IFM08330 - Co-ownership Authorised Contractual Schemes (CoACS): Calculation of plant and machinery allowances

Legislation

Sections 262AA-AF of the Capital Allowances Act 2001 (“CAA01”), which were inserted by section 40 of the Finance (No 2) Act 2017, provide for an elective, simplified basis by which the operator of a Co-ownership Authorised Contractual Scheme (CoACS) may calculate capital allowances on plant and machinery and allocate them to investors. The detailed rules are outlined below.

{#}Qualifying activity

To claim capital allowances, a taxpayer must be carrying on a qualifying activity as defined in s15 CAA01. HMRC guidance is contained in the Capital Allowances Manual at CA20010.

An operator of a CoACS can elect into the simplified basis if the investors carry on a qualifying activity collectively. The simplified basis treats an investor as carrying on the collective qualifying activity on an individual basis so that the investor is potentially eligible to claim allowances. Allowances can only be claimed to the extent that the profits or gains arising to the investor are chargeable to tax.

{#}The election into the simplified basis

The operator of a CoACS has the option to elect to calculate capital allowances at the CoACS level and to then allocate these allowances to investors. The operator is required to calculate allowances as if all investors were taxable. As stated above, an investor can only claim allowances to the extent that its profits or gains from the qualifying activity are or would be chargeable to tax.

If an operator chooses not to make an election then investors may still be entitled to claim capital allowances, but the simplified basis will not be available.

Only the operator can elect into the simplified basis. It is expected that the contractual relationship between the operator and investors, as well as regulatory obligations, will mean the operator will act in the interests of investors generally when it decides whether to make the election.

The election must specify an accounting period of the scheme as the first accounting period in which the election has effect. This accounting period must not be longer than 12 months and an election can be made for any accounting period beginning on or after 1 April 2017.

Once an election has been made it has effect for that first accounting period and all subsequent accounting periods of the scheme. This means that the operator does not have to elect for every accounting period and once an election has been made it is irrevocable.

In the case of a CoACS which is structured as an “umbrella” fund with a number of sub-funds, each sub-fund is treated separately for the purposes of capital allowances and an election into the simplified basis should be made for each applicable sub-fund. This follows on from the regulatory regime which treats investors in a sub-fund as tenants in common in that sub-fund.

The election is made by the operator by notice to an officer of Revenue and Customs, in the same way as other elections for capital allowances purposes.

{#}Calculation once an election has been made

Where the operator of a CoACS has elected into the simplified basis, the operator should calculate the allowances that would be available for the relevant period based on a set of assumptions outlined below:

a) The CoACS is a person;

b) The relevant period is a chargeable period for the purposes of the Act;

c) Any qualifying activity carried on by the investors in the scheme together is carried on by the scheme;

d) Property which was subject to the scheme at the beginning of the first accounting period for which the election has effect –

i. Ceased to be owned by the investors at that time, and

ii. Was acquired by the scheme at that time;

e) The disposal value to be brought into account in relation to the cessation of ownership and the acquisition referred to in (d) is the tax-written down value;

f) Any property which became subject to the scheme at a time during an accounting period for which the election has effect was acquired by the scheme at that time;

g) Property which ceased to be subject to the scheme at any such time ceased to be owned by the scheme at that time;

h) The disposal value to be brought into account in relation to the cessation of ownership referred to in (g) is the tax written down value;

i) The scheme is not entitled to a first year allowance or an annual investment allowance in respect of any expenditure.

The operator of the CoACS must allocate to each investor in the scheme a proportion of the allowances calculated. The proportion has to be made on a just and reasonable basis. In determining what is just and reasonable the operator has to take into account the relative size of each investor’s holding of units in the scheme. The operator must not take into account the investor’s liability to any tax.

The investors are only allowed to claim allowances that have been allocated to them by the operator. They cannot claim allowances for amounts greater than the amount allocated.

The operator must make a calculation for each individual qualifying activity and allocate separately for each separate activity.

{#}Tax written-down value, first-year allowance and annual investment allowance

The purpose of the simplified basis is to deliver simplified arrangements for investors in CoACS.

In relation to any acquisition or cessation of ownership, tax written down value (TWDV) means the amount that would give rise to neither a balancing allowance nor a balancing charge on the assumption that the relevant expenditure were in a single pool and all profits and gains of the activity were liable to tax.

Claims for the first-year allowance (FYA) and annual investment allowance (AIA) are not available within the simplified basis. As well as simplifying the rules, this avoids the need for exchanges of information between investors and the operator of a CoACS to establish the investor’s capital allowances position generally.