-
This clause codifies the rules for giving machinery
and plant capital allowances to non-residents and other persons
with non-taxable activities, with effect from Budget Day. It confirms
that capital allowances are restricted to the part of the activity
that is taxable in the UK. It provides for a balancing adjustment
to be made if the proportion of taxable use is reduced and the
allowances that have been given are excessive. It provides for
allowances to be given on the lower of current market value and
original cost to the taxpayer, rather than on the current market
value as previously, where equipment is transferred from non-taxable
to taxable use.
______________________
DETAILS OF THE CLAUSE
-
Subsection (1) inserts a new section 83(2A)
into the Capital Allowances Act 1990 ("CAA").
-
New section 83(2A) provides that, in the rules
for giving capital allowances on machinery and plant, any reference
to a trade or an activity treated as a trade shall be construed
as a reference to so much of the trade or activity as is within
the charge to tax.
-
New section 83(2A) clarifies the rules for giving
machinery and plant capital allowances to non-residents and other
persons with non-taxable activities. It has effect where a trade,
or other activity for which machinery and plant capital allowances
are given, is only partly within the charge to tax. It ensures
that the rules for giving machinery and plant capital allowances
are applied to the part of the trade or activity within the charge
to tax as if that were a separate trade.
Example
A French Bank, which has a single
world-wide banking trade, has a branch in London. The part of the
trade carried on through the branch is within the charge to tax
under section 11 Income and Corporation Taxes Act 1988. The rules
in Part II CAA for giving machinery and plant capital allowances
are applied to the part of the trade carried on through the branch
as if that were a separate trade.
The bank transfers a computer from
the Paris office to the London office. The rule in section 83(2A)
treats the transfer as bringing the computer into use for the purposes
of the London branch trade. Capital allowances are due on the lower
of the open market value and the original cost to the bank by virtue
of section 81 CAA (amended as below).
The London office buys an executive
jet for use by the London and Paris offices. The rule in section
83(2A) treats use by the London office as qualifying use and by
the Paris office as non-qualifying use. Capital allowances are restricted
to the London share of the use by virtue of section 79 CAA.
The bank transfers a computer, on
which capital allowances have been given, from the London office
to the Paris office. The rule in section 83(2A) treats the transfer
as a cessation of use by the London branch trade. The open market
value of the computer is brought in as a disposal value by virtue
of sections 24(6)(c)(iv) and 26(1)(f) CAA.
-
Section 83(2A) does not apply to Chapter V (overseas
leasing) and sections 64A (oil profit sharing contracts) and 75
to 78 (sale and leaseback, successions) of CAA as these provisions
include references to a trade which is not intended to be restricted
to a trade, or part trade, carried on within the UK tax net.
-
Subsection (2) adds a new section 79A CAA,
which provides for a balancing adjustment to be made if the proportion
of taxable use is reduced and the allowances that have been given
are excessive.
-
Where machinery or plant begins to be used other
than for qualifying purposes, it is treated as sold and re-acquired
at the lower of open market value and original cost by virtue
of sections 24(6)(c)(iv), 26(1)(f) and (2) and 79(3) CAA. The
effect of these provisions is to make a balancing adjustment,
bringing the allowances given up to the change of use into line
with the depreciation actually suffered.
-
Expenditure on a machine or plant used partly
for non-qualifying purposes goes into a single asset pool by virtue
of section 79 CAA. Capital allowances are reduced in relation
to the extent of non-qualifying use. New section 79A has effect
where the proportion of qualifying use of an asset in a section
79 pool is reduced and the open market value of the asset at the
end of the chargeable period exceeds the balance in the pool by
more than £1 million.
-
Where section 79A has effect, the asset is treated
as sold immediately before the end of that chargeable period,
which gives rise to a balancing adjustment, and reacquired at
the start of the following chargeable period for the disposal
value, which goes into a new single asset pool.
Example
A Bahamas shipping company carries
on part of its shipping business through a branch in London. A tanker,
costing £100 million is bought by the company and, for the first
year, 90% of the use of the tanker is contracted out by the London
branch at an arms length fee, after expenses, of £10 million. In
year 2, the proportion contracted out through the London branch
is reduced to 10% at an arms length fee, after expenses, of £1 million.
The open market value of the tanker at the end of year 2 is £120
million.
For year 1, the branch is entitled
to capital allowances of £100 million @ 25% x 90% = £22.5 million.
After setting against the profit of £10 million, it makes a loss
for tax of £12.5 million, which can be set against other profits
or surrendered as group relief.
For year 2, under the present rules
it would have been entitled to capital allowances of £75 million
@ 25% x 10% = £4.125 million, and would make a loss for tax of £3.125
million, which could be set against other profits or surrendered
as group relief.
The new rule in section 79A will
however apply instead as the proportion of qualifying use has been
reduced and the open market value at the end of year 2 (£120 million)
exceeds the tax written down value (£75 million) by more than £1
million.
