Accounts depreciation is not allowed within tax calculations; it’s too subjective, so instead of that capital allowances generally apply for tax purposes. These allowances have been in place for ‘wear and tear’ to plant and machinery since 1878, with a factory and mills allowance allowing for economic depreciation within a trading business.
HMRC provides a useful history in its Capital Allowances Manual at CA10040. The current legislation is contained within the Capital Allowances Act (CAA) 2001.
What are they Exactly?
Allowances themselves are given through a ‘written-down allowance’, which is 18% of the cost and subsequent written-down value of assets in a ‘general pool’ and 6% in a ‘special rate’ pool (which contains cars with CO2 emission of more than 50g/km, integral features such as electrical and water systems). An accelerated 100% ‘annual investment allowance’ (AIA) is also available for up to £1m of expenditure, with a further 100% ‘firstyear allowance’ potentially available for new and unused energy-saving plant and machinery.
All business entities claim these allowances, though limited companies can also claim a further 100% first-year allowance known as ‘full expensing’; originally introduced as a temporary measure in 2023 to replace the ‘super allowance’, it was announced in the 2023 autumn statement that it would be made permanent.
The key concept is that capital allowances are available for plant and machinery, not buildings or structures; the divide is whether the item in question has a function in the trade or is the setting in which the trade takes place; a ‘passive or active’ divide may be another way of looking at it. Case law dates back beyond the last century to help define what ‘plant’ or ‘machinery’ actually is, as the legislation does not do so.
The CAA does give a list of those assets which are deemed to be buildings (List A in CAA 2001, s 21), and ‘structures, assets and works’ in List B within section 22. List C under CAA 2001, s 23 contains a list of those assets which are allowable, many consisting of buildings or structures which, under case law, were deemed to be plant. Cases generally go to court to ascertain whether the asset in dispute comes under List C.
Settings as Plant
Machinery is essentially anything with a mechanism, but plant is often more difficult to define as many a time it is a setting; they can still be a setting whilst still used as apparatus and as a tool in the trade.
Paintings can be plant, as can grain or potato silos, decorative screens, or room partitions; whilst these may have the characteristics of a structure, they perform a function – so they qualify. The case of Wangaratta Woollen Mills Ltd v Commissioner of Taxation of the Commonwealth of Australia [1969] 43 ALJR 324 concerned a dyehouse which highlighted the concept of the ‘complex whole’, i.e., that each part of the building performs a function which is necessary for the trade as a whole; so whilst it is a building, it still plays an active role, and it has a function beyond being a simple setting. This concept was unsuccessfully argued against HMRC when considering whether a nuclear deconversion faculty was plant. The Urenco case (Urenco Chemplants Ltd v HMRC [2022] EWCA Civ 1587) did produce one change in favour of the appellants; the Court of Appeal held that expenditure on items within List C included ‘provision for’ those items, and not just the items themselves (in List C, only items 23 onward allowed for this wider interpretation of spending).
The Supreme Court held (in HMRC v SSE Generation Limited [2023] UKSC 17) that tunnels carrying water as part of the Glencoe Hydro-electric power station were plant; HMRC argued that they were ‘tunnels’ or ‘aqueducts’ under List B, but the Supreme Court agreed with the Court of Appeal that these definitions are confined to means of transporting people, vehicles or boats.
Practical tip
When considering whether expenditure counts as plant in particular, as opposed to a building, review precisely what that purchased asset actually does. Even if it seems to be part of a building, if it actively performs a function, then it may arguably be plant and qualify for capital allowances.
