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).

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 2010/11 he bought a new caravan for £150,000 to hire out for 90% of the year and to use privately for his own and his family’s holidays for 10% of the year. Fred claimed AIA in respect of his new caravan. The AIA threshold was £100,000 at the time but an AIA claim must be reduced to an amount that is ‘just and reasonable’ to reflect private use, so Fred claimed only 90% x £100,000 = £90,000 (CAA01/S205). The remaining 10% of the AIA, £10,000, was disallowed. Fred added the remaining expenditure of £50,000 to a single asset pool in order to claim WDAs. The WDA rate was 20% at the time but a WDA claim must also be apportioned to reflect private use, so Fred claimed 90% x £10,000 = £9,000 and disallowed £1,000, leaving a balance of £40,000 in the single asset pool to be carried forward at the end of 2010/11.

At the beginning of 2011/2012 Fred bought a cottage in Devon as a holiday home. He stopped using the caravan privately and began to use it wholly for the purposes of his business. He could therefore claim WDA in full (the WDA rate was 20% at the time) for the balance in the single asset pool (£40,000 x 20% = £8,000), leaving a balance of £32,000 in the single asset pool to be carried forward at the end of 2011/12.

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/S209-212) CA27500.

Anti-avoidance rules - no AIA

There are anti-avoidance rules in Chapter 16 Part 2 CAA01 CA28800. 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 tax advantages

(See CA28300). Where the main purpose, or one of the main purposes of a party entering into a transaction, scheme or arrangement is to obtain a tax advantage, no AIA is to be made in respect of the qualifying expenditure (CAA01/S215 & 217). Similarly, a person is not entitled to an AIA if arrangements have been entered into with the aim of enabling that person to obtain an AIA to which the person would not otherwise be entitled (CAA01/S218A).

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).

Property loss relief (s.127 ITA 2007)

This legislation is to disallow property loss relief against general income (in terms of Chapter 4 of Part 4 of the Income TAX Act 2007) to the extent that the loss is attributable to the AIA. The restriction applies to losses arising as a result of relevant tax avoidance arrangements entered into on or after 24 March 2010 and where the legislation applies, the loss will be treated as attributable to the AIA before anything else, including other capital allowance. In this context ‘relevant tax avoidance arrangements’ means arrangements where the main purpose or one of the main purposes is the obtaining of a reduction in tax liability by means of property loss relief against general income, and ones to which the person claiming the relief is party.