CA23110 - PMA: FYA: Expenditure on which available and rates

CAA01/S39, S46, S50 & S52; FA04/S142; FA06/S30; FA07/S36

There are three rates of FYA - 100%, 50% and 40%.

FYA is available at the 100% rate on:

• expenditure incurred by small or medium sized enterprises (SMEs) CA23170, for Northern Ireland purposes CA23120;
• information and communications technology expenditure incurred by small enterprises CA23130;
• expenditure on energy-saving plant or machinery CA23140;
• expenditure incurred by energy services providers CA23150;
• expenditure on low carbon dioxide emission cars, not exceeding 120gm CO2/km driven CA23153;
• expenditure on equipment for refuelling vehicles with natural gas or hydrogen fuel CA23155;
• expenditure on North Sea oil ring-fence plant and machinery (long-life asset expenditure can qualify for 24% FYA) CA23157.

FYA is normally available at the 40% rate on expenditure incurred by SMEs CA23160. There is one exception to this. FYA is available at the 50% rate on expenditure incurred by small enterprises in:

• the years ended 31 March 2005, 31 March 2007, and 31 March 2008 (corporation tax),
• the years ended 5 April 2005, 5 April 2007 and 5 April 2008 (income tax).

Normally expenditure incurred before a qualifying activity begins is treated as incurred on the first day that the person who incurred the expenditure carries on the qualifying activity CA11800 (Section 5). Ignore this rule when you decide if the expenditure is incurred in the periods for which first year allowance is available. That is:

• For expenditure incurred for Northern Ireland purposes by an SME - expenditure incurred between 12 May 1998 and 11 May 2002.
• For expenditure incurred by SMEs - expenditure incurred on or after 2 July 1998.
• For information and communications technology expenditure incurred by small enterprises - expenditure incurred between 1 April 2000 and 31 March 2003.

If expenditure is incurred outside these periods no FYA is due even though the date that the qualifying activity commences falls within them. FYA is only available if the asset belongs to the taxpayer at some time during the chargeable period for which the FYA is claimed.

Where FYA is claimed, the balance of the qualifying expenditure on which FYA is claimed after deducting the FYA is added to the pool for the following year. If FYA is available it can be claimed on part of the qualifying expenditure. If that happens the part on which FYA is not claimed is added to the pool for that year.

Example

Eric buys an electric guitar for £100,000.

It qualifies for FYA at the 40% rate.

He does not want the full £40,000 FYA that is available and claims FYA of £30,000. £30,000 is FYA of 40% on £75,000 and so the part on which FYA is not claimed is £25,000 (= £100,000 - £75,000).

This means that he can add £25,000 to the pool for the current year. The balance of £45,000 (= £75,000 - £30,000 FYA) is added to the pool for the following year.

FYA is not available on expenditure:

• incurred in the chargeable period in which the qualifying activity is discontinued;
• incurred on the provision of a car, unless it is a qualifying car with low carbon dioxide emissions CA23153;
• incurred on the provision of a ship to which the long life asset legislation does not apply CA23730;
• incurred on the provision of a railway asset to which the long life asset legislation does not apply CA23730;
• excluded from long life asset treatment by the transitional provisions;
• incurred on the provision of plant or machinery for leasing unless these conditions are satisfied. It is incurred on or after 17 April 2002 on qualifying energy-saving plant and machinery CA23140, cars with low CO2 emissions CA23153, or environmentally beneficial plant or machinery CA23135. Where the expenditure is incurred after 1 April 2006 on qualifying energy-saving plant or machinery or environmentally beneficial plant or machinery for leasing FYA is not available unless the plant or machinery is provided for leasing under an excluded lease of background plant or machinery for a building CA23835. This exclusion applies whether the leasing is in the course of a qualifying activity or otherwise so activities like special leasing are caught. That means that assets in properties let out by the taxpayer are excluded. Treat letting a ship on charter or any other asset on hire as leasing. This exclusion also applies to software acquired on or after 26 March 2003 for licensing or sub-licensing. It does not apply where a person lets another person use software without granting a licence or sub- licence. For example, it does not apply where a person lets another person use software that does no more than allow access to the Internet, order goods or view advertising. In a case like that no rights have been granted and there is no licence or sub-licence.

There is a distinction between the leasing or hiring of an asset and the provision of services that involve the use of an asset, CA23115.

FYA is not available where an asset has been received as a gift or where an asset is brought into use for the purposes of a qualifying activity having been acquired for something else, including leasing under a long funding lease.

FYA is not available where the asset is provided in connection with a change in the nature or conduct of a business carried on by someone else and the main benefit, or one of the main benefits, that could reasonably be expected from the change is obtaining a FYA. This is anti- avoidance legislation intended to stop a large business that is not entitled to FYA getting round the restriction of FYA to SMEs by parking an asset in a small business. Here is an example of what it is intended to stop.

Example

Garcia Plc is a large business. It wants to buy a new lathe but if it does it will not be entitled to FYA because it is not an SME. Terry, a higher rate taxpayer, buys the lathe for a qualifying activity of operating the lathe, thus obtaining FYA, with fixed supply and sale contracts with Garcia Plc. The lathe is installed in Garcia Plc.'s factory and operated by its workforce on a subcontract basis. The tax saving is shared by Garcia Plc and Terry through the contract price.

The anti-avoidance legislation means that Terry is not entitled to FYA and so the scheme does not work.