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HMRC internal manual

Capital Allowances Manual

Plant and Machinery Allowances (PMA): cars: expenditure after April 2009 - anti-avoidance rules

CAA01/S104F

Where expenditure on a car is allocated to either the main pool or special rate pool (where there is no non-business use of the car), there will be no balancing adjustment when the car is sold, or otherwise disposed of, unless the business is ceasing (CA23210). There will only be a balancing adjustment on the disposal of a car when the car is in a single asset pool.

If no balancing adjustment is made on disposal, it is possible that the economic loss made by a business over the period of ownership of the car will be written off over a longer period of time. This is particularly likely where the expenditure on the car is in the special rate pool and attracts WDA at 10%.

The rate of WDA of the special rate pool is reduced to 8% from 1 April 2012 (CT) and 6 April 2012 (IT).

The legislation in section 104F is designed to prevent businesses contriving to wind up their activities to generate a balancing adjustment that would not otherwise be due on the cessation of the special rate pool.

The rule only applies to companies and only in certain circumstances:

  • the qualifying activity of the company must permanently cease,
  • the qualifying activity must be, or include, making cars available to other people,
  • at some time in the six months following the cessation of the qualifying activity, another company in the same group as the ceasing company must carry on a qualifying activity of making cars available to other people,
  • the ceasing company must have incurred expenditure on a car that has been allocated to the special rate pool, and
  • on cessation of the qualifying activity the balancing allowance arising in the special rate pool is greater than any balancing charges, less balancing allowances, arising in other pools.

 

If all these conditions are met the balancing allowance that the company is entitled to in respect of the special rate pool is limited to an amount equal to the balancing charges, less balancing allowances, arising in other pools.

Any excess of the balancing allowance in the special rate pool over this amount is, instead, treated as qualifying expenditure to be allocated to the special rate pool of the other group company that carries on a qualifying trade of making cars available to other people. Where there is more than one group company carrying on such a qualifying activity, the ceasing company may nominate the company that will be treated as having incurred the nominal expenditure. The nomination must be made within 6 months of the company’s final chargeable period and if no nomination is made then HMRC will chose the recipient company.

The group company (the recipient company) is treated as having incurred this ‘notional’ expenditure on the day after the date of the first company’s cessation. However, if this date falls in an accounting period which overlaps with the first company’s penultimate accounting period, the appropriate proportion of the notional expenditure is not treated as qualifying expenditure in the acquisition period. However, it will be treated as qualifying expenditure in the following period.

Example

Redshank Ltd is the parent company of a group; it has subsidiaries Dunlin Ltd and Knot Ltd. All three companies commenced trading on 1 January 2010 and have accounting dates of 31 December. All employees of the group are employed by Dunlin Ltd which carries on the group’s manufacturing trade. Dunlin Ltd pays an annual fee to Knot Ltd so that Knot Ltd will provide its 50 employees with company cars. On 5 January 2010 Knot Ltd buys 50 cars, 10 of which cost £30,000 each and have CO2 emissions of 185g/km driven. The remaining 40 cars cost £15,000 each and have emissions of 140g/km. Knot Ltd has no other plant and machinery.

Knot Ltd will allocate £300,000 of expenditure to the special rate pool (and will claim WDA of £30,000 in the period ending 31 December 2010) and £600,000 to the main pool (and would claim WDA of £120,000).

A third subsidiary, Turnstone Ltd is set up on 1 July 2012 but does not commence trading until 1 May 2013. It has an accounting date of 30 June.

On 30 April 2013 Knot Ltd sells all of its cars to a car dealer, its agreement with Dunlin Ltd terminates and it ceases trading. It sells its cars for a total of £400,000, £100,000 of which is attributable to the cars in the special rate pool.

Knot Ltd claimed total WDA of £81,300 in respect of expenditure in the special rate pool in the periods ending 31 December 2010, 2011 and 2012, leaving a balance of expenditure of £218,700 unrelieved. The disposal proceeds are £100,000, so the potential balancing allowance is £118,700 in the special rate pool.

Knot Ltd also claimed total WDA of £211,200 in respect of expenditure in the main pool over this period leaving a balance of expenditure of £388,800. Disposal proceeds of £300,000 would give rise to a balancing allowance of £88,800.

However, on 1 May 2013 Turnstone Ltd buys 50 cars (all with emissions below 160g/km) which it provides to the employees of Dunlin Ltd. All the conditions required for section 104F to apply are therefore met. Knot Ltd can, then, only claim the balancing allowance arising in the main pool (£88,800). The balancing allowance arising in the special rate pool may not be claimed by Knot Ltd but instead Turnstone Ltd is treated as having incurred £118,700 special rate expenditure on 1 May 2013.

However, Turnstone Ltd may not claim WDA in respect of the full amount of £118,700 in the year to 30 June 2013 because this accounting period overlaps with Knot Ltd’s penultimate accounting year to 31 December 2012. The overlap period is 6 months, so in the year to 30 June 2013 Turnstone Ltd may claim WDA in respect of only £59,350 (£118,700 x 6/12). If Turnstone Ltd claims the maximum 10% WDA, then the expenditure carried forward in the special rate pool and on which WDA may be claimed in the year ending 30 June 2014 is £112,765 (being £59,350 + (£59,350 - £5,935)).

The rates of WDA of the main pool and the special rate pool are reduced to 18% and 8% respectively from 1 April 2012 (CT) and 6 April 2012 (IT).