CA22340 - Plant and Machinery Allowances (PMA): buildings and structures: expenditure on integral features: meaning of ‘replacement’ expenditure
CAA01/S33A, S33B and S104A
Meaning of ‘replacement’
This section of guidance explains how you decide if expenditure is expenditure on the replacement of an integral feature for the purposes of CAA01/S33A. If it is, the expenditure will count as special rate expenditure (CAA01/S104A) and will attract WDAs at the special rate (although the taxpayer may be able to claim the AIA instead) See CA22320.
If the expenditure represents the whole, or more than 50% of the cost of replacing an integral feature, either all at once, or within any period of 12 months, such expenditure is to be treated as capital expenditure on the replacement of an integral feature for capital allowances purposes. And the person incurring the expenditure is to be deemed to own the P&M as a result of incurring the expenditure. The allowances detailed in CA22320 will be available.
No double deduction
If the expenditure is so deemed to be capital expenditure, the same expenditure may not also be deducted as a revenue expense in calculating the income from the qualifying activity (CAA01/S33A(3)).
Policy aim: a simple, pragmatic approach
The broad policy purpose underlying these rules is to ensure that both new and replacement expenditure on an ‘integral feature’ is afforded the same tax treatment.
‘Replacement’ expenditure is defined and brought within these new capital allowances rules to prevent some businesses from seeking to claim that they have really incurred a revenue expense on a repair to a larger asset such as the building itself, in other words, that they have not incurred capital expenditure.
The test of ‘replacement’, by reference to expenditure on replacing more than 50% of the integral feature within 12 months, is intended to discourage any attempts to avoid the application of the replacement rules by businesses, say, splitting replacement expenditure over two or more chargeable periods.
In most cases, however, it is expected that businesses will simply replace a particular integral feature and so will know that the new rules apply. Even where the business does not replace the feature all at once, it will know whether or not a specific integral feature has worn out, and whether or not it plans to replace the whole, or the bulk of it, within the next year. Likewise, it is expected that in most cases, it should be apparent to HMRC whether it is reasonable to accept the taxpayer’s advice that expenditure on an integral feature does, or does not, constitute ‘replacement’ expenditure.
So it is not anticipated that, for example, detailed running totals of expenditure will routinely be required, or that the replacement rules will give rise to any need for special or attempted ‘precise’ valuations. Although the usual principles of reasonable care apply, it should be remembered that there is no statutory obligation on the taxpayer to, for example, obtain more than one quote or estimate. In the main, the policy intention is to adopt a ‘light touch’ approach, so that any additional administrative burdens are kept to a minimum. However, if particular difficulties or complexities should unexpectedly arise in a particular case, the case should be referred to a capital allowances technical adviser in Business, Assets & International (BAI) for advice.
Example 1
Jack decides to replace the electrical system in his factory. The cost of replacing the whole system is around £100,000. Jack’s business’s chargeable period ends on 31 December each year. He pays £40,000 towards the new system on 31/12/18 and pays the balance of £60,000 on 30/6/19, after the work is satisfactorily completed.
Although Jack’s initial expenditure in his 2018 chargeable period, on beginning to replace this integral feature represented only 40% of the replacement cost, that initial expenditure plus the further expenditure incurred within 12 months (that is, plus the balance incurred in his 2019 chargeable period) represented more than 50% of the replacement cost, and so the total expenditure is deemed to be capital expenditure, to be allocated to the special rate pool, where it will attract WDAs at the special rate.
Example 2
Phoebe would like to replace the electrical system in her seaside boutique. She obtains an estimate from Seaside Electrics Ltd, who quote a total figure of £100,000 for the whole job. She decides that she cannot afford this, so requests a separate estimate for replacing the wiring and sockets on the ground floor alone, because this is the floor she is most worried about, following some recent flood damage. Seaside Electrics Ltd quote a figure of £48,000 for this floor alone. Although it might have been possible for Phoebe to have obtained a cheaper estimate for replacing the whole system, for a total of say £90,000, (when £48,000 would have represented more than 50% of that total) this is not relevant. The £100,000 estimate from the same established electrician was a bona fide arm’s length estimate and there is no need to enquire further. The partial replacement cost represents less than 50% of the total replacement cost and so the integral features provisions do not apply.