Capital Allowances on Scaffolding?

Capital Allowances on Scaffolding?

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I have inherited a client from another firm. They are Scaffolding contractors. The previous firm has included scaffolding as stock and written off to the P&L 30% of brought forward value + addition in year. I assume this is an attempt to write down to lesser of cost or NRV. I would have thought scaffolding equipment would capitalised as a fixed asset and capital allowances claimed. Is it me or the previous firm that is incorrect?

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By Steve Kesby
02nd Dec 2011 12:19

Scaffolding

This is fixed assets with legs.

I imagine the 30% deduction takes account of the ones that walk, as well as impairment.  From an accounting perspective it doesn't seem an unreasonable treatment.  SSAP 9 recognises that not all stocks are held for resale.  HMRC might insist that you claim capital allowances and short life asset them, but if they did, you'd probably find yourself doing much the same thing with short life asset pools, just assuming the oldest ones walk first.  Obviously, at present, you can claim AIA, but the accounting and tax treatment don't always need to match (although it is preferable).

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By Steve Kesby
02nd Dec 2011 12:17

Valuation basis

Looking at something else this morning, I was reminded of various alternative tax bases for these sort of things.

There is a statutory renewals basis in S.68 ITTOIA 2005/S.68 CTA 2009.  In addition, HMRC allow a "non-statutory renewals basis" and a "valuation basis".

Your predecessors appear to have adopted this "valuation basis".

See BIM46940 regarding the "valuation basis" and BIM46900 as an index of the various other bases.

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By thacca
02nd Dec 2011 12:23

AIA

In the year I am doing there is profit circa £50k. AIA limit is 100k. Scaffold additions in the year are circa £60k. Am I entitled to claim AIA on the additions as this will obtain a favourable tax result.

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By Steve Kesby
02nd Dec 2011 13:24

Yes, but...

... we already know that the AIA won't always be £100k (it could disappear completely in time) and although HMRC will allow a change of basis from time to time, you can't just chop and change for the most favourable result.

You want the basis that's going to be best in the longer term.  I'd suspect that a stautory-renewals basis for those that are genuine replacements and capital allowances for those that are additions will both achieve your current objectives and be no worse than the existing basis in the longer term.

If you are going to switch to a capital allowances basis, the balance of the scaffolding "stock" seems to me to be unrelieved capital expenditure eligible for capital allowances (but not AIA, due to aving been incurred in earlier periods).

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Replying to Southwestbeancounter:
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By Malcolm Veall
05th Dec 2011 13:20

"no CAs due"

Steve,  Great answers, as a reader:thank you.

In BIM469935 what does "no capital allowances are due for the cost of the original asset" mean in the conditions HMRC list for Renewals basis to be used?  In this case we seem to think that the scaffolding might qualify for CAs is we claimed them.

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By George Attazder
05th Dec 2011 13:04

Oops

Had to delete my offering.  I'd got my wires crossed.

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By Steve Kesby
05th Dec 2011 13:57

2 renewals bases

Malcolm, that's correct.  Under the non-statutory basis (ie a treatment permitted by HMRC, but that may be ultra juris following Wilkinson) an initial capital allowances claim is not permitted.

However, there are two "renewals" basis.  The other is a scheme offered by statute (under S.68 ITTOIA 2005/S.68 CTA 2009) and is dealt with in HMRC's manuals at BIM46910 and is referred to briefly in the first paragraph of BIM46935.  It is derived from the old ICTA 1988 S.74(1)(d) test for "the supply [=replacement], repairs or alteration of any implements, utensils or articles employed for the purposes of the trade."

The modern legislation refers to "any tool", which is then defined as any implement, utensil or article and makes it clearer that it applies even though the expenditure might otherwise be considered non-allowable as capital expenditure.  HMRC's manuals do still refer to the old legislation, however.

The statutory scheme allows a revenue deduction for replacement items and does not preclude a claim for capital allowances on the initial outlay.

HMRC's view (with which I'd concur to a degree) is that this treatment is only really available where the items concerned are not an entirety themselves but are part of a wider entirety.  Scaffolding seems to me to fit this well.  Hence my view that there should be a distinction drawn between those items that are replacements (revenue) and those that are initial outlay (CAs - AIA).

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Replying to Fast German Car:
By plummy1
05th Dec 2011 22:42

Can you put me straight on this one please.

Dear Steve,

You obviously know your onions. Does it make any difference in this case that the company is in fact a scaffolding company and the scaffolding could be treated as their stock? I am more familiar with capital allowances as they apply to commercial property and I know a property developer cannot claim capital allowances on the property because in their case it is treated as stock. I'm sure I am putting 2 and 2 together and getting 5.

Thanks

John 

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By blok
06th Dec 2011 10:01

.

I struggle to convince myself that scaffold would ever be stock, unless your business was selling scaffold.

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By billgilcom
06th Dec 2011 12:07

Are the assets hired out?

I think you should refer to HMRC Guidance manauals at http://www.hmrc.gov.uk/manuals/bimmanual/BIM33040.htm  to see what their view is as regards hired out "stock".

However something that should not be overlooked is that if assets are capital and - as sometimes happens with compensation for their loss or disposal - you get more than original cost then the CGT provisions and wasting assets might mean that any profit was not chargeable to tax of any sort.

Just a thought 

 

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By ringi
06th Dec 2011 12:20

Scaffolding company often rent, sell and buy scaffolding…

At the time of putting up the scaffolding for a builder they may not even know if it will be rented short turn, or if the builder will decide to buy it, then maybe sell some of it back at the end of the job.

A scaffolding company could very reasonably not know how many bits of each type of scaffolding they have out on client sites, as the contract is to provide scaffolding for say a 3 bedroom house, not to provide a set number of bits.   So any “stock take” is unlikely to be of much use.

And yet accountants are expecting them to identify what new bits are replacements of lost or damages bits or are additions to their stock…

So saying 30% is are replacements of lost or damages bits may be as good as you will get!

 

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By Steve Kesby
06th Dec 2011 14:45

All good stuff

I think Bill and Blok's points (did you see what I did there?) address Plummys' question.

To be honest, I hadn't come across this in a scaffolding context before, but I've seen it done for small items in a plant hire business.  In that situation they maintained separate stocks for resale, but could also, occasionally, appropriate from the "hire stock" in fixed assets to trading stock.  As I think I said originally, SSAP 9 does though recognise that there may be stocks of consumable stores (which you might argue scaffolding is, in the context of Ringi's response).

I essentially agree with what HMRC say, but hadn't come across the section of the manuals that Bill referred us to.  The rewritten statutory renewals basis is more generous under the rewritten legislation, as I've said, in that it expressly allows the treatment where an item might otherwise be regarded as capital.

Bill's latter point is an excellent one that I'd forgotten too.  I remember dealing with a company that hired out antique furniture to television production companies.  There was generally a balancing charge on the plant pool and we had to check whether each item fell within the chattels exemption.  Horrible computation each year.

And the further info on the practicalities of a scaffolding business from Ringi are useful knowledge for me, and I'm sure the OP.

What an interesting thread!

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