OT21230 - Corporation Tax Ring Fence and Supplementary Charge

Supplementary Charge: First-Year Allowances for a Ring Fence Trade: Introduction

Finance Act 2002 introduced first-year allowances for capital expenditure incurred by companies wholly for the purpose of a ring fence trade subject to the supplementary charge. The legislation is in FA02/s63 and FA02/Sch21, which make various amendments to CAA01.

To qualify, the capital expenditure has to be first-year qualifying expenditure incurred on or after 17 April 2002 on plant or machinery or certain mineral extraction activities, principally mineral exploration and access. The rate is 100%, or 24% for plant or machinery long-life assets. The normal rules in CAA01/s5 determine when expenditure is incurred.

The first-year allowances are withdrawn if the asset is used for another purpose within five years of the date on which the expenditure is incurred. However, allowances are not withdrawn following a sale to an unconnected party.

With the same 100% rate applying to expenditure on research and development, mineral exploration and access and plant or machinery (excluding long-life assets), some of the distinctions made in the past will assume less importance. However, companies should maintain systems that distinguish between the three types of expenditure. This is to ensure that the right treatment is applied on any subsequent disposals of the assets. For example, the disposal proceeds of a plant or machinery asset will normally be deducted from the general pool of expenditure, and so would not trigger an immediate balancing charge.