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Further attack on schemes to gain the benefit of capital allowances

A long time ago now, HMRC suggested businesses would like to have their tax simplified by having accounting depreciation as their tax deduction instead of capital allowances. There was almost unanimous objection from businesses – they liked the flexibility of deciding when they wanted to receive amounts of tax relief for acquiring plant and machinery. HMRC have not forgotten that businesses were keen on the “inconvenience” of capital allowances.

In July 2009, HMRC announced the removal of this flexibility for some allowances within a company where there is a tax advantaged sale of the company and draft legislation has now been published for inclusion in Finance Bill 2010. This will apply if an objective of the sale is to transfer a tax value of plant in excess of its book value to a group unconnected with the vendor – in other words, where the principal reason for the transaction was to acquire the pool of unclaimed capital allowances. Capital allowances emerging in the new ownership on the excess of tax over book value will be available against future profits of that company only and cannot be surrendered as group relief. Furthermore, the allowances will only be available against profits of the trade that the company was actually carrying on at the time of the change of ownership. This prevents groups transferring new activity into such companies simply to use the capital allowances, and this also applies where the trade transferred in is similar to that carried out by the company.

Detailed rules have applied for many years on a transfer of ownership of a company to deny a new owner relief for trading tax losses. Until 21 July a loss making company could decide not to claim capital allowances or claim less than the full amount – doing so would both reduce the amount of losses that might lapse on a sale, and allow the relief to emerge later as current period relief.

HMRC have said they will look for indicators of tax advantages before applying the legislation. These could include

  • disclaimers to create a large excess of tax value over book value,
  • a restructuring of the company’s operations to isolate the value of the excess capital allowances in a special purpose vehicle,
  • where there have been changes in the business,
  • where there is no clear fit of the business to the new owner ,or
  • there are arrangements to transfer the business back to the vendor.

At the Pre-Budget Report it was announced that the rules will be extended to ships (which have a special “free depreciation” regime), and also where an unincorporated shareholder sells a company to a group where this is “tax-motivated” – extending its application beyond sales of companies between different groups.

Changes have also been made to transactions that remove profits on leasing from UK tax.

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