I n t his chapt er you will cover t he r ules f or det er mining whet her plant and machiner y qualif y f or capit al allowances – t he t ax deduct ion available inst ead of depr eciat ion. You will lear n about :
- t he st at ut or y def init ion of non-qualif ying expendit ur e;
- t he exclusion f or buildings;
- t he exclusion f or st r uct ur es and land;
- t he over r ide t o t he exclusions;
- case law t est of f unct ion v set t ing.
St at ut or y r ef er ences in t his chapt er ar e t o CAA 2001 unless ot her wise st at ed.
B4.1 Introduction
Capit al allowances ar e a tax deductible allowance given when a trader incurs qualifying capital expenditure. The t r ader would not get a r evenue deduct ion f or t he ex pendit ur e because it has an enduring benefit f or t he t r ade and is t her ef or e r egar ded as capit al. I t will however be a business cost and t her ef or e t he t r ader should be able t o claim a deduct ion against t axable pr of it s. This is done by means of a capit al allowance.
s. 2
The amount of t he capit al allowances available depend on t he t ype of qualif ying ex pendit ur e. All allowances ar e laid down in st at ut e. The allowance could be as lit t le as 4%, it could be as high as 100% - it depends on t he t ype of expendit ur e and t he t ype of business incur r ing t he expendit ur e.
Capit al expendit ur e f alls int o 3 br oad cat egor ies:
- ex pendit ur e on plant and machinery (by f ar t he most common); and - ex pendit ur e on industrial buildings (ver y common); and.
- other ex pendit ur e (less common), such as on agr icult ur al buildings..
s. 1(2)(a)
s.. 1(2)(b)
I n t his chapt er we will look at t he def init ion of plant and machiner y. I n subsequent chapt er s we will look at how we calculat e t he var ious t ypes of allowances.
You should not e t hat capit al expendit ur e will include any ir r ecover able VAT. This is VAT which t he t r ader is unable t o claim back f or var ious r easons - t his will become clear er once you have st udied t he VAT par t of your cour se.
B4.2 Definition of “Plant and Machinery”
The def init ion of plant and machiner y is f ound in t he Capit al Allowances Act of 2001 (CAA 2001). Ther e is also a significant body of case law discussing what is and what is not plant .
s. 21- s. 33
CAA 2001 def ines what is non-qualif ying expendit ur e. Ther ef or e if an it em is not wit hin t he non-qualif ying expendit ur e, by eliminat ion it is likely t o be r egar ded as plant .
Capit al Allowances - Def init ion 31
The non-qualif ying expendit ur e is br oken down int o “buildings”, and “structures and land”. The non qualif ying expendit ur e included under buildings can be f ound wit hin S.21 CAA 2001. Ther e is a list called List A in t his sect ion. I f a par t icular it em is wit hin List A, it is specif ically excluded and is therefore unlikely to qualify as plant and machiner y
s. 21
Similar ly wit hin S.22 CAA 2001, t her e is a list (List B), which ident if ies expendit ur e in connect ion wit h st r uct ur es and land which should not be regarded as plant or machinery. So you can see t hat t he legislat ion is ver y usef ul in det er mining whet her somet hing is plant or not .
s. 22
Ther e is also a ver y impor t ant override wit hin t he legislat ion. This can be f ound at S.23 CAA 2001 wit hin List C. Essent ially if expendit ur e is within List C it is likely to qualify as plant and machiner y.
s. 23
I t could t her ef or e be t hat ex pendit ur e looks as t hough it f alls wit hin S.21 CAA 2001 (and would t her ef or e not qualif y f or allowances), but if you can specif ically f ind it wit hin S.23, t hen S.23 over r ides t he or iginal ex clusion, and t he expendit ur e will pr obably be t r eat ed as plant and will qualif y f or allowances
Even if an it em in included wit hin List C, it must st ill sat isf y t he case law t est of
“f unct ion ver sus set t ing”.
