BUSINESS TAX

Capital Allowances: Plant and Machinery Allowance Regime; Special Rate Pool

As part of the business tax reform package announced at Budget 2007, the following changes will be introduced to the plant and machinery capital allowances regime from 1 April 2008 (corporation tax) or 6 April 2008 (income tax):

• the main rate of writing-down allowances (WDAs) will be reduced to 20% (previously 25%);
• the rate of WDAs on long-life assets will be increased to 10% (previously 6%);
• a new annual investment allowance (AIA) will be introduced for the first £50,000 of expenditure on most plant and machinery each year. Where more than £50,000 is spent in a chargeable period, the excess will qualify for WDAs in the normal manner. (This AIA is intended to complement any existing 100% first-year allowance (FYA) schemes. Any expenditure that qualifies for 100% allowances under separate schemes will be unaffected by the introduction of the AIA); and
• where unrelieved expenditure in the main pool is £1,000 or less, businesses can claim a WDA of any amount up to £1,000.

In addition, a new 10% ‘special rate’ pool will be introduced into which capital expenditure on the following assets will be allocated:

• any unrelieved expenditure in a pre-FA 2008 long-life asset pool;
• expenditure on the thermal insulation of a building (previously such expenditure qualified for 25% allowances, but only when incurred on an industrial building); and
• expenditure on certain ‘integral features’. (Currently listed as electrical systems (including lighting systems); cold water systems; space or water heating systems, powered systems of ventilation, air cooling or air purification and any floor or ceiling comprised in such systems; lifts, escalators and moving walkways; external solar shading; and active facades).

As for the main pool, where the unrelieved expenditure in the ‘special rate’ pool is £1,000 or less, businesses can claim a WDA of any amount up to £1,000.

Capital Allowances: Enterprise Zone Allowances, Industrial Buildings Allowances and Agricultural Buildings Allowances

As previously announced, enterprise zone allowances (EZAs) are to be withdrawn from April 2011. The EZA withdrawal is similar to the withdrawal of the agricultural buildings allowances (ABAs) and industrial buildings allowances (IBAs) introduced in FA 2007, except that:

• EZAs will not be subject to the phasing out rules which will apply to the IBAs and ABAs; and
• balancing charges in respect of EZAs will be retained for a limited period, such that where a business disposes of a building within 7 years of first use (and allowances have been claimed), then the business will still potentially be liable to a balancing charge. FA 2008 will also contain detailed rules on:
• the phasing out of WDAs for expenditure on industrial and agricultural buildings (broadly the amount of WDA is to be stepped down by 25% for each financial or tax year, from 1 April 2008); and
• specific anti-avoidance provisions counteracting disclosed schemes aimed at exploiting the legislation withdrawing balancing adjustments in order to claim multiple WDAs.

Draft legislation has been published and is available on the HMRC website.

First-year Allowances for Natural Gas, Biogas and Hydrogen Refuelling Equipment

The 100% first-year allowance available for expenditure incurred on natural gas and hydrogen refuelling equipment for vehicles will be extended until 31 March 2013 (previously due to end on 31 March 2008). From 1 April 2008, the allowance will also apply to refuelling equipment for biogas.

First-year Allowances for Expenditure on Lowemission Cars

The 100% first-year allowance for qualifying expenditure on new cars with CO₂ emissions not exceeding 120g/km will be extended until 31 March 2013. In addition, the definition of a qualifying low-CO₂ car will be amended. For expenditure incurred on or after 1 April 2008, the qualifying emissions threshold will be reduced to 110g/km. Low-emissions cars costing more than £12,000 are not treated as falling in a singleasset pool. A transitional rule will apply in relation to leases entered into before 1 April 2008, to ensure that cars with emissions below the current threshold but above the new threshold are unaffected by the reduction.

Capital Allowances: First-year Tax Credits

New measures will enable loss-making companies to surrender losses in exchange for a cash payment (a first-year tax credit) from the Government, provided:

• the losses are attributable to 100% first-year allowances on designated energy-saving or environmentally beneficial plant and machinery;
• the loss cannot be otherwise relieved by the company; and
• the qualifying expenditure was incurred on or after 1 April 2008. The credit that will be paid to the company will be 19% of the loss surrendered, although it cannot exceed the greater of:
• the total of the company’s PAYE and NIC for the loss period; or
• £250,000.

Any first-year tax credits will be clawed back if the qualifying plant and machinery is sold within 4 years of the end of the period in which the tax credit was paid.

Capital Allowances Buying and Acceleration

New measures will counter the avoidance of corporation tax through the use of arrangements designed to crystallise a balancing allowance on plant and machinery involving the sale of a trade to a profitable group which does not intend to carry on the trade in the long term. An example of this is where a lossmaking company is sold to an unconnected profitable group prior to the trade (rather than the company) being sold to a third party some time later. The new measures will ensure that the sale of the trade does not lead to a balancing allowance in the hands of the profitable company. The rules will take effect where a company sells its trade on or after 12 March 2008.

Trading Stock

Finance Bill 2008 will provide that, where goods are appropriated into or from trading stock other than by way of trade, the profits of the trade should be adjusted for tax purposes to replace the cost of the stock, or the actual proceeds, with their market value. This is intended to give statutory effect to a long-established, non-statutory rule.

Leased Plant or Machinery: Anti-avoidance

Legislation is to be introduced to counter avoidance by businesses acting as intermediate lessors, leasing in plant or machinery under one lease and leasing it out under another. The avoidance exploits differences in the way the two leases are taxed, which allow the business, as lessee, to deduct all the lease rentals payable but tax the business, as lessor, on only a portion of rentals receivable, thus creating an artificial loss. The legislation will ensure that rentals received are taxed on the same basis as rentals paid.

Legislation will also be introduced to counter avoidance involving leases of plant or machinery granted in return for a capital payment, often described as a premium, which escapes taxation because it does not have to be brought in as a disposal receipt for capital allowances purposes and because little or no tax would be payable under the chargeable gains regime. The legislation will ensure that such payments are normally to be taxed as income of the lessor. It will also counter attempts to reduce or avoid a capital allowances disposal receipt on the granting of a long funding finance lease where these rely on reducing the value of the leased asset as shown in the lessor’s balance sheet.

In addition, in the case of a sale and finance leaseback, the finance lease will in most cases be treated as a long funding lease, with ensuing tax consequences. Lease and finance leasebacks will be treated in similar fashion.

In all cases the legislation will generally have effect for transactions entered into after 12 December 2007 but certain aspects of it have effect only after 11 March 2008.

Restrictions on Trade Loss Relief for Individuals

Legislation is already in place to counter the use of partnership arrangements that generate trade losses for use as ‘sideways loss relief’ by a non-active or limited partner. ‘Sideways loss relief’ means the set-off of trading losses against income other than from the trade and against chargeable gains. Similar action is now to be taken against individuals who are not in partnership but carry on a trade in a ‘non-active capacity’. Where a loss arises to such an individual as a result of tax avoidance arrangements made on or after 12 March 2008, no sideways loss relief will be available. Where this is not the case, there will nevertheless be an annual limit of £25,000 on the total sideways loss relief that an individual can claim from trades carried on in a non-active capacity. Transitional rules will apply where the individual’s basis period straddles 12 March 2008. The restrictions will not apply to losses derived from certain film reliefs or to Lloyd’s underwriting losses. For these purposes an individual carries on a trade in a non-active capacity if he spends an average of less than 10 hours a week personally engaged in commercial activities of the trade. Legislation will also align the existing definition of ‘non-active partner’ with this new definition.