A sole trader buys a van which has 80% business use in the first year and AIA claimed accordingly. Subsequently from the 2nd year on the business/private element reverses. In the tenth year the van is sold. Am I right to conclude that the disposal charge reflects the situation in year ten rather than year one, i.e. disposal value is reduced by the 80% private element?
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Just an observation...
It's just I thought that AIA can only be claimed on assets used wholly for business (100%), and that a restriction for private use is not appropriate for AIAs..?
You're all wrong
AIA can be claimed where there is private use... the whole allowance gets deducted from the expenditure, but only the business use proportion is claimed.
The adjustment on disposal must be just and reasonable though. See CA27005; 2nd example.
@ Basil
I think you'll find that the requirements of the legislation are unchanged since "the days of yore" of which you have already spoken.
That is to say that CAA 2001 (s. 207(2)), in this respect, is directly drawn from CAA 1990 (s. 79(5)). Accordingly, I rely on your own evidence.
Incidentally, my peremptory headline was originally "you're both [OP and first respondent] wrong", but required hasty amendment since you agreed with the OP.
However, if I acquire a £500,000 asset that I use 10% for private use in year 1 and so reduce my claimed AIA to £450,000, but in year 10 when I use it 90% for private purposes and sell it for £400,000, are you seriously suggesting that a court or tribunal would consider that it is just and reasonable (under CAA 2001, s. 207(2)) to reduce my £400,000 balancing charge to just £40,000. I beg to differ on grounds of common sense.
In particular
You failed to emphasise the words in particular, in relation to the chargeable period in question Basil. In particular lends greater importance to a thing, but it doesn't give that thing exclusivity of importance.
You also didn't deal with the fact that "in days of yore", when things apparently had to be done differently, the legislation said the self-same thing.
I don't invite a tribunal to a common sense decision; I invite them to a just and reasonable decision based on their own common sense, which is how just and reasonable things must ultimately be decided.
HMRC's "assertions" are valid in the context of S. 207 in the real world.
Basil
Last year I bought an inter-galactic space car (it's mechanically propelled and has four wheels)for £750,000 (ineligible for AIA), which I used 99% for business), so I claimed a WDA @ 8% (60,000, leaving a balance on the single asset pool of £690,000). I get a ££59,400 tax deduction for my 99% business use.
This year, inter-galactic space car market has dropped away and I use I only use my inter-galactic space car 1% for business, but sell it at the end of the year, and due to the sudden decline of the inter-galactic space car market, manage to only sell it for £10.
I have a balancing allowance of £689,090. That then needs to be restricted on a just and reasonable basis.
You argue that the actual tax-deductible amount, calculated on a just and reasonable basis (with particular regard to the year 2 use) is just £6,810.
Due to the extent of business use in year 1, I think that, on a just and reasonable basis (notwithstanding that particular attention should be paid to the year 2 use), it should be considerably more than that. Sorry, but I'm going to use the CA 27005 calculation.
My "real world" is based on the premise that boots must be worn on both feet.
£25
manage to only sell it for £10.
On a [perhaps] somewhat lighter note - I'd have given you £25 for it
Tolleys Capital Allowances 2013-14
I was taught that balancing charges / allowances were reduced pro-rata to allowances previously claimed net of private use, this was a few decades ago, so I might not be upto date with retaining this phrase, so let's look at what Tolleys Capital Allowances 2013-14 says:
If, therefore, an item of machinery or plant is used as to three-fifths for 'business' purposes
and two-fifths for non-business purposes, a taxpayer will be entitled to only three-fifths of the
full writing-down allowances. It is, however, the full amount of the writing-down allowances,
before any reduction, that is deducted in determining the amount of unrelieved qualifying
expenditure carried forward.
If the proportion of business use remains the same until such time as a balancing allowance
or charge arises, that allowance or charge will be reduced in the same proportion as the
allowances previously given; but where the proportion of business use has varied, the
balancing allowance or charge will usually be reduced in the same proportion that the total
amount of allowances previously given bears to the amount that would have been available
had there been no non-business use.
Where the proportion of use other than for the purposes of the qualifying activity increases
and the market value of the plant or machinery at the end of the chargeable period of the
increase exceeds the available qualifying expenditure for the period by more than £1 million,
then, if not otherwise required, a disposal value must be brought into account for that period.
The amount of the disposal value is then treated as if it were expenditure incurred at the
beginning of the next chargeable period on the provision of the plant or machinery partly for
the purposes of the qualifying activity and partly for other purposes. [CAA 2001, s 208, Sch
3 para 42].
According to Simon's Taxes...
... at B3.359 you would do (80% x 1 + 20% x 8)/ 9 = 27% of the notional balancing charge is a taxable charge.
In a fictional place or on a far and distant planet you might do something else, of course. Something completely different you might say
Note that if you start off with 100% business use and, at some point along the way, introduce private use, there is effectively a deemed disposal and reacquisition at market value at that point, by virtue of CAA 2001, s. 61(1)(e) and item 7 of the table in s. 61(2). Again see Simon's Taxes at B3.359.
@ Basil
Would you mind explaining what the purpose of plant and machinery capital allowances is for me, given that s. 207 needs to be interpreted in the context of the Act as a whole?
Actually, let me offer a wacky suggestion. Is it perhaps to allocate the consumption, by a business, of net capital expenditure as a deduction against the profits of the various different periods affected by that capital expenditure? A sort of tax depreciation if you will.