Kevin Read explains why more expenditure may now be eligible for plant and machinery capital allowances.
With the 100% annual investment allowance now set permanently at £1m and the introduction of a 100% first-year allowance for companies incurring new general pool expenditure, knowing what qualifies as plant and machinery (P&M) is more important than ever.
For expenditure to be eligible for P&M capital allowances, it must be incurred on an integral part of how the appellant carries out its qualifying activity (such as a trade), not on the setting for that activity. This long-standing ‘function or setting’ test is probably well-known to many readers.
However, where this test appears to indicate P&M, the lists contained in CAA 2001, ss 21-23 still need to be considered. If the expenditure falls within List A (s 21) or List B (s 22), it will not qualify as P&M unless also appearing in List C, contained in s 23. As I shall explain, the Court of Appeal has recently expanded what might count as qualifying expenditure in List C.
Lists A and B
List A (assets treated as buildings) includes (inter alia) walls, floors, ceilings, doors, gates, shutters and drainage systems. List B (excluded structures and other assets) includes, for example, tunnels, bridges, dams and docks.
Such expenditure does not normally qualify as plant and machinery, but may be eligible for the much slower tax relief available under the structures and buildings allowance (SBA) rules. SBA is a 3% per annum straight-line allowance (or 10% for qualifying expenditure in a freeport or investment zone).
List C (Expenditure unaffected by sections 21 and 22)
List C has 33 items that come within the categories in List A or List B but which are regarded as performing a function in the qualifying activity and so qualify as P&M. Examples include:
- strong rooms in bank or building society premises (item 12);
- partition walls, where moveable and intended to be moved in the course of the qualifying activity (item 21); and
-
the provision of dry docks (item 23).
Widening the scope of List C expenditure
In Urenco Chemplants Limited and Urenco UK Limited v HMRC [2022] EWCA Civ 1587, the Court of Appeal considered a cross-appeal that looked at various items of expenditure on the construction of a nuclear deconversion facility in Cheshire. This facility safely processes a radioactive and highly toxic by-product of uranium enrichment. We need not concern ourselves here with the individual items of the disputed expenditure; what is important more widely is what the judges said about interpreting List C.
Items 1 to 22 of list C simply list the assets (as in items 12 and 21 above). In contrast, items 23 to 33 expressly refer to expenditure ‘on the provision of’ such assets (as in item 23 above), which is a wider formulation that permits capital allowances to be claimed not just for expenditure 'on' the actual item itself, but also for the ancillary costs of ensuring it can be safely used on site. Such costs include, for example, transport and installation costs.
The EWCA felt it “implausible” that parliament intended to draw a distinction between expenditure ‘on’ items 1 to 22 and expenditure on the ‘provision’ of those items, with only the former qualifying for capital allowances. Instead, it concluded that this distinction arose from an inadvertent drafting error.
Subject to any appeal, it is therefore now the case that expenditure ‘on the provision of’ items 1 to 22 can be treated as P&M.
Practical tip
Capital allowances claims should be reviewed to make sure that incidental costs related to items 1 to 22 of List C items are included as qualifying expenditure.
