This Brief clarifies the HM Revenue & Customs (HMRC) view that once a business has exercised its choice to claim one type of capital allowance rather than another, that choice may not be revisited and effectively reversed in respect of expenditure incurred in a closed year, under the 'error or mistake' provisions.
Capital Allowances Act (CAA) 2001 expressly provides that if an allowance is made under one Part of the Act no further allowance may be made under another Part of the Act in respect of the same expenditure.
Following the Government's announcement at Budget 2007 that industrial and agricultural buildings allowances (IBAs & ABAs) would be gradually withdrawn, taxpayers have enquired about the possibility of submitting 'error or mistake' claims in order to:
This Brief explains HMRC's view that it is not possible to use the 'error or mistake' provisions in this way as:
It has always been the case that certain kinds of expenditure may qualify for capital allowances under more than one Part of CAA and that, in these circumstances, taxpayers may decide under which Part of the Act to claim. For example, expenditure on the fixtures incorporated in an industrial building may be included in a taxpayer's claim for IBAs on the building as a whole (under Part 3 of CAA), or the taxpayer may distinguish his expenditure on those fixtures that can qualify for PMAs (under Part 2) from his expenditure on the rest of the building in order to maximise his claim for PMAs.
However, in these cases where expenditure may qualify for allowances under more than one Part of CAA, the legislation makes it clear that double allowances, under different Parts of CAA in respect of the same expenditure, are expressly excluded (section 7 CAA).
So, in these situations, the taxpayer has a choice about which allowance to claim. And, HMRC's official guidance makes it clear that: 'Once a choice has been made to claim one type of allowance the taxpayer cannot change to another in later years.' (See section CA31800 of the Capital Allowances Manual.)
However, since the announcement that IBAs and ABAs would be gradually withdrawn by 2011 (which was legislated in Finance Act 2008) there has been an increase of public interest in this area.
Some businesses have written to HMRC to say that, in the past, they had chosen to claim only IBAs (or ABAs, as the case might be) on their expenditure on qualifying buildings, simply for reasons of administrative convenience. In other words, they had been content to claim only IBAs (or ABAs) because those allowances would ultimately give relief on the whole expenditure incurred, albeit at a slower rate and over a longer period, to the extent that any part of that expenditure would also have qualified for PMAs. However, now that the 'safety net' of IBAs (or ABAs) is to be withdrawn, they would like to revisit their earlier choices. They have asked HMRC whether they may do so using the 'error or mistake' rules.
The relevant 'error or mistake' legislation is contained in section 33 and 33A of the Taxes Management Act, for income tax cases, and paragraph 51 of Schedule 18, Finance Act 1998, for Corporation Tax cases. In broad terms, these provisions allow persons who have grounds for believing that the tax they have paid is excessive because of some mistake made in a return to claim repayment of the amounts they have paid.
However, both section 33 TMA 1970 and paragraph 51 schedule 18 FA 1998 deny any relief in respect of an error or mistake in a claim which is included in a return. Claims by individuals and companies in respect of an IBA claim made in a return are therefore expressly excluded.
It is HMRC's view that relief is also not due where the claim was made in a partnership return for two reasons:
In such cases there has been no 'error or mistake' where there has been a deliberate choice between permitted alternatives and, at the time that the choice was made, taking into account all the reasons for that choice, it did not clearly disadvantage the taxpayer. The outcome of any choice affecting later tax periods may be uncertain. A decision taken with that uncertainty is not mistaken if subsequent events show that the choice was not the most advantageous. It may be that in some cases where a partnership has claimed IBAs instead of PMAs in respect of some of its expenditure on building fixtures, the business would have obtained more relief had it chosen to maximise its claim to PMAs instead.
Clearly, there was no mistake within the meaning suggested by HMRC's guidance. That gives examples of mistakes which include computational errors, misunderstandings of the law or erroneous statements of fact (see the 'Self Assessment Claims Manual SACM) at 12015). The official guidance explains that:
Where a deliberate choice has been made between two alternatives permitted by the Taxes Acts (such as claiming less that the full amount of capital allowances) there can be no error or mistake in the return.
The chosen alternative may not with hindsight prove to be to the best advantage of the taxpayer but it is not incorrect...' (SACM 12045)
Also, the amount of relief must be reasonable or just having regard to all the relevant circumstances. HMRC considers that it would be neither just nor reasonable to allow partnerships to amend claims to capital allowances outside the period permitted by the Capital Allowances Act 2001 and beyond that available to other taxpayers.
Finally, whilst it is HMRC's view that the 'error or mistake' provisions do not permit a taxpayer to reverse a choice made for an earlier closed year, a taxpayer would nonetheless be able to amend a return in respect of qualifying expenditure incurred in a year for which the return was still open.
CT & VAT Capital Allowances
Leasing & Other Reliefs
Mail Station A
100 Parliament Street
London SW1A 2BQ
Tel: 020 7147 2610
Issued 31 March 2009