The capital allowance computation
for year 2 is as follows. There is a disposal value of £100 million,
being the lower of the open market value £120 million and the cost
£100 million. Setting this against the tax written down value brought
forward in the pool of £75 million gives rise to a balancing charge
of £25 million which, taking all the relevant circumstances into
account, is reduced to the amount of allowances given £22.5 million.
The company makes a profit for tax of £1 million + £22.5 million
= £23.5 million.
Looking at year 1 and 2 together,
the company is taxed overall on £23.5 million less £12.5 million
= £11 million. This is equal to its commercial profit over the period,
ignoring any capital profit from revaluation of the ship. The qualifying
expenditure for capital allowances at the beginning of year 3 is
£100 million.
-
Subsection 3 inserts new subsections (2AA)
and (2AB) into section 81 CAA. Section 81 applies where machinery
or plant belonging to a taxpayer is brought into use for the purposes
of a trade carried on by the taxpayer, and the machinery or plant
has not previously qualified for capital allowances in respect
of that trade. It allows the taxpayer to claim capital allowances
based on the current open market value of the asset. Section 81
covers both assets bought by the taxpayer for a different purpose,
for instance for private use, and assets acquired as a gift.
-
Where an asset bought by the taxpayer has increased
in value, the taxpayer gets allowances on more than the original
cost. This is anomalous compared with the treatment of an asset
bought by the taxpayer for use in the same trade or bought by
a connected person, such as a fellow subsidiary, and later transferred
to the taxpayer. In the first case, allowances are given on the
original cost. In the second case, they are limited to the original
cost by section 75 CAA.
-
New section 81(2AA) removes the anomaly. Where
machinery or plant bought by the taxpayer other than for the purposes
of a trade carried on by the taxpayer is brought into use for
the purposes of the trade, it provides for allowances to be given
on the lower of the current open market value and the cost to
the taxpayer.
Example
(1) An amateur musician buys
an antique violin for £100,000. Five years later, he decides to
give up his job and become a full-time professional musician. The
violin has a market value of £150,000. He can claim capital allowances
against his professional income on £100,000, being the lower of
the cost and the current open market value.
(2) A French oil company transfers
an oil rig, which has previously been used for purposes outside
the UK tax net, to a UK branch. The oil rig, which cost £100 million,
has a current open market value of £150 million. The branch can
claim capital allowances on £100 million, being the lower of the
cost and the current open market value.
-
New section 81(2AB) provides that where the amount
on which allowances could have been claimed, if the asset had
qualified for allowances when it was bought by the taxpayer, would
have been restricted to less than cost by virtue of section 75,
76 or 76A CAA (connected person, sale and leaseback or main benefit
sale), the same restriction applies to section 81(2AA).
Example
In example (2) above, if the oil
rig was purchased by a foreign subsidiary for £100 million and sold
to the company at an open market value of £140 million one year
before it was transferred to the UK branch, the branch can claim
capital allowances on £100 million, being the lower of the current
open market value, the cost to the company and the cost to the connected
person.
-
Subsection (4) makes a consequential amendment
to Schedule 19AC Income and Corporation Taxes Act 1998 (overseas
life insurance companies). It provides for section 81 CAA, as
it has effect by virtue of the new rule in section 83(2A), to
apply to transfers of machinery or plant from a category that
does not qualify for capital allowances to a category that qualifies
for capital allowances. This will mean that the lower of open
market value or original cost rule will apply to the transfer,
instead of the current rule for these companies which requires
market value to be used in all circumstances.
-
Subsection (5) makes a consequential amendment
to section 53 CAA. It removes subsection (1)(bb), which is made
otiose by the rule in section 83(2A).
-
Subsection (6) provides the commencement
provisions. The rule in new section 83(2A) has effect for chargeable
periods ending on or after budget day. The new rules in section
79A and sections 81(2AA) and (2AB) have effect where the relevant
event takes place on or after budget day.
___________________
BACKGROUND
-
There are no specific rules for giving capital
allowances to non-residents at present, which can create uncertainty
over the way in which the rules should operate in some circumstances.
The new rules in this clause provide a clear code for giving machinery
and plant capital allowances to non-residents and other persons
with non-taxable activities, which will assist businesses by providing
fairness and certainty.
-
The main rule confirms that capital allowances
are due on machinery and plant for use in a trade only if the
trade is taxable in the UK. Where only part of the trade is taxable,
for instance where a non-resident carries on a trade partly through
a branch in the UK, the capital allowance rules are applied as
if it were a separate trade. This broadly confirms the way in
which the rules have been applied in the past. It also adds clarity
and certainty as to the correct treatment where an asset is transferred
wholly or partly between the UK and non-UK part of the trade.
-
The further changes in new sections 79A and 81(2AA)
and (2AB) make the rules fairer and help to protect the Exchequer
by bringing the allowances given closer into line with the amount
of the actual depreciation suffered that relates to the taxable
activity.
