HM Revenue & Customs (HMRC) published its annual compliance toolkit for plant and machinery allowances in May and it’s a useful reference point on the areas taxpayers (and their advisors) should expect to be checked in a compliance review.
Almost every UK business, regardless of sector, will have some level of capital allowances claim, so it’s an area of the tax system that most HM Inspector of Taxes will have experience of and confidence in.
The toolkit is aimed at helping and supporting tax agents and advisers by providing guidance on the errors HMRC commonly find in relation to capital allowances for plant and machinery.
The main areas of risk for capital allowances for plant and machinery broadly fall into the following categories:-
Record keeping:- Good record keeping is essential. Lack of such records can mean that information provided is not accurate resulting in the submission of incorrect tax returns. An asset may be owned by the business for a number of years and without good records it may be difficult to determine the correct capital allowances treatment. For example, an asset may have had different proportions of non-business use during the period of ownership that will affect the balancing allowance or balancing charge on disposal. Detailed records of all acquisitions and disposals including their value are important. These records make it easier to gather the relevant information when needed and consider the current position to help complete the return correctly and completely.
Acquisitions and disposals:- When assets are acquired careful consideration should be given to whether the asset qualifies for capital allowances and the amount that qualifies. Whether expenditure on an asset qualifies for capital allowances depends on whether certain conditions are met and in addition there are issues to consider around the date on which the expenditure is incurred and how the asset is used in the business.For disposals, errors can arise when assets that have been disposed of are not recognised in the capital allowances computation. For example, when an asset is given in part exchange against another asset this is a disposal for capital allowances purposes.
Non-business use and cars:- A significant area of error in some returns is identifying non-business use of assets, mainly, although not exclusively, with cars. It is important to consider the assets used in the business (both companies and other businesses) and review both the trade and the assets to take into account any non-business use when calculating the capital allowances.
As in previous years the toolkit contains a 28 point checklist to help businesses and their advisors comply.
If you have questions or concerns about capital allowances compliance, or are in need of expert input to deal with a tax investigation, please do not hesitate to contact us.