is £20,000 and the tax credit clawed back £3,800. The company keeps the tax credit that relates to the loss on disposal (i.e. £30,000 @ 19% = £5,700). Following the claw back the company will have losses of £20,000 available to carry forward at 31 December 2010.
Assessments to claw back first-year tax credits are to be made as necessary and CA23189 explains the mechanism for doing this.