LAM07150 | Trade profits: Capital allowances: BLAGAB CAA01/S545(2); non-BLAGAB CAA01/S544(2)

BLAGAB capital allowances

In computing BLAGAB trade profits or losses capital allowances may be claimed on both management and investment assets. Management assets are defined in CAA01/S544(2) as assets which are used in the management of the long-term business. Only Plant and Machinery allowances and Structures and Building allowances, available under CAA01/PART2 and CAA01/PART2A respectively, can be claimed on management assets.

Investment assets are defined in CAA01/S545(2) as assets held by a company carrying on any long-term business for purposes other than the management of that business. In contrast to the computation of non-BLAGAB trade profits there is no specific rule denying capital allowances on investment assets in computing BLAGAB trade profits. However the company will need to show that it has incurred capital expenditure as required by CAA01/S4 (and any other qualifying conditions are met). But expenditure on plant and machinery in buildings held by it as assets backing its insurance business cannot be relieved under the capital allowances code, as they are circulating assets and do not fall to be treated as capital expenditure (CAA01/S4(2)(a)).

Where the I-E rules apply FA12/S86 provides for separate property businesses. Within the context of those businesses, by contrast to the computation of BLAGAB trade profits, expenditure on fixtures will ordinarily be of a capital nature.

Where a company is entitled to an allowance on management assets in BLAGAB it is treated as a deemed management expense and is given effect to in I-E under CAA01/S256(2) (for plant and machinery) and CAA01/S279HH (for Structures and Building). Although BLAGAB allowances can increase a trade loss, that applies only to the minimum profits test or in determining policyholder profits in a future period (CAA01/S257(2)). This means in effect that BLAGAB capital allowances cannot increase the measure of trade losses available for set off against total profits of the company, of the current or previous period or by way of group relief or carried forward losses or carried forward group relief.

Non-BLAGAB capital allowances

Allowances for management assets comprising plant and machinery or buildings and structures can be deducted from non-BLAGAB trade profits. Management assets are defined in CAA01/S544(2) as assets which are used in the management of the long-term business.

CAA01/S545(3) specifically provides that allowances on investment assets are not given in computing non-BLAGAB trade profits. Investment assets in this context are assets which are held for a purpose which is other than the management of the long-term business. In many cases investment assets, such as property fixtures, will be circulating assets of the insurance trade and will not qualify for capital allowances in any event.

CAA01/S255 provides that allowances on management assets should be apportioned between BLAGAB and non-BLAGAB in accordance with the rules in FA12/PART2/CH7. There is no comparable provision for investment assets. Nevertheless, where the investment asset backs both BLAGAB and non-BLAGAB, the allowances will need to be apportioned between the categories following the best available commercial method with only the BLAGAB part being taken account of in computing I –E profits. Where the investment asset is used in a property business falling within FA12/S86(4)(c), assets not matched to long-term liabilities, in determining I-E income, plant and machinery and structures and buildings allowances are deducted before property business profits are apportioned.

Plant and machinery allowances on second-hand assets

CAA01/S187A - S187B make the availability of capital allowances to a purchaser of second-hand fixtures conditional on the pooling of relevant expenditure prior to a transfer (to the extent a previous owner CA26476 was entitled to claim capital allowances), and on the seller and purchaser formally agreeing a value for fixtures within two years of a transfer (or commencing proceedings to reach an agreement). Detailed guidance may be found at CA26470 onwards.

Where the property is held to back only non-BLAGAB and no past owner incurred capital expenditure on the provision of the property, the conditions in CAA01/S187A cannot be met because capital expenditure has not been incurred by a past or current owner.

Where the property is held for mixed purposes the fixtures may qualify by virtue of being used in a BLAGAB property business CAA01/S11(4) taxed under I-E. Where this is the case, all of the expenditure may qualify notwithstanding that allowances cannot be taken into account in computing non-BLAGAB trade profits. This means that the provisions in CAA01/S187A can potentially apply if the other conditions are met.