CA23087 - PMA: Qualifying expenditure: Annual Investment Allowance (AIA) qualifying expenditure: Restrictions on entitlement - general

CAA01/S38A and S38B, S51A to S51N

Restrictions on AIA entitlement

A person’s entitlement to an AIA for each of his or her qualifying activities may be restricted where he or she -

• controls a company which carries on more than one qualifying activity, or a group or groups of companies, or ‘related’ singleton companies CA23088 
• controls ‘related’ unincorporated businesses CA23089
• incurs expenditure on plant or machinery provided or used partly for other purposes (see example 1 below);
• receives or is likely to receive a partial depreciation subsidy in respect of the expenditure (see example 2 below);
• enters into a transaction with a ‘connected’ person or enters into an arrangement to obtain an AIA to which he would not otherwise be entitled (see under ‘Anti-avoidance’ below).

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Use of asset partly for other purposes

Example 1

Fred runs an unincorporated business of leasing caravans and mobile homes to holidaymakers. His accounting period runs from 6 April to 5 April each year. In 2008-09 he buys a new caravan for £75,000, which he hires out for 90% of the year, but uses privately for his own and his family’s holidays for 10% of the year. Fred has not bought any other plant and machinery in 2008/09 and claims AIA in respect of his new caravan. His AIA must be reduced to an amount that is ‘just and reasonable’ to reflect the private use, so Fred claims a reduced AIA of 90% x £50,000 = £45,000 (CAA01/S205). In 2009-10 Fred buys a cottage in Devon as a holiday home and so stops using the caravan privately. He now uses the caravan wholly for the purposes of his business.

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Partial depreciation subsidy

A person who has a qualifying activity may receive a payment to cover depreciation of an asset used in that qualifying activity, which may reduce his or her entitlement to an AIA.

Example 2

Ginger is an employee who works from home. She purchases a computer, printer and fax machine for £3,000 to use wholly for the purposes of her work. Her employer decides to pay her a partial depreciation subsidy of £1,000 to cover part of the depreciation of these assets. Ginger claims an AIA on her expenditure, but this must be reduced to a ‘just and reasonable’ amount to reflect the partial depreciation subsidy. So her claim is for an AIA of £3,000 - £1,000 = £2,000 (CAA01/S209-S212) CA27500.

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Anti-avoidance rules - no AIA

There are anti-avoidance rules in Chapter 17 Part 2 CAA01 CA28000. The rules designed specifically to deny an AIA in certain circumstances are as follows:-

• Connected persons transactions: if a person incurs expenditure in a transaction with a connected person CA28800, no AIA is due (CAA01/S214 & S217). There is an example of a connected person transaction (where brothers attempted to exploit the legislation to obtain more allowances than was intended) at CA28100. This anti-avoidance rule prevents such exploitation and denies an AIA in all cases where the parties to the relevant transaction CA28200 are connected.
• Transactions to obtain allowances (see CA28300) - either where the ‘sole or main benefit’ of the transaction appears to have been the obtaining of an AIA (CAA01/S215 & 217) or where ‘one of the main purposes’ of the arrangement was to obtain an AIA to which the person would not otherwise be entitled (CAA01/S218A). The latter, somewhat less stringent, test was introduced in FA08, specifically to protect the valuable AIA from attempts at exploitation.
• Sale and leaseback arrangements (CAA01/S216 & S217 see CA28300)
• Additional VAT liabilities - where an AIA is prohibited on expenditure under any of the above anti-avoidance rules, then any additional VAT liability arising in respect of that expenditure will similarly be denied any AIA (CAA01/S241).