This ver y impor t ant t est asks whet her ;
(i) t he asset in quest ion f or ms par t of t he set t ing in which t he t r ade is car r ied on?;
or
(ii) t he asset in quest ion is somet hing which a t r ader act ively uses in his t r ade, i.e.
does t he asset per f or m a f unct ion in t he business?
I f t he asset has a f unct ion, it will be plant and capit al allowances can be claimed.
However , if expendit ur e has been incur r ed by t he t r ader on par t of t he set t ing wit hin which he r uns his business, it will not be plant and no allowances can be claimed. This was est ablished of J Lyons & Co v At t or ney Gener al and has been r evisit ed many t imes by t he Cour t s in deciding what is or is not “plant ”.
B4.3 Buildings – s. 21 CAA 2001 s. 21
Under t he buildings exclusion wit hin S.21 CAA 2001, t he t er m “building” includes:
- an asset which is incor por at ed in t he building;
- an asset which, alt hough not incor por at ed in t he building (because per haps it is moveable), is in t he building and is of a kind which would nor mally be incor por at ed in t he building;
- an asset t hat is in or connect ed wit h t he building and is in List A.
You can see t hat if an it em is incor por at ed in t he building, or it is nor mally incor por at ed, but on t his par t icular occasion it is moveable, it is likely t o be excluded under (a) or (b).
List A pr ovides f ur t her clar if icat ion as t o it ems included wit hin t he t er m “building”, specif ically det ailing t he f ollowing:
W alls, f loor s, ceilings, door s, gat es, shut t er s, windows, st air s.
Mains ser vices and syst ems f or wat er , elect r icit y and gas.
W ast e disposal syst ems.
Sewer age and dr ainage syst ems.
Shaf t s or ot her similar st r uct ur es.
Fir e saf et y syst ems.
No gr eat sur pr ises t her e, but List A does clar if y t hat ex pendit ur e on t hese par t icular it ems (unless lat er over wr it t en by List C), would be r egar ded as expendit ur e on
“buildings” and t her ef or e would not qualif y as “plant ”.
B4.4 Structures and Land – s.22 CAA 2001 s. 22
Under S.22, plant and machiner y does not include expendit ur e on t he f ollowing:
The pr ovision of a st r uct ur e or ot her asset in List B; or Any wor ks involving t he alt er at ion of land.
Land is not plant , but List B is wor t h a close look and cont ains t he f ollowing:
Tunnel br idge, viaduct et c.
Pavement , r oad, car par k.
Canal or basin.
Dam, r eser voir s et c.
Docks, har bour s, whar f s.
Dykes and sea walls.
Again no gr eat sur pr ises her e. You would have t o be f air ly opt imist ic t o ar gue t hat a t unnel, f or example, was a piece of plant . However , t o be saf e do check t hat your it em is not wit hin List C as anyt hing in List C over r ides List B.
B4.5 Override – s. 23 CAA 2001 s. 23
S.23 t ells us t hat t hat S.21 and S.22 do not apply t o t he f ollowing:
Ther mal insulat ion of indust r ial buildings.
Fir e saf et y.
Saf et y at designat ed spor t s gr ounds.
Saf et y at r egulat ed st ands at spor t s gr ounds.
Saf et y at ot her spor t s gr ounds.
Per sonal secur it y.
Sof t war e and r ight s t o sof t war e.
List C it ems.
Ther ef or e expendit ur e on any of t he it ems above will be t r eat ed as expendit ur e on
“plant ” and will qualif y f or capit al allowances.
List C is a long list of ver y specif ic it ems. The maj or it y of t hese it ems have been der ived f r om case law. I ndeed List s A, B and C have lar gely been const r uct ed as a
Capit al Allowances - Def init ion 33
summar y of case decisions r egar ding whet her asset s const it ut e plant or not . Ther ef or e, in t his ar ea, we no longer need t o r ef er t o much case law as case pr ecedent s have now been put on t he st at ut e books and incor por at ed int o t he Capit al Allowances Act . The new legislat ion is ver y compr ehensive and is a gr eat help in det er mining whet her a par t icular it em is plant or not .
