CA23170 - Plant and Machinery Allowance (PMA): First Year Allowance (FYA): meaning of SME

CAA01/S47 & S48

FYA is available for expenditure incurred by a small or medium-sized enterprise (SME). This is the definition of a SME for capital allowance purposes. It is based on the Companies Act 2006. The definition of SME for other purposes such as research and development tax credits is different because it is based on different EC legislation.

A SME is:

  • A company that is a small or medium-sized company and is not a member of a large group.
  • A business that is not a company but which would be a small or medium-sized company if it were a company.

Company

Expenditure incurred by a company is incurred by a small or medium-sized enterprise if the company that incurs it:

  • qualifies as a small or medium-sized company in the financial year in which the expenditure is incurred, and
  • is not a member of a large group when the expenditure is incurred.

A small or medium-sized company is defined in Section 382 and 465 Companies Act 2006. There is an identical definition for companies formed and registered in Northern Ireland in Article 255 Companies (Northern Ireland) Order 1986.

A company qualifies as a small or medium-sized company for its first financial year if it satisfies two or more of the requirements below for being a small or medium-sized company in that financial year. Once a company has qualified as a small or medium-sized company you should keep on treating it as a small or medium-sized company unless it fails to meet the requirements for two years in a row.

Where a large company reduces in size to become a small or medium-sized company you should not treat it as one until it satisfies the requirements for two successive years.

Requirements for financial years ending before 30 January 2004

  Turnover (not more than) Balance sheet total (not more than) Number of employees (not more than)
Small company £2.8 million £1.4 million 50
Medium-sized company £11.2 million £5.6 million 250

Requirements for financial years ending on or after 30 January 2004

  Turnover (not more than) Balance sheet total (not more than) Number of employees (not more than)
Small company £5.6 million £2.8 million 50
Medium-sized company £22.8 million £11.4 million 250

The balance sheet total means the aggregate of the amounts shown as assets in the balance sheet (that is before deducting both current and long-term liabilities).

If the financial year is not in fact a year, adjust the turnover figures proportionately. For example, if the financial year is 9 months long the turnover requirement for a small company for financial years ending on or after 30 January 2004 is that the turnover is not more than £4.2 million (= £5.6 million x 9/12).

A company may qualify as small or medium-sized for the first financial year for which the new requirements apply but fail to be small or medium-sized for the previous financial year under the old requirements. In that case you should check to see if it would have been small or medium-sized for the previous year if the new requirements had applied. If it would have been treat it as small or medium-sized for the previous financial year for the purposes of deciding whether it is small or medium-sized for the current financial year.

The regulations increasing the requirements (with effect from 30 January 2004) were made on 9 January 2004. There is an anti-avoidance measure. A company could have extended its financial year by up to 6 months (under section 225 of the Companies Act 1985, now section 392 Companies Act 2006) to make it end after 30 January 2004, in order to try to take early advantage of the new thresholds. If the company does this by the giving of a notice to the registrar on or after the date on which the regulations were made the old requirements will still apply to that financial year.

Group

A small or medium-sized group is defined in section 466 Companies Act 2006. These are the requirements for a group to be a small or medium-sized group.

Financial years ending before 30 January 2004

  Turnover (not more than) Balance sheet total (not more than) Number of employees (not more than)
Small group £2.8 million net (or £3.36 million gross) £1.4 million net (or £1.68 million gross) 50
Medium-sized group £11.2 million net (or £13.44 million gross) £5.6 million net (or £6.72 million gross) 250

Financial years ending on or after 30 January 2004

  Turnover (not more than) Balance sheet total (not more than) Number of employees (not more than)
Small group £5.6 million net (or £6.72 million gross) £2.8 million net (or £3.36 million gross) 50
Medium-sized group £22.8 million net (or £27.36 gross) £11.4 million net (or £13.68 million gross) 250

The balance sheet totals net are not assets net of liabilities. They are assets with inter-company balances netted off. The gross amounts are the aggregate of the assets, including inter-company balances, shown in the accounts of each company that is part of the group before deducting liabilities.

A company is a member of a large group at the time when expenditure is incurred if:

  • it is at that time the parent company of a group which does not qualify as small or medium-sized by reference to the financial year of the parent company in which that time falls; or
  • it is at that time a subsidiary undertaking in relation to the parent company of such of a group.

For FYA the definition of group includes groups with overseas parents. This means that in order for a company to qualify for FYA any group of which it is a member including any group with an overseas parent must be small or medium-sized.

There is anti-avoidance legislation in CAA01/S49 (4). A company is treated as a member of a large group if any arrangements exist which, if they had come into effect before the company incurred the expenditure, would make the company or its successor a member of a large group. This prevents First Year Allowance on any expenditure it incurs. Arrangements means arrangements of any kind, whether in writing or not, including arrangements that are not legally enforceable.

Business

The same rules apply to businesses which include:

  • an individual,
  • a partnership of which all the members are individuals,
  • a registered friendly society within the meaning of ICTA88 Chapter II Part XII, or
  • a body corporate which is not a company but is within the charge to Corporation Tax.

To decide whether expenditure incurred by a business that is not a company has been incurred by a small or medium-sized enterprise, treat the business as if it was a hypothetical company and apply the SME tests referred to above. All trades, professions or vocations carried on by the business should be included for the purposes of calculating whether it is a SME. You should then check to see if the hypothetical company would be small or medium-sized in its financial year in which the expenditure is incurred. Similarly, you check whether a business is a small business by checking if the hypothetical company would be a small company.

The above definition of business does not cover all partnerships. The definition only covers a partnership of which all the members are individuals. This means that a partnership of which a company is a member, for example, is not within the definition of business. This means that it cannot be an SME and so it cannot claim FYA. Trusts are in the same situation in that they cannot get within the definition of SME either.

Both trusts and mixed partnerships were considered when the legislation was introduced. In the 1997 Standing Committee debate on clause 43 (which became CAA01/S48 eventually) Dawn Primarolo (then the Financial Secretary) said:

‘The hon. member for Bognor Regis and Littlehampton, during his second contribution to the debate, asked why trusts and mixed partnerships were excluded. Simply, under the criteria in the Companies Act 1985, trusts and mixed partnerships do not fall easily into the relevant group. Incredibly complex rules would be required to bring them in, which would open possible abuses of tax-driven options that the hon. gentleman would deprecate.’