Ltd Co Capital Allowances - does the asset have to be used?

Ltd Co Capital Allowances - does the asset have...

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Strange question.

Client (Ltd Co, one director, no employees) brought in his books today and said that there won't be a profit because the company bought a £40k bit of machinery. During the conversation he said (smugly) that the company didn't need the machine at all and it hasn't ever been used, it's just sitting there. He said he bought it because he'd rather have a machine he doesn't use than pay tax.

Apart from the ridiculousness of his stand, is the company still allowed to claim AIA's on an un-needed and unused machine? Can honestly say I've never encountered this situation before.

Thanks in advance for any pointers (or insults, if they're clever or witty).

Replies (25)

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By Wanderer
15th Apr 2016 13:24

Seem to remember that it used to be 'owned & in use' but was changed some time ago to just owned.

Can't quote any authority for that view though & is probably memory playing tricks!

Having said that wondering if the following 11 (4) (a) is in point in your case:-

http://www.legislation.gov.uk/ukpga/2001/2/section/11

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By RTFMorSTFW
15th Apr 2016 13:26

To claim plant and machinery capital allowances a person must incur capital expenditure wholly or partly for the purpose of a qualifying activity that they carry on.

The purpose of incurring expenditure on the machine appears to be otherwise than for the purpose of the qualifying activity, on the information given.

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By mwngiol
15th Apr 2016 13:29

Seems like he won't be smug for long...

11 (4) (a) -

"Wholly or partly for the purposes of the qualifying activity". That seems quite clear that it's therefore not qualifying expenditure.

Thanks for the link.

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By Ruddles
15th Apr 2016 13:34

Is the machinery appropriate for the trade? If so then, short of HMRC reading this thread and trying to identify the client, I'd have thought that the chances of HMRC picking up the non-use to be zero. You may want to remind the client of the legislation, but I'd claim the allowance. Because - as soon as you point out the legislation what to you expect his response to be? Perhaps something along the lines of "OK. I'll use it, but perhaps only once a year"

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Replying to Hugo Fair:
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By RTFMorSTFW
15th Apr 2016 13:39

Yes but...

Ruddles wrote:

"OK. I'll use it, but perhaps only once a year"

... use is not relevant, is it? It is about the purpose of incurring the expenditure, and the client has already said that there was no purpose of the qualifying activity in incurring the expenditure.

You appear to be advocating just claiming the allowance because you're likely to get away with it?

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By mwngiol
15th Apr 2016 13:40

Ruddles

That's probably what will end up happening. But I am hoping for a few seconds of panic on his face when I show him the legislation.

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Replying to Wanderer:
Euan's picture
By Euan MacLennan
15th Apr 2016 13:55

Ooh! You are awful ...

mwngiol wrote:

... I am hoping for a few seconds of panic on his face when I show him the legislation.

... but I like you!

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By Matrix
15th Apr 2016 14:01

I would rather have £32k than

I would rather have £32k than a useless piece of machinery personally.

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By Ruddles
15th Apr 2016 14:01

No, but

I'm taking the pragmatic approach. If you tell the client in this position that he will not get any allowances for the reasons stated, what do you honestly think his response is going to be?

At worst, we'd be looking at s13 - with no AIA, but WDAs.

The real question is whether or not you want to hang on to a client with such an attitude.

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RLI
By lionofludesch
15th Apr 2016 14:08

Intention

What's his intention ?

He doesn't intend to use it in the business, presumably there was some object to paying out £40k to save £8k.

If he intends to sell it without using it, I'd say it's stock.  No AIA, no stock relief, no money either by the look of it..

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Replying to Elgin:
By mwngiol
15th Apr 2016 15:22

Object

lionofludesch wrote:

What's his intention ?

He doesn't intend to use it in the business, presumably there was some object to paying out £40k to save £8k.

The object was to not give money to 'the taxman'. I explained that he'd only be saving 20% of the expenditure. He seemed to take it a compliment. I can just imagine him bragging in the pub "I hate paying tax so much that I spent £40k on something I didn't need just to keep £8k out of the taxman's hands". Like I said in the question, it's ridiculous.

If I was in a position to get rid I would, but I'm merely an employee and have no such  powers.

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Replying to Moonbeam:
RLI
By lionofludesch
15th Apr 2016 15:39

Taking your comment literally ....

mwngiol wrote:

lionofludesch wrote:

What's his intention ?

He doesn't intend to use it in the business, presumably there was some object to paying out £40k to save £8k.

The object was to not give money to 'the taxman'. I explained that he'd only be saving 20% of the expenditure. He seemed to take it a compliment. I can just imagine him bragging in the pub "I hate paying tax so much that I spent £40k on something I didn't need just to keep £8k out of the taxman's hands". Like I said in the question, it's ridiculous.

