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HMRC internal manual

International Manual

HM Revenue & Customs
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Foreign Permanent Establishments of UK Companies: capital allowances: plant & machinery: notional CAs

Purpose of notional Capital Allowances

To ensure that relief continues to be provided in calculating permanent establishment profits that are charged to UK tax, notional Capital Allowances are still calculated as if the separate PE activity provided for by CAA01/S15(2A)(a) was a qualifying activity - provided that it would be such but for the election for exemption and S15(2A)(b)..

Those notional Capital Allowances are given automatically in the calculation of profits or losses attributable to the PE for all accounting periods after an election for exemption has been made (in a similar way as for the calculation of the profits of a Real Estate Investment Trust, which are exempt from Corporation Tax). No claim can be made, and no “disclaimer” is possible. It is assumed that the election or claim made is that which produces the largest reduction in profits/increase in loss. (The same principle applies to all claims and elections - see also INTM281080. There is no requirement for the company to actually make the election or claim).

Automatically taking into account notional Capital Allowances ensures consistency with calculations of PE profit for credit relief purposes (although there is no change in the credit relief regime : the requirement for capital allowances to be assumed to have been claimed only applies if a company has elected for CTA09/S18A to apply). That prevents the build-up of unclaimed balances in the “exempt” branch, which otherwise could distort the application of the anti-diversion rules e.g. by reducing profits in the period that the rule is failed when exemption does not apply.