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CLAUSE 69 AND SCHEDULE 21: CAPITAL ALLOWANCES: MINOR AMENDMENTS

SUMMARY

1.                  This Clause and Schedule make minor amendments to the Capital Allowances Act 2001.  These deal with small, technical points missed when the legislation was rewritten.  They maintain what was the tax treatment in practice before the legislation was rewritten.  The changes will apply, like the new Capital Allowances Act 2001, to chargeable periods ending on or after 1 April 2001 for corporation tax, and on or after 6 April 2001 for income tax.

DETAILS OF THE CLAUSE AND SCHEDULE

Clause 69

2.                  Subsection (1) gives effect to Schedule 21.  The schedule amends the Capital Allowances Act 2001.  This is the Act resulting from the work of the Tax Law Rewrite Project.  It rewrote legislation about capital allowances.

3.                  Subsection (2) provides for the amendments to apply from when the Capital Allowances Act 2001 applies.  That is to chargeable periods ending on or after 1 April 2001 for corporation tax and 6 April 2001 for income tax.

Schedule 21

4.                  Paragraph 1 allows a person carrying on an overseas property business to get capital allowances for expenditure they incur on adding thermal insulation to an industrial building they let in the course of that business.

5.                  This was the position in the Capital Allowances Act 1990.  But it was arrived at only by following a succession of deeming provisions:

• section 67(1) of that Act provided plant and machinery allowances if a person carrying on a trade incurred expenditure in adding thermal insulation to an industrial building they occupied for the purposes of that trade;
  
  
• section 28A treated a person’s Schedule A business as a trade for the purposes of plant and machinery allowances;
  
  
• section 67(4A) treated a person who let an industrial building in what was deemed by section 28A to be a trade as occupying that building for the purposes of that trade throughout the period for which it was let by them for the purposes of section 67(1).  (Otherwise they could not satisfy the condition in section 67(1).); and
  
  
• section 161(2A) applied the Capital Allowances Act 1990 to an overseas property business as it applied to a Schedule A business.

6.                  Section 28(2) of the Capital Allowances Act 2001 dealt with thermal insulation and property businesses more directly:

“(2) This section also applies to expenditure if a person carrying on a qualifying activity consisting of an ordinary Schedule A business has incurred it in adding insulation against loss of heat to an industrial building let by him in the course of the business.”

7.                  But it did not cover overseas property businesses.  The amendment made by paragraph 2 of the Schedule corrects this.

8.                  Paragraph 2 ensures that an equipment lessor and an equipment lessee cannot both claim plant and machinery allowances in respect of the same expenditure on the same fixture.  They could not do so under the Capital Allowances Act 1990.  But a minor change in the law made by the Capital Allowances Act 2001 means that they might in some circumstances be able to do so without this amendment.

9.                  Special rules are needed to deal with plant and machinery allowances for fixtures because of the interaction with property law.  This legislation was in Chapter VI of Part II of the Capital Allowances Act 1990.  It was rewritten as Chapter 14 of Part 2 of the Capital Allowances Act 2001.  It determines who (if anyone) is entitled to allowances for a fixture. 

10.             The Capital Allowances Act 1990 contained an unintended trap that, in certain circumstances, could have prevented anyone from claiming allowances in respect of a fixture.  The Capital Allowances Act 2001 removed this trap so as to bring the legislation into line with practice.  This minor change was wholly favourable to taxpayers.  However, it subsequently emerged that the change would allow, in certain circumstances, both an equipment lessor and an equipment lessee to get allowances on the same fixture.  This paragraph prevents this from happening.

11.             The paragraph does so by extending the rules in subsections (2) and (3) of sections 181, 182 and 184.  These rules already prevent two people from claiming allowances in respect of the same fixture.  Currently they only apply if the first claimant has an interest in the land which contains the fixture.  An equipment lessor will generally not have an interest in the land and so would not be covered by these rules.  This paragraph removes this requirement so as to ensure that the rules work as intended for equipment lessors.

