James Bailey highlights potential traps for businesses incurring expenditure which would otherwise be subject to the annual investment allowance.
A recent tax case (Keyl v Revenue & Customs [2014] UKFTT 493 (TC)) concerned a failed claim for the annual investment allowance. This article examines certain circumstances in which this valuable tax relief cannot be claimed.
Capital allowances are claimed when a business spends money on (among other things) ‘plant and machinery’. Normal allowances consist of writing down the cost of the plant at either 18% per year, or 8% in the case of certain categories of plant including ‘integral features’ of a building and ‘long life’ (over 25 years) assets.
There is, however, an ‘annual investment allowance’ (AIA), and expenditure on plant and machinery up to this amount can all be deducted in the year of purchase. The AIA is currently at the unprecedentedly high figure of £500,000.
There are, however, certain restrictions on claiming AIA which must be remembered.
Cessation of trade
Mr Keyl’s mistake was to claim AIA (on the purchase of a van) in the year he ceased trading. The fact that the end of his sole trader business occurred because he was transferring it to a company did not matter; it was treated as a cessation of trading and AIA cannot be claimed in that year.
Connected persons
It might be thought Mr Keyl’s company could make the claim instead, but unfortunately AIA is also not available where the plant is acquired from a ‘connected person’.
Cars
AIA cannot be claimed on cars. A van is not a car (though the exact difference can be difficult to determine in some cases), so were it not for the cessation, Mr Keyl could have claimed AIA on his van.
Trusts
In some cases, a trust may carry on a trade, but it cannot claim AIA because the right to AIA is restricted to individuals, partnerships where all of the members are individuals, and companies.
‘Mixed partnerships’
Where a partnership includes a company or a trust, it cannot claim AIA because it is not in any of the three categories described above.
Groups of companies
A group of companies gets one AIA, to be shared among the companies in the group as they wish.
‘Related’ businesses
Every business that does not fall foul of one of the exclusions above can claim AIA, but in certain cases there is only one AIA available, split between different entities that are ‘related’ to each other.
This applies to ‘related’ companies, and to ‘related’ partnerships or individual traders, but interestingly there is no restriction in a case where a company is ‘related’ to a non-corporate business. Mr Smith could claim AIA for his trading company Smithco Ltd and another AIA in his own right as a sole trader, even if both businesses carried on the same trade.
A company is ‘related’ to another company (or an unincorporated business to another unincorporated business) if they are controlled by the same person or persons and they meet either the ‘shared premises’ or the ‘related activities’ condition.
‘Shared premises’ is more or less self-explanatory, but note that plenty of businesses may not have ‘premises’ as such – simply doing the bookwork at home is not enough to make the home of (say) an electrician who works on building sites his ‘premises’.
‘Related activities’ means that the two activities fall within the same NACE first level classification. This is a set of 17 categories of business and can be found on the website of the Office of National Statistics at http://www.ons.gov.uk/ons/index.html.
Practical Tip :
The AIA is a valuable tax relief, and it is worth taking some trouble to ensure you do not accidentally lose your entitlement to it. In many cases, it may be possible to double up on the AIA by carefully avoiding businesses being ‘related’ to each other.
