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HMRC internal manual

International Manual

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HM Revenue & Customs
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Controlled Foreign Companies: Computation of Chargeable Profits and Creditable Tax: Capital allowances

General

Capital allowances are given in the computation of chargeable profits on broadly the same basis as applies to companies resident in the United Kingdom. Once an apportionment has been made or an acceptable distribution policy (accounting periods beginning on or after 28 November 1995 and ending on or before 30 June 2009 only) has been pursued a foreign company is assumed to remain resident in the UK in each subsequent accounting period (see INTM255630). Under ICTA88/SCH24/PARA2(2) a computation of chargeable profits is assumed to be made for each of the subsequent accounting periods regardless of whether the foreign company is assumed to remain resident in the UK in each subsequent accounting period. In this way continuity in capital allowances computations is preserved.

It should be noted that in a computation of chargeable profits a controlled foreign company is assumed to have the maximum capital allowances available to it in an accounting period. The right to disclaim or postpone any of the capital allowance under ICTA88/SCH24/PARA4(2) (see INTM255700) may be made in respect of any accounting period after assumed residence.

Plant and machinery - ICTA88/SCH24/PARA10

Where a company incurs capital expenditure on plant and machinery for the purposes of its trade before the beginning of the first accounting period in respect of which an apportionment is due or an acceptable distribution policy has been pursued, the plant is assumed to have been provided for the purposes other than those of the trade and not to have been brought into use for the purposes of the trade until the beginning of that accounting period, and CAA01/S13 applies accordingly. Thus writing-down allowances are available on the market value of the plant at the date of the company’s assumed UK residence begins. Capital expenditure incurred after that date qualifies for first-year and writing-down allowances in the normal way.

Where a computation of chargeable profits is made for a particular accounting period and no apportionment is due in respect of the foreign company concerned, ICTA88/SCH24/PARA1(4) permits the assumption that an apportionment falls to be made for the accounting period to which the computation relates (see INTM255630). The effect is that the rule in ICTA88/SCH24/PARA10 applies and capital allowances are calculated by reference to the open market value of plant and machinery at the beginning of the accounting period in question. If, however, no apportionment is due for that period, the capital allowances are computed in accordance with ICTA88/SCH24/PARA10 for each subsequent accounting period until an apportionment is actually due.

Capital allowances other than plant and machinery

There are no special provisions in ICTA88/SCH24 relating to capital allowances other than those for plant and machinery and industrial buildings, and allowances in respect of other categories of capital expenditure will be taken into account in the computation of chargeable profits applying the normal rules.

If expenditure incurred at a time before the company is assumed to be UK resident would have qualified for allowances if the company had then been resident in the UK, allowances will generally be given in respect of the expenditure for periods for which a computation of chargeable profits is made. However, scientific research allowances, which are given wholly in the chargeable period relating to the expenditure, will be available only for expenditure incurred while the company is deemed to be UK resident.

The method of giving allowances in respect of expenditure incurred before the company is deemed to be UK resident will be to assume notional allowances for the period from the accounting period in which the expenditure was incurred until the first period for which an apportionment is due or an acceptable distribution policy pursued, and to give writing down allowances at the appropriate rate for the remainder of the writing down period.

Example

Controlled foreign company Z incurs expenditure of £100,000 during the year to 31 December 2010, on the construction of an industrial building which it puts into use in that year for the purposes of its trade. A direction is made in respect of the profits of Z for the year to 31 December 2013. Writing down allowances of £4,000 per annum (£100,000 @ 4%) will be assumed to have been given for 2010 to 2012, but no initial allowance will be assumed. Allowances of £4,000 per annum will be given in computing chargeable profits of Z from years 2013 to 2024 inclusive, when total allowances (actual and assumed) will be £100,000, the amount of the expenditure, so no further allowances are due.

In addition to industrial buildings allowance, this principle will apply to expenditure on mines and oil wells, dredging, agricultural buildings, patents and know-how.