A deregulatory package of measures to modernise the capital allowances system was announced by the Chancellor today. This will give business fairer and simpler rules. It will make the legislation on capital allowances clearer and easier to use in the Tax Law Rewrite Bill, which is planned to be ready for introduction in Parliament later this year.
The main changes are to:
– abolish the requirement to notify expenditure on which machinery and plant capital allowances may be claimed
– remove the requirement to put expenditure on cars costing less than 12,000 pounds into a separate pool for capital allowances
– give capital allowances to oil companies on machinery and plant used under an oil production sharing contract
– encourage investment in machinery and plant by making it easier to finance investment through leasing
– set out a clear code for giving machinery and plant capital allowances to non-residents
– extend the herd basis to shares in production animals and confirm that capital allowances are not due.
Abolition of notification
1. At present businesses have to notify expenditure on which machinery and plant capital allowances may be claimed within fixed time limits, broadly within two years after the period for which the business may wish to claim the allowances. Capital allowances cannot be claimed on expenditure that has not been notified. Expenditure may be notified by inclusion in a tax computation or by separate notice. Many businesses routinely notify all expenditure by separate notice, which puts an unwelcome compliance burden upon them.
2. In order to reduce burdens on business and to make the capital allowance system simpler and fairer, the requirement to notify expenditure will be repealed. This will also remove the consequential restriction on the capital allowances that can be claimed. It will apply to all periods for which the time limit for notification falls on or after 1 April 2000, that is for chargeable periods ending on or after 1 April 1998 for corporation tax or 6 April 1998 for income tax. Removal of separate pool for cars costing less than 12,000 pounds
3. At present expenditure on cars costing less than 12,000 pounds goes into a separate pool for computing capital allowances, together with certain pre-1986 expenditure on leased assets. There have been suggestions from business that this rule, which imposes additional record keeping requirements, should be removed.
4. The separate pool will be abolished from the start of the present chargeable period, that is the chargeable period that includes 1 April 2000 for corporation tax or 6 April 2000 for income tax. The balance brought forward on the separate pool will be added to the main pool.
5. In order to give businesses flexibility to arrange their tax affairs in ways that are most beneficial to them, they will be able to choose to delay the abolition of the separate pool until the start of the chargeable period that includes 1 April 2001 for corporation tax or 6 April 2001 for income tax. Oil production sharing contracts
6. Oil companies sometimes enter into contracts with foreign governments to extract oil under which the ownership of machinery and plant used for the contract passes from the oil company to the foreign government at some point. In the past, we have adopted ad hoc arrangements to deal with this type of contract, which is not adequately provided for by the present rules.
7. The new rule, which will apply to expenditure incurred on or after today, will allow oil companies to claim capital allowances on machinery and plant used under such a contract. It also provides for any disposal proceeds to be brought into account or, where there are no such proceeds, for the disposal value to be nil. It has been welcomed by the oil industry as providing fairness and certainty.
Sale and leaseback
8. Since 1972, the amount on which the lessor can claim capital allowances where machinery and plant, on which capital allowances have not been claimed by the lessee, is sold and leased back has been restricted to the current open market value of the asset. In 1997, further restrictions were placed on sale and finance leaseback to prevent the recycling of unused allowances.
9. The new rule, which has been developed in consultation with the leasing industry, will relax these restrictions, so that allowances can be claimed by the lessor on the lower of cost to and sale by the lessee, provided certain conditions are met. The main conditions are that:
– the equipment is new when acquired by the lessee
– the acquisition is not from a connected person, a sale and leaseback or a main benefit sale
– the equipment is sold to the lessor not more than four months after it is first brought into use and
– the lessee does not claim capital allowances.
10. The new rule, which has been welcomed by the leasing industry, will make it easier for businesses to finance investment in new equipment through leasing. Non-residents and other persons with non-taxable activities
11. 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.
12. The new rules provide a clear code for giving machinery and plant capital allowances to non-residents and other persons with non-taxable activities, which will assist business by providing fairness and certainty.
13. 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 allowances rules are applied to the part of the trade taxable in the UK as if it were a separate trade. This applies to chargeable periods ending on or after today.
14. There are two further small changes, which will make the rules fairer. These apply to events taking place on or after today.
15. Where machinery or plant begins to be used other than for qualifying purposes, an adjustment is made to bring the allowances given into line with the depreciation suffered. The new rule will provide for an adjustment also to be made if the proportion of qualifying use is reduced and exceptionally, for that item of machinery or plant, the amount written off for tax exceeds the commercial depreciation suffered by more than one million pounds.
16. Where machinery or plant is acquired from a connected person who has not claimed capital allowances, the amount on which allowances can be given is limited to the lower of the current open market value and the original cost to the connected person. Where machinery or plant, on which capital allowances have not been claimed, is brought into qualifying use without a change of ownership, capital allowances are given on the current open market value. The latter rule will be brought into line with the former, so that allowances are given on the lower of the current open market value and the original cost.
17. There are special rules, collectively known as the ‘herd basis’, which ensure that the keeping of production animals, such as cows or sheep, is taxed on a trading basis, using either of two alternative methods. These are applied by extra- statutory concession to shares in production animals, for instance in share farming.
18. The new rule will put the existing treatment on a firm legal basis, by extending the special rules to shares in production animals, and confirm that capital allowances, which are not given on assets taxed on a trading basis, cannot be claimed.
19. These changes will provide certainty and fairness over the taxation of production animals. As they are being made to confirm existing practice and understanding of the law, they will be treated as always having had effect.
NOTES FOR EDITORS
1. The abolition of notification will benefit those businesses that routinely notify by separate notice expenditure on which machinery and plant allowances may be claimed. Practices vary, but perhaps half of all larger businesses routinely notify by separate notice, printing out the items of expenditure on which allowances may be claimed in a substantial document, which is delivered to the Tax Office. Abolition will save businesses the cost of this exercise.
2. The abolition of the separate pool for cars costing less than 12,000 pounds will provide a modest saving in the records that need to be kept for tax by businesses with a number of such vehicles for use by employees or otherwise for use wholly in the business. Separate records will however continue to be required for cars used partly for private purposes, in order to work out the private use adjustment.
3. The new election for sale and leaseback will make it easier to finance investment through leasing where sale and leaseback is preferred for commercial reasons, with consequential savings for both lessees and lessors. The leasing industry advise that the main benefit will be in the middle ticket market, where around a quarter to a third of leases are structured in this way.
4. The other changes provide some deregulatory benefit by removing uncertainty over the rules that should be applied.
5. The two further changes to the rules for non-residents and other persons with non-taxable activities may add some costs. The first rule, which provides for an adjustment to be made where the proportion of qualifying use is reduced, will require the market value at the end of the chargeable period to be established. It will however apply only very exceptionally, as it is limited to cases where the open market value of the item of machinery or plant exceeds the tax written down value by more than one million pounds. The second rule, which limits allowances on machinery or plant that has not previously qualified for allowances to the lower of open market value and original cost, will require the original cost to be established. It also applies only rarely in practice. A main purpose of both these measures is to protect future Exchequer yield. Exchequer yield
6. These measures will have a negligible effect on Exchequer yield. Tax Law Rewrite Project
7. The Tax Law Rewrite 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. A Bill is planned to be ready for introduction in Parliament towards the end of 2000. It will rewrite the capital allowances legislation. Draft clauses were published for comments on 29 February. A draft Bill will be published in July for a final round of consultation.
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