12.             Paragraph 3 restores a few words which were accidentally omitted from the draft capital allowances bill published in July and subsequent versions of the Bill.  This puts the law for certain transactions involving the sale and leaseback by means of a finance lease of plant and machinery back where it was before the Capital Allowances Act 2001.

13.             Section 221 of the Capital Allowances Act 2001 is part of Chapter 17 of Part 2.  That rewrote part of the provisions in sections 75 to 76A of the Capital Allowances Act 1990.  Those were long-standing provisions which stop people:

• accelerating allowances by disposing of plant or machinery for an artificially low (or no) consideration; or

• pumping up allowances by disposing of plant or machinery for an artificially high price.

14.             The provisions generally apply only to transactions:

• between connected persons;
  
  
• where the plant or machinery is still used after the transaction for the transferor’s trade (normally achieved by means of a sale and leaseback); or
  
  
• where capital allowances are the sole or main benefit. 

15.             There are particular provisions for assets sold and leased back under a finance lease for activities which are not treated as a “qualifying activity” – for example use by a non-taxpayer.  But these provisions only applied, in the Capital Allowances Act 1990, if the plant and machinery is used for the purposes of a non-qualifying activity carried on by the “seller” or by a person (other than the “buyer”) who is connected with the “seller”.  The words omitted from section 221 mean the restrictions apply even if the person using the plant or machinery has no connection whatsoever with the original seller.  This would penalise unfairly transactions involving non-taxpayers, such as local authorities and hospitals, who lease plant and machinery from unconnected persons.  So the amendment corrects the slip.

16.             Paragraph 4 amends sections 263(1) and 558 of the Capital Allowances Act  2001 so they maintain the treatment of changes in partnerships involving companies in the Capital Allowances Act 1990. 

17.             Section 263 was based on section 78(3) and (4) of the Capital Allowances Act 1990.  That provided a general continuity rule.  If a partnership succeeded to the trade of another partnership the new partnership could get capital allowances based on expenditure incurred by the old partnership (even though the make up of the new partnership was different).  But this did not apply if there was a “permanent discontinuance” of the trade carried on by the partnership.  Then the continuity was broken; and the permanent discontinuance was a disposal event for plant and machinery allowances. 

18.             In rewriting section 78(3) and (4) of the Capital Allowances Act  1990, section 263 of CAA 2001 referred directly to a permanent discontinuance under section 113(1) of the Income and Corporation Taxes Act 1998 1988. This was more helpful to users as it pointed to the legislation that deems a qualifying activity to cease in certain circumstances.  But it ought also to have pointed readers to section 337 of the Income and Corporation Taxes Act 1998in order to take account of the rules for partnerships which include companies as partners.

19.             Section 114 of the Income and Corporation Taxes Act 1998 1988 provides computational rules for partnerships which have companies as partners.  It deems the income of the partnership to be computed as if it were a company (a notional company).  This means that the provisions of corporation tax apply to it.  Section 114(1)(c) deals with changes in the composition of the partnership.  It provides that when the members change, the trade is treated as transferred to a different company, as long as there is at least one company in the new partnership that was in the old.  So the transfer sets up a new notional company, and the old one ceases to exist.

20.             Section 337(1) of ICTA 1988 provides that where a company ceases to carry on a trade, or ceases to be within the charge to corporation tax in respect of a trade, that trade is treated as permanently discontinued.  This applies to the notional company created under section 114 of ICTA 1988.  When the transfer takes place the old notional company ceases to be within the charge to tax and ceases to carry on the trade so the trade is treated as permanently discontinued by section 337(1) of ICTA 1988.  This permanent discontinuance is picked up by section 78(3) and (4) CAA1990 along with section 113(1) of ICTA 1988 in the general reference to discontinuance.

