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Capital allowances on additions

Insurance claim

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This is an edited version of a question sent a few weeks ago, now the matter has been clarified:

Following a fire at company premises a company have received insurance proceeds to purchase some new machines (not replacements) , just checking on the accounting/tax treatment of the transaction. The proceeds is dealt with by the insurer as the additional cost of working as a result of the fire. i.e. they have had to purchase new machines to make up for the lost production, the new machines will allow them to produce more, quicker. 

£500k received and spent on new machines. The company now owns machinery valued at £500k so I believe the proceeds for accounting purposes should not be offset against the addition but instead posted to P & L. 

New machines will sit in FA's.

However, to make it tax neutral should the £500k in P & L be deducted on tax comp and for CA purposes nothing included in relation to the asset purchase? Otherwise, the company will pay tax on the £500k @ 19% but only receive tax relief on the WDA's on the £500k.

I cant find anything in the legislation to back up this theory other than:

CA14100

 

 

Replies (18)

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RLI
By lionofludesch
05th Jan 2021 12:16

I still say that you've sold some machines to InsCo and bought some new ones.

Capital Allowances follow that analysis.

It's nothing to do with the P+L (as adjusted for tax purposes).

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Replying to lionofludesch:
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By Paul Crowley
05th Jan 2021 12:32

That is what I would do

No set off as such

A disposal and a purchase

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Psycho
By Wilson Philips
05th Jan 2021 12:51

The final analysis may be the same, but:

We're told that the new machines are new and not replacements for the old. If the £500k was not marked specifically as compensation for loss of the old machines but was instead a general payout for loss of profits etc, for the owner to spend as they saw fit, then I'd say that you have a taxable P&L receipt but a £500k asset cost, eligible for AIA.

If on the other hand the £500k was clearly in respect of the loss of machinery then I'd agree that you have disposal proceeds of £500k.

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Replying to Wilson Philips:
RLI
By lionofludesch
05th Jan 2021 13:10

I was assuming that the whole of the £500,000 insurance money was for the machines destroyed by fire.

On reflection, that may not be the case. There may be several elements to the insurance payout.

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By SA2016
05th Jan 2021 13:33

Thank you all for your comments. They are definitely not replacement machines so there is no asset to dispose of. They are new machines that the company did not have beforehand. The company has already fully utilised AIA so in year one this scenario will cost them tax as they can only claim WDA's.

The insurer class the spend on P & M as increased cost of working. As per CA14100 could this not be treated as a contribution and therefore be dealt with from an accounting and tax perspective as outlined by me above?

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Replying to SA2016:
Psycho
By Wilson Philips
05th Jan 2021 13:41

Insurers tend not to hand out £500k without some basis. It is usually to compensate the insured for the loss (or cost) of something. So what is the 'something' in this case? What exactly is the "increased cost of working" and how did they arrive at the sum of £500k?

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Replying to Wilson Philips:
RLI
By lionofludesch
05th Jan 2021 13:49

I'm unclear as to what's happening too.

Were there no machines before the fire ?

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By SA2016
05th Jan 2021 14:02

The machines that were destroyed have been replaced seperately, these are new machines. The insurer allocated £500k as increased cost of working, so I assume these new machines will help them produce more of what they would have done if it weren't for the fire. Similar to loss of profits.

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Replying to SA2016:
RLI
By lionofludesch
05th Jan 2021 14:13

SA2016 wrote:

The machines that were destroyed have been replaced seperately, these are new machines. The insurer allocated £500k as increased cost of working, so I assume these new machines will help them produce more of what they would have done if it weren't for the fire. Similar to loss of profits.

So the original machines weren't insured ?

It's beginning to sound like creative wording by the insurers.

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Replying to SA2016:
Psycho
By Wilson Philips
05th Jan 2021 14:20

But why was it going to cost £500k to do what? There must have been some basis for the figure of £500k. Even it was just an estimate, an estimate of what?

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By SA2016
05th Jan 2021 14:46

In large insurance claims, sometimes it forms part of the negotiation relating to business interruption/loss of profits. An insurer may agree to provide the funds for a company to purchase P & M which will allow them to manufacture quicker than normal, they may see this as a more cost effective way compared to allowing the period in which loss of profits for business interruption is available to extend which may cost them more in the long run. It appears such payments are classed as additional cost of working.

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Replying to SA2016:
Psycho
By Wilson Philips
05th Jan 2021 14:53

My last attempt at extraction of that troublesome bicuspid.

Precisely what did the insurer say the funds were for. Was it really as vague as "increased cost of working" or did they in fact say "here's some cash for you to buy some new plant (and only to be used for that purpose)"?

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Replying to Wilson Philips:
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By SA2016
05th Jan 2021 15:08

The latter of the two.

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Replying to SA2016:
Psycho
By Wilson Philips
05th Jan 2021 15:27

I don't know why it's taken so long to get here but in that case I would treat the insurance monies as a contribution towards the cost of the new machinery.

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Replying to Wilson Philips:
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By SA2016
05th Jan 2021 16:19

Thank you, but they cover it 100%. For accounting purposes surely they own a machine so it shown pre insurance money to provide a fair value of their assets. I just wasn't sure where in the legislation it would allow a deduction for CA purposes and deduct the proceeds on the tax comp.

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Replying to Wilson Philips:
RLI
By lionofludesch
05th Jan 2021 16:23

Wilson Philips wrote:

I don't know why it's taken so long to get here but in that case I would treat the insurance monies as a contribution towards the cost of the new machinery.

That grates with me.

From an accounting point of view, you have some assets which you'll need to write off, replaced by some more assets which show at a cost of £0 on the balance sheet.

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Replying to lionofludesch:
Psycho
By Wilson Philips
05th Jan 2021 16:36

I don't see the issue. Plant and machinery is generally shown at cost. If the machinery didn't cost you anything there's no cost to disclose. Just as would be the case if the asset had been gifted to the company. (And once again, the new machinery is not - apparently - a replacement).

The company may of course be able to use the revaluation model.

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By Tax Dragon
05th Jan 2021 16:38

Who knew? Maybe this thread https://www.accountingweb.co.uk/any-answers/tangible-moveable-property will have a future echo?

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