Taking a closer look at List C, which compr ises some 33 it ems, it should be not ed t hat whilst List C it ems nor mally qualif y as plant , it does not aut omat ically mean t he asset is plant . The asset must also f ulf il t he case law t est of f unct ion v set t ing.
I n t he maj or it y of cases t he “f unct ion” t est will be passed. However you should be awar e t hat j ust because an asset appear s on List C, it does not aut omat ically mean t hat capit al allowances can be claimed. I f a “List C” asset f or ms par t of t he “set t ing” in which a business is car r ied on, a capit al allowances claim will be denied.
Illustration 1
Consider a dr y dock. A dr y dock is ment ioned in S.22 List B, it em 5 (ie a dock, har bour , et c). These ar e t he it ems which ar e consider ed t o be par t of a st r uct ur e or land, t her ef or e you would t hink it would not be plant and would not qualif y f or capit al allowances.
Now t ake a look at List C in S.23.
I n List C, it em 23, we have t he pr ovision of dr y docks. I n t he case of CI R v Bar clay, Cur le & Co Lt d, a dr y dock was held t o per f or m a f unct ion in t he business, ie, r emoving a ship f r om t he r iver , holding it upr ight whilst it was being r epair ed and t hen r et ur ning it t o t he r iver when t he r epair s wer e complet e. Consequent ly t he dr y dock f ulf illed a f unct ion in t he business r at her t han j ust being par t of t he set t ing in which t he business was car r ied on.
Ther ef or e t he dr y dock will qualif y as plant , pr oviding of cour se t he f unct ional t est has been met , which it should do f ollowing t he Bar clay Cur le case.
Fr om t his ex er cise we see an it em t hat init ially looked as t hough it was ex cluded f r om being plant because it was in List B. However , on an inspect ion of over r ides in List C we f ind it specif ically ment ions t he it em concer ned. Ther ef or e we can assume t hat we ar e a long way t o est ablishing t hat a dr y dock is plant .
B4.6 Case Law
Var ious cases on t he “f unct ion v set t ing” t est demonst r at e t his ver y impor t ant pr inciple.
I n Dixon v Fit ch’s Gar age Lt d (1975), it was held t hat a gar age canopy over a pet r ol f illing st at ion did not act ually help in t he supplying of pet r ol. I t was t her ef or e held t o be par t of t he set t ing, and t her ef or e not plant . However , if t he canopy was mor e t han j ust a canopy (ie, it per f or med a gr eat er r ole in t he business such as at t r act ing cust omer s t o t he gar age), t hen t he Revenue may accept t hat t he canopy f ulf ils a f unct ion and capit al allowances could be claimed. I n an I r ish case (O’Culachain v McMullan Br ot her s) t he t axpayer succeeded in such a claim as t he canopy car r ied adver t ising in illuminat ed let t er ing.
I n Schof ield v R & H Hall Lt d (1975), dockside concr et e gr ain silos wer e held t o be plant as t hey f ulf illed a f unct ion in t he t r ade. They held t he gr ain in a posit ion f r om which it could be dischar ged t o pur chaser s. This was a f unct ion, and t he silos wer e t her ef or e plant . This has now been specif ically included in List C - I t em 28 st at es t he pr ovision of silos pr ovided f or t empor ar y st or age or st or age t anks ar e specif ically included as plant . I n Cooke v Beach St at ion Car avans Lt d (1974), a car avan par k wit h leisur e f acilit ies, claimed t hat t he const r uct ion of t heir swimming pool f ell wit hin t he “f unct ion”
pr ovisions, and was t her ef or e plant . The Revenue ar gued it was set t ing. The Cour t s agr eed t hat t he pool per f or med a f unct ion, i.e. t he car avan par k used t he swimming pool f or car r ying on it s t r ade, and it was a maj or at t r act ion t o t he car avan par k. Again t his case has now been included in t he legislat ion at List C, it em 16.
