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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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PMA: How allowances and charges are made: Special leasing

CAA01/S258 - S261A

There are separate rules for income tax and corporation tax where the qualifying activity is special leasing.

Income tax

Deduct a PMA from any income from special leasing unless the lessee did not use the asset for a qualifying activity for all or part of the current tax year.

If the lessee did not use the asset for a qualifying activity for all or part of the current tax year, deduct the PMA on the asset (or part of it) from the income from special leasing of that asset only.

So in summary PMA on an asset used for special leasing can only be set against other income from special leasing to the extent that the lessee uses the asset for a qualifying activity.

There are also rules for dealing with any excess of PMA over income. They follow the same pattern as the rules above.

Excess PMA from an asset used by the lessee for a qualifying activity can be set against future income from any special leasing.

Excess PMA from an asset not used by the lessee for a qualifying activity can be set against future income only from special leasing of that particular asset.

Income from special leasing includes balancing charges. So PMA from special leasing can be set off against balancing charges - subject to the rules above if the asset was not used by the lessee for a qualifying activity.

Assess any remaining balancing charge to income tax.

Example Rob has a spare harmonica that he leases to Bruce not as part of another qualifying activity so the leasing is special leasing. The income from the harmonica in the tax year 2004/05 is £1,400 and the allowances due are £2,400. There are therefore excess allowances of £1,000. If Bruce does not use the harmonica for a qualifying activity the excess allowances must be carried forward and set against Rob’s income from leasing that harmonica in future years.

If Bruce uses the harmonica for a qualifying activity for 3 months and for other purposes for 9 months then:

  • nine-twelfths of the allowances of £2,400, that is £1,800, can only be set against Rob’s income from that harmonica;
  • the maximum amount which Rob can set against his other special leasing income is £600 since, of the allowances due of £2,400, £1,800 can only be set against the income arising from the harmonica;
  • the allowances remaining after any sideways set-off against Rob’s other special leasing income must be carried forward and set against Rob’s income from special leasing that harmonica in future years.

Whether or not Bruce uses the harmonica for a qualifying activity the excess allowances cannot be set against any income of Rob’s that is not special leasing income.

Corporation tax

Deduct a PMA from a company’s income from special leasing unless the lessee did not use the asset for a qualifying activity during the current accounting period (AP).

If the lessee did not use the asset for a qualifying activity for all or part of the current AP, deduct the PMA on that asset from other income from special leasing to the extent that the lessee’s use was for a qualifying activity. The balance has to be deducted from the income from the special leasing of the asset. So if the company’s AP is 12 months long and the lessee only used the asset for 4 of those 12 months for a qualifying activity the company can only deduct 4/12 of the PMA on the asset from its other income from special leasing. The remaining 8/12 can only be deducted from the company’s income from the special leasing of that asset.

There are set-off rules for excess PMAs that are available against income from special leasing generally. The company can claim to have those excess PMAs deducted from its profits of the current AP or any previous AP ending within the carry-back period. The carry-back period is a period that is the same length as the current AP and that ends when it starts. If an AP is partly within the carry-back period the excess PMAs can only be set against a proportionate part of its profits.

Example Cassie Ltd. has excess PMAs for its AP ending 31 December 2007. Its previous APs were the 8 months to 31 December 2006 and the 12 months to 30 April 2006. It can make an election to set its excess PMAs from special leasing against its profits for the AP ended 31 December and 4/12 of its profits for the 12 month AP ended 30 April 2006.

A company cannot surrender excess PMAs from special leasing as group relief under ICTA88/S403 (3) unless it could have deducted those allowances from its other income.

A building that is let may consist partly of trade premises and partly of non-trade premises (for example, flats). In that case split expenditure on plant common to the whole of the building into two parts. The restrictions on the sideways set-off of excess PMAs apply to that part of the expenditure that relates to the non-trade premise.

A company may carry on a business of leasing plant or machinery in partnership with other companies. If the company’s share of the business profits for a chargeable period is not the same as its share of the capital allowances for that chargeable period there are restrictions on how it may set off excess capital allowances. These are the restrictions.

The company may not set any excess PMAs from special leasing against its profits of the current AP or any previous AP ending within the carry-back period. The carry-back period is a period that is the same length as the current AP and that ends when it starts. If an AP is partly within the carry-back period the excess PMAs can only be set against a proportionate part of its profits.