Short Life Asset Tax Benefits
If you spend money on plant or machinery (including certain fixtures) for use in your business and regularly dispose or scrap them within eight years, then Short Life Asset (SLA) elections could provide a legitimate opportunity for a valuable tax timing benefit.
A lot of businesses do not consider SLA elections for qualifying plant or machinery (P&M) because the current Annual Investment Allowance (AIA) allows them to write-off up to £1 million in Year 1. However, with the AIA set to reduce to £200k from 1 January 2021, SLA treatment is likely to come back on people’s agenda and here we explain why.
Enhanced Timing Benefits
Without accelerated allowances (e.g. AIA or First Year Allowances), ordinary plant and machinery is written off for tax purposes over several years (currently 18% or 6% per annum on reducing balance basis). This means a business can still receive allowances many years after an asset is acquired and/or even scrapped.
The benefit of SLA treatment is that it lets the taxpayer write off the cost of an asset over its actual life.
It does this by creating a separate capital allowances computation (single asset pool) for the asset(s) involved which enables an alternative balancing adjustment calculation on asset disposal (or scrappage) which is separate to the normal ‘main pool’ rules.
If the P&M asset is scrapped with no value consideration any unrelieved plant and machinery allowances (PMAs) is received as a ‘balancing allowance’ in the year of scrappage. If the balancing event results in a disposal value that is higher than any unrelieved PMAs a balancing charge can arise.
Strict Procedure Requirements
A P&M asset is only eligible for SLA treatment if the taxpayer elects to treat it as one. This should be made in the tax return for the chargeable period in which the expenditure is incurred and within normal filing deadlines (i.e. no later than 2 years after the end of the relevant chargeable period). Once made an SLA election is irrevocable.
Strictly, an election for SLA treatment should specify each asset it covers together with its cost. A degree of grouping for the same assets held in large numbers where separate calculation is not practical may be acceptable to HM Revenue & Customs (CA 23640) and Statement of Practice 1 (1986) and can prove invaluable.
Notwithstanding, the administration of tracking multiple SLA disposals with different asset life’s and disposal events can be burdensome and off putting, which is why the Office of Tax Simplification (OTS) has suggested in its latest review that the government: -
Consider the benefits and costs in introducing a pooling mechanism for short life assets acquired in a particular year.
Review the current requirements to provide information on all assets being treated as short life assets, to identify whether they could be simplified or reduced.
To what extent the government takes on the OTS recommendations to make SLA administration less onerous we await with interest.
Interaction with Fixtures
An often overlooked opportunity with SLA treatment is on fixed ‘main pool’ P&M in a property (e.g. fire alarms, security systems, sanitaryware, sprinkler systems etc.) that is disposed of within the eight year cut-off and subject to a £1 capital allowances election.
Provided the overall sale conditions are met (i.e. not under value etc.) and the general anti-avoidance provisions are not triggered (i.e. it is a genuine commercial sale) then a significant timing advantage can occur.
Subject to some very limited exceptions, leased P&M is generally excluded from SLA treatment (see exclusions below) which means landlords will not normally be able to benefit from the above.
It is also worth remembering that a valid s198 or s198 capital allowances election will require the co-operation of a Buyer and anyone considering this type of SLA treatment for fixtures should do so carefully and in conjunction with expert professional advice.
Not all P&M is eligible for SLA treatment; most notably, cars (apart from hire cars for disabled persons), ships, long life assets and special rate pool expenditure (e.g. air-conditioning, heating, water systems, lifts etc.). Specific exclusions also exist for leased P&M and further details can be found here.
Utilisation of SLA treatment in a capital allowances computation can provide taxpayers with a valuable planning tool and if you would like further details, or discuss their application in more detail, please do not hesitate to contact us.