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HMRC internal manual

Capital Allowances Manual

Plant & Machinery Allowances (PMA): Long-life assets: Anti-avoidance

CAA01/S104

There are anti avoidance provisions in Section 104. Their main purpose is to prevent acceleration of allowances while the asset continues to be owned by or used in the same group of companies. They also cover other types of avoidance. S 104 was repealed by Finance Act 2008 in relation to expenditure incurred on or after the “relevant date” and long life asset expenditure incurred before the “relevant date” but not allocated to a pool in a chargeable period beginning on or after that date.

The relevant date is 1 April 2008 for CT purposes and 6 April 2008 for IT purposes.

The rules in S104 apply where allowances have been given on a long-life asset to a person (the taxpayer) under the long-life asset legislation, and:

  • there is a disposal event for that asset;
  • the disposal value to be brought to account is less than the notional written down value of the asset; and
  • the disposal event is part of, or occurs as a result of, a scheme that has the obtaining of a tax advantage by the taxpayer as its main object, or as one of its main objects.

 

Where the above conditions apply the notional written down value is used in place of the sale price in the capital allowance computations of the taxpayer. But this does not affect the computations of the purchaser, who can only claim capital allowances on the actual sale price.

You calculate the notional written down value of an asset by writing down the cost at 6% a year on the reducing balance basis from the chargeable period in which it was acquired to the end of the last chargeable period ending before the disposal event. The notional written down value is the balance remaining.

Example Henderson plc sets up a subsidiary Zimmer plc, which purchases a long-life asset for £150,000 and leases it to Henderson plc for use in its trade. Two years later, Zimmer plc sells the asset to Henderson plc for £80,000, which it claims is the open market value as a used asset, and ceases its leasing trade. It appears that a main object of the arrangements is to avoid tax by creating a balancing allowance. The notional written down value of the asset is calculated like this.

 

Cost in Year 1                                                £150,000

Year 1 write off at 6%                                     £9,000   

Carried forward to Year 2                                £141,000

Year 2 write off at 6%                                     £,8460   

Balance remaining                                          £132,540 

The notional written down value when Zimmer plc sells the asset to Henderson plc in year 3 is £132,540. Zimmer plc’s capital allowances are calculated as if it had sold the asset to Hendrix plc for £132,540. Henderson plc is treated as if it had bought the asset for £80,000, the price it actually paid.

A person obtains a tax advantage if that person

  • obtains an allowance or a greater allowance, or
  • avoids a charge or secures the reduction of a charge.

 

If you think that a case falls within Section 104 the file should be submitted to CTIAA (Technical) prior to making any challenge. Your submission should:

  • set out the basic facts that you should already have obtained.
  • include the reasons why you think Section 104 applies.