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Reclassifying capital allowances

Reclassifying capital allowances

Following the 2007 Budget and the changes to the capital allowance regime, including the phasing out of industrial buildings allowances (IBAs) and agricultural buildings allowances (ABAs), it has been suggested in the tax press on many occasions that existing pools should be reviewed to ensure expenditure is correctly allocated into plant and machinery (PMA), IBA and ABA pools, and reclassifying these where they are not to ensure allowances are maximised post April 2008.

Unfortunately there has not been anything in the press to suggest how the reclassification works going forward. There appears to be several opinions on this.

1. Time limit for claim

S 3 CAA 2001 says that a claim must be included on the tax return. The time limit for making a claim or amending a claim is the normal time limit for making or amending a tax return.

This would suggest, where a partnership has a March year end they are out of time to make a claim or an amendment to years earlier than 2005/06.

If a claim is amended for 2005/06, by reclassifying the items in ABA to PMA, the claim would have to be a correct claim, therefore if the correct PMA were to be claimed you would have to go back and re-work the brought forward figure from the date of addition, claiming FYA and 25% annual allowances to arrive at the correct brought forward figure in 2005/06. This would mean that you would have a much lower brought forward figure than the one in the ABA comp so that you will have lost a substantial amount of relief. However see point 3 below.

2. Error or Mistake Claim

One capital allowance book suggests error or mistake claims can be done for incorrect claims made during that period.

If this is the case we can go back not later than five years after the 31st January next following the year of assessment to which the return relates. That is 2001/02.

However, it will only be the additions in that year that can be reclassified, not the brought forward figure.

3. Disclaimed Allowances

As you can disclaim PMA you could look at the previous years ABA claims as actually being PMA but disclaiming 21%ish (reducing balance v straight line) so that you do not reduce the balance brought forward on the correct claims going forward. However, the claim would have been made in the ABA box on the tax return.

Overall, the legislation is not clear on this point so we would appreciate guidance from readers.

Samantha Kirkham

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25th Oct 2007 12:21

How it would work ...
We have heard public confirmation from an HM Revenue source (who should know), that HMRC will NOT be sympathetic to any attempts to reclassify expenditure from IBAs/ABAs to plant and machinery (P&M). That does not of course mean it cannot be done, but it has to be done within the rules.

1. Time limit for claim - You are correct about the time limits to make or amend a capital allowances claim. It should be possible to go back and reclassify any additions within that timeframe by submitting an amended tax return. The same should also be possible for any earlier periods' returns that are still under enquiry. If a return is amended, then all brought forward amounts will have to be changed in subsequent periods' returns.

2. Error or mistake claims - Errors of judgement are not protected, so where a deliberate choice has been made between two alternatives (such as claiming IBAs or ABAs instead of P&M) in HMRC's view there is no error or mistake. And no relief is available if the return was made in accordance with the practice generally prevailing at that time. Therefore, (particularly in light of HMRC's expected unsympathetic stance) it is highly unlikely that HMRC will accept error or mistake claims to reclassify IBA or ABA expenditure to P&M.

3. Disclaimed allowances - If (rarely) IBAs or ABAs have been disclaimed it should be straightforward to unwind these in open returns & claim the writing down allowances within the allowed time limits by submitting amended returns as discussed above (or reclassify any P&M). Otherwise, we would have serious reservations about effectively pretending that IBA or ABA claims (made in the IBA or ABA box) were actually partially disclaimed P&M claims, as you seem to be suggesting.

4. Property transfers - It may in theory be possible (subject to the usual provisos about needing valid commercial reasons etc.) to 'refresh' expenditure that was previously added to an IBA or ABA pool, so that P&M allowances may be claimed going forward. However, it would appear to be necessary to transfer the relevant interest intra-group and the P&M claim would then be restricted to the attributable portion of unrelieved expenditure (for IBAs by s186 CAA 2001).

We are also aware of artificial arrangements (in our view normally ineffective for a multitude of reasons) being promoted by some advisers that rely on numerous existing group companies with different year ends and repeated intra-group transfers of industrial property to accelerate writing down allowances before IBAs are phased out.

Steven Bone
The Capital Allowances Partnership LLP (www.cap-allow.com)
Co-author of Tottel's "Capital Allowances: Transactions & Planning" and Tolley's "Handbook on The Capital Allowances Act 2001" and "Tax Planning 2007-08"

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