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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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PMA: Anti-avoidance: Restriction on qualifying expenditure

CAA01/S220

Where an asset is purchased during a chargeable period the full purchase price is normally treated as qualifying expenditure for that chargeable period even if the asset is bought just before the end of the chargeable period. For example, a person who spends £1milllion on an asset 3 days before the end of a chargeable period can normally treat the whole £1million as qualifying expenditure for that chargeable period. The rules are different for assets acquired for leasing under a finance lease.

Expenditure incurred before 1 April 2006

The amount that a finance lessor can treat as qualifying expenditure for the chargeable period in which an asset is bought for leasing under a finance lease is restricted on a time basis by reference to the time from the acquisition date to the end of that chargeable period. The balance of the expenditure can be added to the pool for the next chargeable period.

Example San Fernando Plc draws up its accounts to 30 June each year. On 1 June 2003 it buys a locomotive for £438,000 to lease to Georgian Rail Ltd. under a finance lease. The expenditure that it can treat as qualifying expenditure for the year ended 30 June 2003 is £36,000. The balance of £402,000 is qualifying expenditure for the year ended 30 June 2004.

If the expenditure on the provision of an asset for finance leasing is incurred in instalments on different dates you should apply the rule to each instalment.

Example San Fernando Plc pays for the locomotive in two equal instalments- £219,000 on 31 May 2003 and £219,000 on 1 January 2004. This is its qualifying expenditure.

AP ended Qualifying expenditure
   
30 June 2003 £18,000 (= £219,000 x 30/365)
30 June 2004 £310,500 (= £201,000 [= £219,000 – £18,000] + £109,500 [= £219,000 x 6/12])
30 June 2005 £109,500 (= £219,000 – £109,500)

Where exceptionally the asset is disposed of by the finance lessor in the same chargeable period as that in which the expenditure is incurred, all the expenditure, (i.e. without apportionment), and the disposal value are brought into the pool for that chargeable period. This means that the allowances given are based on the actual depreciation suffered by the finance lessor.

Example San Fernando Plc pays the whole £438,000 for the locomotive for finance leasing on 1 June 2003. It then decides that it does not want to go in for finance leasing and so it sells the locomotive to Georgian Rail Ltd. for £430,000 on 18 June 2003. San Fernando Plc can treat the whole £438,000 as qualifying expenditure for the year ended 30 June 2003. It has to bring a disposal value of £430,000 to account.

Expenditure on an asset is not qualifying expenditure until the chargeable period in which the asset first belongs to the taxpayer. If the asset does not belong to the lessor until after the chargeable period in which the expenditure is incurred, no apportionment is needed. The whole of the expenditure is qualifying expenditure for the chargeable period in which the asset first belongs to the lessor. This can happen where a fixture is let under an equipment lease because the asset  is not treated as belonging to the lessor in the chargeable period in which the expenditure is incurred if the lessee does not start to trade until after the end of it. However, if the equipment lessee starts to trade either earlier or later in the chargeable period in which the expenditure is incurred, the expenditure is apportioned from the date it is incurred and not from the date that the lessee starts to trade.

The WDA that can be claimed on a car costing more than £12,000 are restricted to £3,000 a year. Where the car is leased out under a finance lease, the qualifying expenditure will be restricted for the chargeable period in which the expenditure is incurred. The WDA calculated on the restricted qualifying expenditure at 25% and then restricted to £3,000.

Example Bruce buys two cars, each costing £40,000, 6 and 3 months before the end of a 12- month chargeable period.

The qualifying expenditure for that period for the car bought 6 months before the end of the chargeable period is £40,000 x 6/12 = £20,000.

WDA on that car (£20,000 x 25% = £5,000) is restricted to £3,000.

The qualifying expenditure for that period for the car bought 3 months before the end of the chargeable period is £40,000 x 3/12 = £10,000.

WDA on that car is £10,000 x 25% = £2,500 which is less than £3,000 and so there is no restriction.

Expenditure incurred on or after 1 April 2006

The rules are different for expenditure incurred on or after 1 April 2006.

They do not apply to individuals and they only apply to some companies.

These are the cases where the rules apply.

They apply to a company that is a member of a group where the last day of its period of account is not the same as the last day of its principal company’s period of account, and that is:

  • a finance lessor, or
  • a lessor under a qualifying operating lease.

 

A qualifying operating lease is a plant or machinery lease CA23830 that satisfies these three conditions:

  1. It is not a finance lease.
  2. It is a funding lease CA23830.
  3. Its term is more than four years but not more than five years.

 

Example

Holdco is the principal company of a group. Subco is a member of that group. Holdco’s accounting date is 30 June 2008. If Subco draws up accounts to 31 May 2008 the legislation restricting qualifying expenditure will apply because the last day of its period of account is not the same as the last day of the Holdco’s period of account.