If I was in a position to get rid I would, but I'm merely an employee and have no such  powers.

So, taking your comment literally, it's not allowable.  Best option is Chargeable Gains acquisition cost or stock.

Neither of which gives immediate relief.

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By craig preece
15th Apr 2016 15:43

Lot of assumptions out there

Is it just timing?

Doesn't need it (now) but will do when the old one goes belly up (1 week, 1 month, 1 year, who knows).

Rather pay for it now and get earlier tax relief than post year end and have to wait an additional 12 months.

Maybe it is for the purposes of the trade he just has not started using it yet.

 

 

 

 

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By mwngiol
15th Apr 2016 15:48

Not assumptions

They're not assumptions, they're straight from the horse's mouth. The client's own actual words, as physically spoken from his own actual mouth.

The expenditure clearly isn't allowable on the facts. But as Ruddles pointed out, once he sees the legislation I'm sure he'll say he was only joking and that he uses the machine all the time and that the business couldn't exist without it. And my employers will say that on that basis AIA is claimable.

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Replying to carnmores:
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By Discountants
18th Apr 2016 15:34

Push the decision 'upstairs' to your employer

mwngiol wrote:

They're not assumptions, they're straight from the horse's mouth. The client's own actual words, as physically spoken from his own actual mouth.

The expenditure clearly isn't allowable on the facts. But as Ruddles pointed out, once he sees the legislation I'm sure he'll say he was only joking and that he uses the machine all the time and that the business couldn't exist without it. And my employers will say that on that basis AIA is claimable.

On that basis you should accept your employers instructions and then inform your company's MLRO that you believe the client was telling porkies.

You have then fulfilled all your duties appropriately and it becomes your employer's problem.

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By craig preece
15th Apr 2016 16:18

Sorry

I assumed "didn't need the machine at all" and will never need the machine and "it hasn't ever been used" and will never be used meant different things.

Would also make a lot more sense to buy in advance rather than buy something that will never have any value to him to save 20% of that amount in CT.

If that is the case tell him if he ever wants to reduce his CT bill in this way again you can put his fee up £40K and that will achieve the same end result for him.

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Replying to Truthsayer:
By mwngiol
15th Apr 2016 16:25

Yep

craig preece wrote:

If that is the case tell him if he ever wants to reduce his CT bill in this way again you can put his fee up £40K and that will achieve the same end result for him.

I did think of that, but only after he'd left!

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By Ruddles
18th Apr 2016 15:39

Money Laundering?

I'm not sure how the client has benefitted in any way in having effectively spent £32k for no good reason.

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Replying to Paul Crowley:
RLI
By lionofludesch
18th Apr 2016 16:42

Asset

Ruddles wrote:

I'm not sure how the client has benefited in any way in having effectively spent £32k for no good reason.

Well, he has an asset worth £40,000 which has cost him £32,000.

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By John R
18th Apr 2016 16:01

Subject to the previous posts, if the asset was purchased using a hire purchase type contract, the expenditure can only be treated as incurred once it has been brought into use. See S.67 CAA2001.

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RLI
By lionofludesch
18th Apr 2016 16:39

Objected

A few years ago, I dealt with a haulage company with an August year end.  The company bought a tractor unit and had  it tradeplated to a body shop where the company's livery was added.  It was then registered for the road from 1st September with the new 50-something plate.

HMRC wouldn't allow AIA in the year of purchase - they had to wait another year until it was brought into use.

After that, they started buying new tractors in March ........

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By Ruddles
18th Apr 2016 17:08

Possibly

But would you rather have £32k in your pocket or an asset sitting there doing nothing? And if he sells it for £40k he's gained nothing.

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Replying to Wanderer:
RLI
By lionofludesch
19th Apr 2016 14:45

Not the point really

Ruddles wrote:

But would you rather have £32k in your pocket or an asset sitting there doing nothing? 

Well, I can't prevent stupidity.

He's still defrauded HMRC out of £8000.  Why should they pay for his pigheadedness?

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Small Dog's RAT Return
By Oldmanwetmix
18th Apr 2016 17:19

At least you don't have to socialise with him/her

Sounds to me as though its all bravado and client is just showing off and thinks they'll impress you with their huge wealth and cavalier attitude. Perhaps they want to ask you for a date.

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By Duggimon
19th Apr 2016 14:51

This is the dumbest tax avoidance ever. I just had almost the same conversation with a client who had the great idea to stop reclaiming expenses from the companies he subcontracts for because then his expenses will be tax deductible so he won't have to pay tax.

It's not uncommon in my experience for clients to think that their expenditure is deducted from their tax rather than their profits, I'm just glad when they ask us about it before doing something tremendously stupid like wasting £32,000.

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