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Payment recognition and claims for plant or machinery

Updated: Jul 5, 2020

With the increase in Annual Investment Allowance (AIA) from £200,000 to £1,000,000 between 1 January 2019 and 31 December 2020 announced in this weeks budget, it is common to receive questions on the correct timing of expenditure payments for plant and machinery allowances purposes.

Businesses with an accounting period that straddles the increase will need to calculate their proportionate allowance based on the limits involved and allocate expenditure accordingly. For example, a business with a 31 March 2019 year end will have an overall AIA limit of £400,000 (i.e. 9/12 x £200,000 + 3/12 x £1,000,000) and will be limited to the amounts in the periods involved (i.e. £150,000 for expenditure in the first 9 months and £250,000 for the remaining).

The capital allowances rules contain special provisions to determine when expenditure is incurred that can differ from accounting treatment and there is detailed anti-avoidance to prevent abuse. The act of ‘incurring expenditure’ is only one condition that businesses need to satisfy to make a claim for plant and machinery allowances (you must own the asset and be intent on using it for the purposes of your business).

Payments under milestone contracts

A milestone contract is a contract that satisfies the following conditions:

  1. The asset which is being constructed under the contract becomes the property of the purchaser as it is being constructed;

  2. Payment becomes due as and when agreed stages of the work (”milestones”) are satisfactorily completed.

Milestone contracts are often found where there is a large-scale construction project for buildings or for major items of machinery or plant such as oil pipelines. In a milestone contract the obligation to pay normally becomes unconditional when an architect or engineer who has inspected the work done issues a certificate.

In a milestone contract, the asset normally becomes the property of the purchaser as it is being constructed. The obligation to pay for a part of the asset that has been completed becomes unconditional when the work is certified and it as this point expenditure is normally treated as being incurred.

To reflect the time lag between work completion, certificate issue and invoicing there is a special rule for milestone contracts that overlap an accounting year end. If the part of the asset which has been completed becomes the property of the purchaser before his accounting date and the work is certified within one month of that accounting date the expenditure which is certified is treated as incurred on the accounting date.

Other payments on or after delivery

If the buyer is legally required to pay on delivery this will normally result in an ‘unconditional obligation’ and it will be this date that determines when the expenditure is incurred. This will be still the case if a limited credit period is offered and monies are not required to be paid until a later date.

To prevent abuse of the above, if there is a gap of more than 4 months between the dates on which the obligation to pay becomes unconditional and the date on which payment is required to be made the expenditure is not incurred until the date on which payment is actually made.

Payments before delivery

Deposit and advance payments for assets that have still be completed (and do not fall within milestone contracts above) are more complex and if significant sums are involved are likely to come under HM Revenue & Customs scrutiny.

Simply paying for an asset does not on its own give an entitlement to claim. You must own the assets and have a suitable contract in place that satisfies the relevant conditions.  A reservation of title clause is an example of a scenario that is likely to preclude a claim until the asset is actually delivered.  Contracts should be reviewed and claims made on a case by case basis in line with the individual contract terms.

If there is an unconditional obligation to make a payment earlier than accords with normal commercial usage, or an arrangement to obtain a tax advantage, the date of expenditure is likely to be deferred.

Special rules for hire purchase payments

Under a hire purchase (HP) contract, a person will normally pay for an asset in instalments with ownership only passing on the final instalment.  Under a HP contract the buyer cannot satisfy the ownership condition until the end of the agreement.

To reflect this, the capital allowances rules contain special provision that enable the person making the payments under the HP contract to be treated as the owner as soon as that person is entitled to the ‘benefit of the contract’. It also lets the person claim allowances on payments that have yet to be made as soon as the asset is brought into use. This means that the person can claim plant & machinery allowances now on payments that will be made in the future.

There are always exceptions to the general rules and there is targeted anti-avoidance in the Annual Investment Allowances rules to prevent abuse.

If you have any questions on this or any other related matter, please do not hesitate to get in touch.


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