CAPITAL ALLOWANCES

Capital Allowances

Capital Allowances

Q: Capital allowances are available to a person who incurs capital expenditure on the provision of plant and machinery

What is machinery?

The legislation does not provide definitions of either 'machinery' or 'plant' (iss2.etax.com). Virtually all of the cases that have come before the courts, since capital allowances were first introduced in 1946, have been on the meaning of plant. This is undoubtedly because machinery is a simple concept with which everyone is familiar and there is not much scope for disagreement as to what is included in the term. Thus in a property context escalators, lifts, heating installation, air conditioning installation and similar items are obviously machinery. Installation costs and costs ancillary to the machinery are regarded as forming part of the cost of the machinery (www.hmrc.gov.uk).

There is statutory authority for this in s.45 of the Capital Allowances Act 1968 where it is provided that 'where a person carrying on a trade incurs capital expenditure on alterations to an existing building incidental to the installation of machinery or plant for the purposes of the trade the provisions of this Chapter shall have effect as if the said expenditure were expenditure on the provision of that machinery or plant and as if the works representing that expenditure formed part of that machinery or plant'. This provision is also applied to the new — perhaps no longer so new — system of allowances for plant and machinery by para. 15(2) of sch. 8 to the Finance Act 1971 (Parsons, 1989).

An example of the usefulness of this extension can be seen in Cole Brothers v Phillips1 (the 'John Lewis' case). Of the total cost of the electrical installation in the John Lewis store at Brent Cross, London, of £945,600, a little over £360,000 (roughly 38 per cent), was accepted by the Inland Revenue as allowable. This consisted mainly of trunking for the telephone system and wiring to heating and ventilating equipment, to fire alarms, to clocks, to the television workshop, to cash registers, to lifts, to escalators, to burglar alarms, to smoke detectors, and to the electrical appliance department. In other words, wiring to machinery (iss2.etax.com).

The balance of the undisputed items was the public address system, the emergency lighting system and the standby electrical supply system. The first of these is probably ancillary to machinery (www.hmrc.gov.uk). The remaining two are probably plant rather than machinery. The distinction between the two is unimportant once it is accepted that an item of expenditure qualifies for allowances. Items such as electrical wiring are not normally accepted by the Revenue as constituting plant or machinery. It can therefore be important to break down such expenditure in great detail to allocate to the appropriate item of expenditure all amounts that are ancillary to it. After wiring, the most common example is plumbing (Parsons, 1989). The Revenue generally accept that hot water pipes are allowable as ancillary to the heating system, but contend that the cost of cold water pipes is not eligible for ...