Controlled Foreign Companies: Assumed Taxable Total Profits, Assumed Total Profits and the Corporation Tax Assumptions: Capital Allowances
Capital allowances - Plant and Machinery
Capital allowances are given in the computation of assumed taxable total profits on broadly the same basis as applies to companies resident in the United Kingdom.
TIOPA10/S371SM applies if the CFC incurred any capital expenditure on the provision of plant or machinery for the purposes of its trade before the first accounting period in which it becomes subject to Part 9A.
TIOPA10/S371SM(2) requires an assumption that, for the purposes of CAA01/Part 2 (plant and machinery allowances), the plant or machinery was provided for purposes wholly other than those of the trade, and was not brought into use for the purposes of the trade until the beginning of the CFC’s first accounting period, so that CAA01/S13 (use for qualifying activity of plant or machinery provided for other purposes) applies. This has the effect of bringing in an amount of notional expenditure equal to the market value of the plant and machinery employed in the trade at the beginning of the CFC’s first accounting period. Capital expenditure incurred after that date qualifies for first-year and writing-down allowances in the normal way. The CFC’s first accounting period is its first accounting period for the purposes of TIOPA10/Part 9A.
It should be noted that in a computation of assumed taxable total profits, a CFC is assumed under TIOPA10/S371SF(1) to have deducted the maximum capital allowances available to it in an accounting period. However, a notice may be given under TIOPA10/S371SG (disapplication of assumption in section 371SF(1)) in order to disclaim or postpone the whole or any part of the capital allowances assumed to have been claimed under section 371SF(1)) may be requested if, for example, a CFC has an amount of assumed total profits that has passed through the CFC charge gateway and there is a potential charge arising as calculated under TIOPA10/S371BA(3).
A CFC acquired machinery in 2010 for £1 million, the market value of which is £900,000 at the start of the CFC’s first accounting period. So on 1 January 2013 £900,000 is the value that is brought into account in computing the maximum amount of capital allowances available under the assumption in TIOPA10/S371SF(1) in computing the CFC’s assumed taxable total profits and this assumption continues for subsequent accounting periods.
However in these accounting periods the CFC satisfies the conditions of the excluded territories exemption and so no actual computation of assumed taxable total profits needs to be made until accounting period ended 31/12/2015.
In this accounting period, the CFC’s assumed total profits pass through the Chapter 4 charge gateway and so will be apportioned and charged on the CFC’s 100% UK corporate shareholder (the chargeable company).
Having worked out the capital allowances position from 1 January 2013 onwards on the assumption under TIOPA10/S371SF(1) (i.e. assuming that maximum relief is given in computing the CFC’s assumed taxable total profits for each accounting period), the chargeable company considers it would be more advantageous to disclaim some of the capital allowances assumed to have been given as a deduction in previous accounting periods and makes a claim to this effect under TIOPA10?S371SG(1) within 20 months of the end of the accounting period ended 31/12/2015.
The earlier computations are then reworked and the amount of capital allowances actually claimed (taking into account the disclaimer) is taken into account in computing the CFC’s chargeable profits for the purpose of apportioning and charging those profits.
Capital allowances – Other than plant and machinery
There are no special provisions in TIOPA10/Part 9A relating to capital allowances other than those for plant and machinery. Allowances in respect of other categories of capital expenditure will be taken into account in the computation of assumed taxable total profits applying the normal rules.
If expenditure is incurred on mineral extraction that would qualify for relief under CAA01/Part 5 at a time before the CFC is assumed to be UK resident, no relief will be available where the trade has actually started before the CFC is assumed to be UK resident. There is also no provision to allow relief for expenditure incurred on acquiring a mineral asset or second-hand asset (CAA01/Part 5) or on dredging (CAA01/Part 9) before the CFC is assumed to be UK resident.
Research and development allowances under CAA01/Part 6 will only be available in respect of expenditure in periods for which a computation of assumed taxable total profits is made i.e. for accounting periods ( beginning on or after 1 January 2013 where such a computation is actually needed as this is a 100% relief that is only given in relation to expenditure incurred in a chargeable period.