The capital allowances rules for leased assets – don't get caught out
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
4 July 2023
We highlight the capital allowances rules on assets purchased for leasing purposes.
The new full expensing regime for companies took effect from 1 April 2023, replacing the 130% capital allowances super-deduction which came to an end as a result of the introduction of the new 25% main rate of corporation tax. Full expensing provides a new 100% first year allowance for assets in the capital allowances main pool and a 50% first year allowance for assets in the capital allowances special rate pool (including long life assets). In essence, the same corporation tax relief has been given for companies paying tax at the 25% main rate, regardless of whether the expenditure was before or after the new rate took effect in April.
Both full expensing, and the super-deduction that was in place before it, are subject to the general exclusions in Section 46 CAA 2001. The most relevant to most businesses are the capital allowances restrictions on cars, which was covered in our recent article.
Exclusion six of Section 46 CAA 2001 affects expenditure on the provision of plant or machinery for leasing. There is an exception to this general rule in Section 9(9) Finance Act 2021 (for super-deduction) for plant or machinery provided for leasing under an excluded lease of background plant or machinery for a building. A similar provision applies for full expensing in the Finance (No 2) Bill, which is currently undergoing parliamentary process.
Aside from this, there can be other cases where the acquisition of plant and machinery may still qualify for super-deduction (up to 31 March 2023) or full expensing (from 1 April 2023 onwards). This would be where the circumstances are more akin to the provision of a service, rather than the simple lease of assets.
Excluded lease of background plant or machinery for a building
Section 70R CAA 2001 covers what is meant by an excluded lease. This mentions where plant or machinery is affixed to, or otherwise installed in or on, any land which consists of or includes a building. It is however necessary to confirm that none of the disqualifications in Section 70S CAA 2001 apply. These disqualifications largely concern lease arrangements where the amounts payable vary, or may be varied by the lessor. There is also an anti-avoidance provision to cover a scenario where the main purpose, or one of the main purposes of the lease arrangement, is to secure capital allowances.
The special rules for background plant or machinery for a building should mean that companies which carry out building works should be able to claim super-deduction (up to 31 March 2023) or full expensing (from 1 April 2023 onwards) on buildings expenditure that would otherwise be qualifying in either the capital allowances main pool or special rate pool. Where buildings are transferred to a new owner, the use of a Section 198 CAA 2001 election will enable the parties to agree the allocation to the capital allowances pools, which cannot exceed the capital allowances claimed originally by the seller of the building.
Assets where a service is provided
HMRC manual CA23115 explains how HMRC changed its view on the lease exclusion in Section 46 CAA 2001 following the case of Baldwins Industrial Services PLC and Barr Ltd. [2002] EWHC 2915 (TCC). That case concerned crane hire, and recognised the importance of the operator in terms of providing a service over and above the simple hiring of plant.
Following HMRC’s new interpretation, where plant and machinery is leased with an operator, this should be considered to be the provision of a service rather than the mere leasing of plant and machinery. HMRC manual CA23115 also states that the provision of building access services by the scaffolding industry should amount to a construction operation and more than mere hire, although this approach would not apply to businesses that simply supply scaffolding poles for use by others.
Each case will be assessed on its own merits, therefore it will be necessary for tax practitioners to consider all the circumstances before forming a conclusion on whether the principles of the Baldwins case are relevant.
Where super-deduction or full expensing is not available
Unincorporated businesses do not of course benefit from either super-deduction or full expensing, as both relate to corporation tax. They will continue to be able to claim annual investment allowance (AIA), subject to the normal rules.
The AIA rules do not include the exclusions mentioned in Section 46 CAA 2001, therefore it may be possible for both unincorporated businesses and those companies who cannot claim super-deduction (up to 31 March 2023) or full expensing (from 1 April 2023 onwards) due to the lease exclusion to claim AIA. This is of course subject to the £1 million annual limit, which may need to be shared between businesses under common control.
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email us to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
