BIM46955 - Specific deductions: repairs & renewals: change from renewals basis to capital allowances

Plant and machinery capital allowances are not due on expenditure which has been relieved under the renewals basis. For example, suppose Brian:

• buys a machine in year1 for £10,000;
• does not claim plant and machinery allowances;
• sells the old machine in year 5 for scrap; he gets the machine's market value of £1,000;
• buys a replacement machine for £12,000; there is no improvement; and
• takes non-statutory renewals deduction of £11,000 (£12,000 less £1,000).

Here Brian cannot later claim plant and machinery allowances on the original £10,000. The depreciation suffered on the first machine has been relieved by the renewals deduction of £11,000 in year 5 and a claim for plant and machinery allowances would be contrary to the terms of the renewals basis.

A change may be made at any time from the renewals basis to the statutory plant and machinery capital allowances basis. But this can only be done if the change applies to all items of plant and machinery in the same class.

The way the change is made depends on the timing. CAA01/S3 requires claims for capital allowances to be made in the return. This applies to both individuals and companies. See CA11120 for further details. This section also sets out the special cases which are exceptions to this rule.

For example, suppose Brian in the machine example above decided to change to the capital allowances basis in year 2.

He is within the time limit to submit an amended return for year 1 and has not yet submitted his return for year 2. So the expenditure could be brought into the pool for either year and the renewals basis never applies because he has not yet bought a replacement machine. The expenditure on the year 5 replacement is dealt with under the plant and machinery code; there is no renewals deduction.

Brian could similarly opt for the capital allowances basis in years 3 to 4 and bring the expenditure into the machinery and plant pool in one of those years. The renewals basis never applies.

Essentially the same approach applies if Brian wants to make the change in year 5. Both the original expenditure of £10,000 and the replacement expenditure of £12,000 are added to the pool. Brian could add the expenditure on the first machine because he still owns it in that year. The sale proceeds of the first machine are deducted from the pool in the usual way.

Suppose, however, that Brian wanted to make the change in year 10. Assume he still owns the second machine and has bought nothing else. Brian cannot:

• bring the cost of the first machine into the year 10 pool because he no longer owns it; he sold it in year 5;
• bring the cost of the second machine into the year10 pool because the net expenditure was deducted as a revenue expense; this means that CAA01/S4 and CAA01/S572 (3) (b) apply and no capital expenditure has been incurred for capital allowances purposes (CA11530).

Here ESCB1 gives some relief for the second machine, it enables Brian to bring into the machinery and plant pool in year 10 the proper commercial written down value of the second machine as at the start of that year. Suppose the application of normal accountancy principles had written the second machine down in the books to £3,000 at the end of year 9. Brian could bring that £3,000 into his machinery and plant pool in year 10. No further relief is given for the first machine: the depreciation on that was relieved by the renewals deduction in year 5.

Finally, suppose that, during year 10, Brian:

• sold the second machine for £2,500; and
• bought a replacement for £14,000.

The outcome here is:

• the book value of the second machine (£3,000) is added to the pool;
• the sale proceeds of that machine (£2,500) are deducted from the pool; and
• the cost of the third machine (£14,000) is added to the pool.

There is, of course, no revenue renewals deduction for the replacement bought in year 10 because Brian has changed to the machinery and plant code. Equally, it does not matter whether there is any improvement element in the third machine; the renewals basis no longer applies.