BIM46935 - Specific deductions: repairs & renewals: renewals basis

ICTA88/S74 (1) (d) is statutory authority for a deduction for the renewal of small assets in certain limited circumstances. This ’renewals allowance' applies only to deductions for expenditure on the replacement of ’implements, utensils or articles' such as ’loose tools' and other similar assets (Hyam v CIR [1929] 14TC479). The word ’supply' in the legislation is used in the old sense of ’replacement' (now used in the expression ’supply teacher') and no deduction is due for the initial cost of the items.

Renewals allowance as an alternative to capital allowances

Before the introduction of machinery and plant capital allowances, the renewals allowance was extended to machinery and plant assets outside the narrow range to which ICTA88/S74 (1) (d) applies. The cost of such assets is capital expenditure and any relief is only due under the capital allowances machinery and plant code. But, as explained below, the renewals basis remains available although it is usually less favourable than machinery and plant allowances. The non- statutory renewals basis fell into disuse during the era of 100% first-year allowance.

A claim to use the non-statutory renewals basis may be admitted provided that the taxpayer is aware of and accepts the restrictions on relief. The renewals basis works if the conditions for its adoption are accepted. These are that:

• no capital allowances are due for the cost of the original asset; there may be a long gap between the expenditure on the original asset and the purchase of the replacement hence relief can be deferred for a long time;
• there is no deduction for the original expenditure and it cannot be relieved in any other way;
• the renewals basis is confined to plant or machinery; there are special rules for orchards, see BIM55275;
• no relief is due for the cost of any improvement element on the renewal of an asset; and
• the old asset must be definitely discarded before renewals allowance on its replacement is due; the old asset cannot be kept as a reserve.

Renewals allowance is only due for the cost of the replacement asset when it is acquired. The deduction due is:

• the cost of the new asset: note that the cost of the replacement can be more than the cost of the original but the claim must exclude any part of the cost which is attributable to additions or improvements; ( BIM46904 has more about improvements),

less

• the scrap value or realised price of the old asset which is replaced; this applies whether or not the cost of the new asset (excluding additions and improvements) exceeds the cost of the asset replaced.

Where the deductible cost of the first replacement is restricted because of improvements, a deduction can be given later for the full cost of replacing the improved asset (the first replacement). But there may be a further improvement restriction if the second replacement is an improvement on the first replacement; and so on for each replacement in turn.

Theory behind renewals basis

The theory behind the renewals basis is that the deduction for the replacement asset (asset 2) broadly relieves the depreciation suffered on the original asset (asset 1). Similarly, the deduction given for the next replacement (asset 3) relieves the depreciation suffered on asset 2; and so on for each replacement. The extra cost of buying an improved replacement asset (say asset 2) is disallowed for the same reason, namely, that the initial capital expenditure is not deductible only the cost of the replacement.

The deduction should also be restricted by any subsidies from outside sources which fall within the terms of CAA01/S532 (see CA14100).

For changes of basis see BIM46950 onwards.