BIM64375 - Measuring the profits (particular trades): Private finance initiative (PFI): Capital allowances
In order to claim capital allowances the person incurring the capital expenditure must satisfy the conditions in CAA01/S11. CAA01/S11 (4)(b) requires that the person incurring the expenditure owns the plant or machinery as a result of incurring it and is a test based on legal title.
Where a private sector “operator” incurs capital expenditure on a PFI “property” there may be circumstances in which it does not hold the relevant legal interest when the trade commences. In such circumstances it is common for the operator to have an exclusive licence to occupy the site during the construction phase. This exclusive right may amount to a licence to occupy within CAA01/S175 (1)(e), giving the operator the necessary qualifying interest for claiming capital allowances on plant and machinery that become fixtures in the property.
When the building phase is completed the exclusive access to the site may cease, which will normally cause termination of the exclusive licence to occupy, as the operator will no longer have control over the land. The expiry of the qualifying interest marks the point when the fixtures cease to belong to the operator for capital allowance purposes. CAA01/S196 (1), item 4 in the table, determines that the disposal value to be brought into the pool of qualifying expenditure is nil, if no capital sums are received. The effect is to enable the operator to continue claiming capital allowances on the pool year on year, as the expenditure in the pool is in respect of assets that were owned by the operator.
If the assets are chattels then the conditions in CAA01/S11 (4)(b) are met when the operator incurs expenditure on acquiring the assets. Ownership will cease when the assets are delivered. That will give rise to a disposal within CAA01/S61 (1)(a). The disposal value is determined by CAA01/S61, item 7 in the table, as the open market value of the assets at the date of disposal.
Where a capital contribution towards the construction costs of a fixed capital asset of a business is allocated against expenditure that qualifies for capital allowances, the qualifying expenditure is reduced accordingly under CAA01/S532 (see CA14100).
For the value to be attributed to the asset see BIM64190.