CA23126 - Plant and Machinery Allowance (PMA): First Year Allowance (FYA): Plant and machinery in freeport and investment zone special tax sites: Anti-avoidance

CAA01/S45Q

There is an anti-avoidance rule to prevent expenditure qualifying for this FYA where it is attributable to plant or machinery being held partly for use outside of a special tax site and a person is party to relevant arrangements involving an intention to obtain the FYA for that expenditure. Where that intention represents the main purpose, or one of the main purposes, in obtaining the FYA or a greater FYA, then that part of the expenditure is not eligible for the FYA.

‘Relevant arrangements’ cover the transaction underlying the expenditure incurred, and any scheme or arrangements of which that transaction forms a part. 

In such circumstances, the expenditure should be apportioned on a just and reasonable basis to determine the amount not eligible for the FYA.

Example

High Quality Machine Tools Ltd purchased nine new mobile cleaning units costing £162,000 in June 2023 to use in its manufacturing business.

The company has a factory, which has been used in its business for many years, situated outside of a special tax site but has set up another larger factory situated within a special tax site which was designated on 19 November 2021. The new factory started to be used within the business from 1 June 2023 and is expected to produce twice as many of the same goods as the other factory.

Three of the nine mobile cleaning units were purchased to replace three existing and comparable cleaning units, which had been used in the old factory for the previous 8 years. Instead of designating those three units for use in the old factory and the six other units for use in the new factory, the company decided to designate all nine for mixed use, with the aim of obtaining the FYA on all of the expenditure.

As the plant and machinery purchased is not intended to be entirely for use within a special tax site, and obtaining the FYA was a main purpose of designating the items for mixed use, a just and reasonable apportionment will need to be made to the cost of the nine cleaning units to arrive at the expenditure on which the FYA is available.

The company prepares accounts for each year ending on 31 May. From the information in this example, the apportionment of the expenditure qualifying for the FYA available for the chargeable period to 31 May 2024 could be calculated as follows.

Although the nine new cleaning units are expected to be used in both factories, three of these were purchased as direct replacements for the existing ageing equipment and, it is reasonable to say, because six represent the additional demand attributable to the new factory, the nine new units were intended for use primarily in a special tax site when the expenditure was incurred CA23122.

Consequently, an apportionment will be needed to include only that part of the expenditure attributable to the equipment which is used, or held for use, in the factory in the special tax site.

The apportionment needs to be made on a just and reasonable basis, which could be estimated in this example (because the goods produced in each factory are the same) from the quantity of goods produced from each factory.

As the new factory is expected to produce twice as many manufactured goods as the older factory, the apportionment could be estimated using a ratio of 2:1.

Apportionment of the expenditure attributable to the new factory and eligible for the FYA will be £162,000 × 2/3 = £108,000.

For the £54,000 of expenditure which does not qualify for the FYA, relief may be available through the annual investment allowance up to its limit (where not fully used to relieve other expenditure on plant or machinery), other FYAs such as full expensing or through writing down allowances.