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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: transition to exemption

Rules on transition

At the beginning of the first period after an election for exemption is made under CTA09/S18A, any plant or machinery being used for the purposes of permanent establishment activity will start to be used for a purpose other than a qualifying activity (as the PE activity will cease to be a qualifying activity). This will trigger a capital allowance disposal event, requiring a capital allowances disposal value to be brought into account for capital allowance purposes.

Generally, a special transitional rule (CAA01/S62A) sets the disposal value as the tax written down amount of the capital expenditure on the provision of the plant or machinery. And where this transitional rule applies, then (for the purposes of calculating notional allowances going forward) the application of CAA01/S13 operates by reference to the same “transitional value”.

However, for some plant or machinery, the normal disposal value (typically market value) will be brought into account for capital allowance purposes at the transition. This will be the case if the asset, or group of assets (defined in CAA01/S62A(4)), has a historic cost greater than £5 million, and the company has used (or is treated as if it had used) the plant or machinery other than for the purposes of the foreign PE activity, at any time in an accounting period ending less than 6 years before the period in which the exemption election is made. However, if in that case the asset, or group of assets, has a historic cost less than £50 million, it is not necessary to look back beyond an accounting period ending more than 12 months before 19 July 2011 (the date the Finance Act 2011 received Royal Assent) to see if there was use other than in a territory outside the UK. If historic cost exceeds £50m it is necessary to look at its use in any accounting period beginning within 6 years before 19 July 2011, and not just the 6 years ending with the accounting period the election for exemption is made.

The reason why the rules look back to see if current PE assets with the most substantial historic costs have previously been used for the purposes of an activity that will continue to be within the charge to tax (e.g. UK activity), is that any “excess” allowances previously obtained in relation to that use will not be recouped by the general transitional rule because those past allowances will not have been taken into account in the calculations of past PE profits or losses.

Any other capital allowance disposal event is treated in the normal way. A particular point to note is that because for all periods after an election has been made the PE activity is not qualifying activity for capital allowances purposes, and no actual capital allowances are available in relation to expenditure on the provision of plant or machinery for the purposes of the PE activity, the condition in CAA01/S61(4) is met then where a person sells an asset to the company for use in the company’s exempt PE. So, if such a sale is made at less than market value the disposal value for capital allowances purposes is increased to the market value.