I n J ar r old v J ohn Good & Sons Lt d, moveable par t it ions in an of f ice t o sub-divide f loor space wer e consider ed not t o be par t of t he st r uct ur e. The Revenue cont ended t hat t hey wer e par t of t he set t ing, i.e. par t of t he building in which t he t r ade was car r ied on.
The Cour t of Appeal agr eed wit h t he t axpayer and decided t hat t he par t it ions per f or med a f unct ion as t hey wer e moveable and wer e int ended t o be moved in t he cour se of t he business. The par t it ions wer e t her ef or e plant . This is now included in List C at it em number 13. As you can see, a lot of case law is now incor por at ed int o List C in S.23 CAA 2001. I t is cer t ainly wor t h looking t his up if you have not alr eady done so.
Example 1
W hich of t he f ollowing t ypes of expendit ur e do you f eel qualif ies as plant ? Gener al light ing in a r et ail st or e
Display light ing in st or e windows Decor at ive t apest r ies in a hot el Ship used as a f loat ing r est aur ant Adver t ising hoar dings
Suspended ceiling over a st air well Suspended ceiling over eat ing ar ea
Capit al Allowances - Def init ion 35
Answer 1
Plant ? Gener al light ing in a r et ail st or e X
Display light ing in st or e windows R Decor at ive t apest r ies in a hot el
Ship used as a f loat ing r est aur ant X Adver t ising hoar dings
Suspended ceiling over a st air well X Suspended ceiling over eat ing ar ea
Gener al light ing in a r et ail st or e does not nor mally qualif y f or plant . I t is j ust consider ed t o be par t of t he set t ing. W hen acquir ing a building, gener al light ing is an int egr al par t . I n List A it em 2, mains ser vices such as elect r icit y syst ems ar e not r egar ded as plant .
Display light ing in st or e windows can be r egar ded as plant . The light ing is nor mally much mor e specialised and wit h t hat it f ulf ils a f unct ion, i.e. t o at t r act cust omer s int o t he shop. I n List C it em 2, elect r ical syst ems which meet t he r equir ement s of a par t icular act ivit y ar e t r eat ed as plant .
I n Cole Br ot her s v Phillips, capit al allowances claims wer e made in r espect of light ing in a r et ail shop (par t of t he J ohn Lewis Gr oup). Gener al light ing was held not t o be plant whilst mor e specialised light ing (eg, f or window displays et c) was held t o per f or m a f unct ion. This est ablished t he pr inciple t hat t he Revenue could r eview capit al allowance claims on a “piecemeal basis” (ie, consider ing each piece of “plant ” on it s own mer it s).
Decor at ive t apest r ies in a hot el ar e r egar ded as plant . I n List C it em 14, decor at ive asset s pr ovided f or t he enj oyment of t he public in a hot el, r est aur ant or similar t r ade will be t r eat ed as plant . This was est ablished in t he case of CI R v Scot t ish & Newcast le Br ewer ies Lt d wher e t apest r ies and mur als f it t ed t o t he walls of pubs and hot els cr eat ed an “ambience and at mospher e” wit h which t o at t r act cust omer s. Ther ef or e such expendit ur e had a f unct ion r at her t han being par t of t he set t ing.
A ship used as a f loat ing r est aur ant was not r egar ded as having a f unct ion, it was act ually t he set t ing in which t he t r ade was car r ied on. (Benson v Yar d Ar m Club Limit ed (1979)).
Adver t ising hoar dings ar e specif ically wit hin List C, it em number 15. Ther ef or e it will be saf e t o assume t hat t hey qualif y as plant .
A suspended ceiling over a st air well is not r egar ded as plant . I t does not f ulf il a f unct ion, but inst ead is mer ely par t of t he set t ing. Hampt on v For t es Aut ogr ill Lt d (1980).
A suspended ceiling over an eat ing ar ea however , could be r egar ded as plant as it f ulf ils a f unct ion in t he t r ade cr eat ing a gener al at mospher e. Exposed wir ing over an eat ing ar ea is not at t r act ive f or cust omer s!