21.             Section 263(1) of the Capital Allowances Act  2001 therefore needs to reflect section 337(1) of the Income and Corporation Taxes Act 1998  in order to maintain the position in the Capital Allowances Act 1990.  Subparagraph (1) amends section 263 to do that.

22.             Section 263 has a parallel section for Parts of CAA 2001 other than Part 2 (Plant and Machinery) in section 558 of CAA 2001.  Section 558(1) refers to section 337(1).  However the wording proposed for the amendment to section 263 brings out more clearly how sections 113 and 337 of the Income and Corporation Taxes Act 1998 result in the trade or other qualifying activity being treated as permanent discontinued.  So it subparagraph (2) amends section 558(1) of CAA 2001 for that purpose.

23.             Paragraph 5 amends the definition of an enterprise zone to take account of the transfer of functions to Scottish Ministers and to the Welsh Assembly.  It makes clear that an area may be designated as an enterprise zone not only by the Secretary of State but also by the Scottish Ministers or by the National Assembly for Wales.  A wide range of buildings constructed within such an enterprise zone may qualify for accelerated industrial buildings allowances.

24.             Section 298(3) of the Capital Allowances Act 2001 defines what is meant by enterprise zones.  It was based on section 21(4) of the Capital Allowances Act 1990.  That defined “enterprise zone” as “an area designated as such by an order made by the Secretary of State under powers in that behalf conferred by Schedule 32 to the Local Government, Planning and Land Act 1980 …”

25.             However, with effect from 1 July 1999, section 53 of  the Scotland Act 1998 transferred functions of the Secretary of State under Schedule 32 of the Local Government Planning and Land Act 1980 in Scotland to the Scottish Ministers.  The National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672) similarly transferred functions in respect of Wales.

26.             Paragraph 5 amends section 298(3)(a) to show the effect of these changes.  No change is needed for Northern Ireland which is covered already by section 298(3)(b):

(3) In this Part “enterprise zone” means an area designated as such by an order—

…

(b) in Northern Ireland, made by the Department of the Environment under Article 7 of the Enterprise Zones (Northern Ireland) Order 1981.

27.             Paragraph 6 similarly amends the definition of a “highway concession” to take full account of the transfer of functions to Scottish Ministers and to the Welsh Assembly.

28.             Section 341 opens Chapter 9 of Part 3 of the Capital Allowances Act 2001.  The Chapter makes provision for industrial buildings allowances in respect of highway undertakings.  Owners of highway concessions may be able to claim industrial buildings allowances even if they do not own the relevant interest in the road.

29.             Part of the definition of a “highway concession” in section 21(5AA) of the Capital Allowances Act 1990 was, in relation to any road, “(a) any right, in respect of the fact that the road is or will be used by the general public, to receive sums from the Secretary of State or from the Department of the Environment for Northern Ireland.”  Section 341(4) CAA 2001 was based on this.

30.             Since 1 July 1999, however, devolved government in Scotland and in Wales has meant that payments in respect of a highway concession can be made by the Scottish Ministers and the National Assembly for Wales as well as by Ministers of the Crown and the Department for Regional Development in Northern Ireland.

31.             Paragraph 6 of the Schedule amends section 341(4)(a) to refer to “the relevant authority”.  The new subsection (5) lists explicitly who is a relevant authority.

BACKGROUND NOTE

32.             The Capital Allowances Act 2001 rewrote, with minor changes, the legislation for capital allowances.  It was the first Act to result from the Tax Law Rewrite Project.  The project is rewriting direct tax legislation to make it clearer and easier to use, but without changing its general effect.  The project commands the support of all parts of the tax community.

33.             There was extensive consultation on draft legislation before the Capital Allowances Bill was introduced in January 2001.  During that consultation professional and business bodies recognised that, despite everyone’s best efforts, some small, technical points were likely to be missed.  They expressed the wish that such points should be dealt with in the Finance Bill wherever possible in the interests of keeping the new legislation fair, clear and self-contained.