REV BN 14: Capital Allowances
Who is likely to be affected?
1. Businesses seeking to exploit the capital allowances rules to obtain a tax advantage.
General description of the measure
2. Some businesses have attempted to exploit the capital allowances rules by entering into artificial transactions which depressed the market value of their qualifying assets on a sale. The effect of this device was to accelerate the remaining capital allowances on those assets, so that the businesses could obtain a tax advantage. The new anti-avoidance legislation blocks this device by denying a balancing allowance if the proceeds from a "balancing event" (such as a sale) are less than they would otherwise have been as a result of a tax avoidance scheme.
3. The new rules apply to capital allowances for:
- industrial buildings;
- mineral extraction;
- flat conversions;
- agricultural buildings; and
- assured tenancies.
Operative date
4. The new legislation was announced by the Chancellor and published last year at the 2002 Pre-Budget Report. It applies to events occurring on or after 27 November 2002.
Current law and proposed revisions
5. Capital allowances allow the costs of capital assets to be written off against a business's taxable profits. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax.
6. The recent attempts to exploit the capital allowances rules were seen in relation to Industrial Buildings Allowances. These allowances can be claimed at 4% a year on the "straight-line basis" on the capital expenditure on the construction of buildings or structures used for the purposes of manufacturing, processing and certain other specified trades. The disposal of an industrial building triggers a balancing event. Where the market value of the building is less than its written down value for tax, an extra allowance, called a balancing allowance is made in respect of the difference (i.e. that extra fall in value) to the person making the disposal.
7. The recent exploitation device sought artificially to depress the market value of a property to obtain an accelerated balancing allowance.
8. The new legislation blocks this device by denying the business a balancing allowance in cases where the proceeds are less than they would otherwise have been, as a result of a tax avoidance scheme. The counter-measure has a deterrent effect because any subsequent capital allowances claim by the purchaser would be limited to the amount the purchaser had actually paid (just as it would have been had a balancing allowance been made to the vendor).
Further advice
9. If you have any questions about this change, please contact the Public Enquiry Unit on 020 7438 6420 to 6425.
| Home | ||||
