HMRC internal manual

Capital Allowances Manual

CA23720 - Plant & Machinery Allowances (PMA): Long-life assets: Meanings and definitions

CAA01/S90 - S92

Long-life asset expenditure is expenditure that is incurred on a long-life asset and that is not excluded from long-life asset treatment CA23730.

An asset is a long-life asset if it is plant or machinery which would reasonably be expected to have a useful economic life of at least 25 years when new. ‘New’ means unused and not second hand.

The 25 year test should be applied to an item of plant or machinery as a whole and not to its component parts. The rule in CAA01/S571 that any reference to plant or machinery includes a reference to a part of any plant or machinery cannot be used to exclude parts that are likely to be replaced within 25 years. This is because the legislation defines the asset to be a long-life asset if it has a useful economic life of at least 25 years. Where the asset as a whole falls to be treated as long-life under this rule, there is nothing in the legislation that then allows part of the asset to be excluded from the long-life asset rules.

FRS15 Tangible Fixed Assets introduced component accounting. Component accounting means that where a tangible fixed asset comprises two or more major components with substantially different useful economic lives, each component should be accounted for separately for depreciation purposes. This does not mean that should apply the long-life asset test to each component separately. You should apply it to the asset as a whole.

For example, if you receive a capital allowance claim for an underground cable system (including television, telecommunications, or electricity supply systems) the costs of installing the cables will include the costs of excavating the land and providing ducting that houses the cables. The cabling and the ducting may be recognised as separate components of the asset in the claimant’s accounts (so that they are depreciated at different rates). Where the ducting is installed as a direct incident of the installation of the cabling, the costs of the ducting and the associated excavation are, for capital allowance purposes, part of the costs incurred on the provision of the cabling regardless of the treatment in the accounts. In these circumstances, if the cabling is not itself a long-life asset, the long-life asset rules are not separately applicable to the ducting.

However, if ducting is installed with the expectation that it will accommodate future upgrades to the cable network or cables owned by other entities, it may be appropriate to treat the ducting as a separate asset to the cabling on the basis that the ducting expenditure is not merely incurred as a direct incident of the initial cable installation but serves a separate purpose.

A fixture in a building or structure may qualify for capital allowances as plant or machinery while the building or structure as a whole does not. In that case you should apply the long-life asset test to the fixture and not to the building or structure as a whole. For example, a factory building may have an expected life of 50 years. If the lift in it has an expected life of 20 years, the lift is not a long-life asset even though the factory building has an expected life of 50 years. But if the lift has an expected life of 30 years, the lift as a whole is a long-life asset even if parts of the lift are likely to be replaced in less than 25 years.

You should use the concept of the entity or entirety as developed by the Courts in cases about whether expenditure on a replacement part is allowable as expenditure on a repair in deciding what is the whole of the item of plant or machinery. You should not accept that the 25 year test can be applied to part of an item of plant or machinery if the cost of replacement of that part without improvement would be allowable for Case I purposes as a repair to the plant or machinery as a whole. There is guidance about this at BIM46900 onwards.

If there is expenditure on an improvement to an asset, you should apply the long-life test to the part of the plant or machinery that represents the improvement. This is because the improvement is treated as a separate asset for the plant and machinery legislation. The useful economic life of the improvement is the period from when the improvement is brought into use until the part representing the improvement is likely to cease to be used. For example, suppose that a printing press has an expected working life of 30 years when it is new. After 25 years there is a major refurbishment that extends the expected working life of the press to 20 years from the refurbishment. The capital expenditure on the refurbishment has a useful economic life of 20 years and is not caught by the long-life asset rules.

The long-life asset test looks at the expected life estimated by reference to the facts when capital allowances are first claimed or when the asset was first brought into use if earlier. This will depend on the way in which the asset is likely to be used in that business and, if it is likely to be sold in working order, by any subsequent owner. It may be dependent on physical deterioration through use or effluxion of time, reduced by economic or technological obsolescence, or directly governed by extraction or consumption as in the case of equipment in a mine.

The useful economic life begins when any person first brings the asset into use. Do not treat:

  • holding the asset as trading stock;
  • construction of the asset;

as use for this purpose. The useful economic life ends when the asset ceases to be used, or to be likely to be used, by any person as a fixed asset of a business.

The definition of useful economic life matches that in FRS15 except that the definition in FRS15 looks at the expected use in that particular business while the definition in CAA01/S91 (1) looks at the overall use in any business. If the asset is bought new and is likely to be scrapped at the end of its use in that business, the definitions will be the same and you should accept the economic life used for accounting purposes unless it is clearly not reasonable.

If an asset has been bought second hand or is likely to be sold in working order you will have to take the periods of use by other owners into account in working out the useful economic life.