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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: pools of expenditure

Treatment of expenditure pools

At the transition to branch exemption the company’s existing expenditure pools, which provide the basis for establishing the actual capital allowances available to claim in calculating the company’s taxable profits, should be reduced by the disposal values arising on the foreign permanent establishment activity ceasing to be qualifying activity for capital allowances purposes (see INTM285030 on the transition to exemption).

Where the special transitional rule in new CAA01/S62A does not apply, and so the disposal value is the normal disposal value, rather than the “transitional value”, then it is possible that a balancing charge or balancing allowance could arise in the normal way, to adjust the total amount of capital allowances given over the period for which the activity has been qualifying activity for capital allowances purposes.

If the company making an election carries on a single activity (e.g. a trade) across the UK and a number of foreign PEs located in more than one territory, then the activity is treated as two activities going forward: the qualifying activity, reduced in scope (e.g. the part of the activity carried on in the UK), and a separate, non-qualifying activity (i.e. the part of the activity, carried on in the foreign PEs).

This separate, non-qualifying activity is not subdivided by territory, though for the purposes of calculating notional capital allowances after an election has been made, it will be necessary to allocate expenditure between territories. This will be particularly important where the UK measure of the profits in the territory is significant - either because a streaming election has been made, or because credit relief calculations are required in relation to individual territories, for example due to the general transitional rule in CTA09/S18K or the anti-diversion rule in CTA09/S18G preventing PE profits from benefitting from exemption.