Paragraph 1 - Introduction
1. Income tax is a tax on income. It is not a tax on capital. Logically enough, capital expenditure is not deductible in arriving at the balance of profits chargeable to tax. Nevertheless the Income Tax Law recognises that relief should be granted for particular assets whose value depreciates.
Paragraph 2 - Scope of Capital Allowances
2. Relief is given by way of capital allowances on machinery or plant; and
glasshouses.
Paragraph 3 to 7 - Machinery or Plant: Meaning
3. The term "machinery or plant" is not defined in the Income Tax Law and the words must be interpreted in their ordinary commercial sense, subject to the guidance given in a number of judicial decisions in United Kingdom tax cases.
4. "Machinery" generally causes little difficulty but the term "plant" has been widely interpreted. From an early (non-tax) case comes the most frequently-quoted definition of plant:
" ....in its ordinary sense, (it) includes whatever apparatus is used by a businessman for carrying on his business - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business."
5. A later case approved that definition but made it clear that the term plant does not cover "the place (or the setting) in which the business is carried on."
6. The phrase "permanent employment in his business" (paragraph 4) demands some degree of durability. In practice a life of two years or more is regarded as sufficient.
7. At one extreme, books qualify as plant - if they have a life of at least two years - but a building or structure is the setting in which a business is carried on. (See, however, paragraphs 34 to 39 for details of allowances on glasshouses).
Paragraph 8 - General
8. Where a trader has incurred capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of the trade, he qualifies for capital allowances provided that the machinery or plant belongs, or has belonged, to him. Items acquired by hire purchase or conditional sale agreement are treated as belonging to the trader.
Paragraph 9 to 11 - Capital Expenditure
9. Expenditure is treated as incurred when the obligation to pay arises. This accords with normal accountancy practice. However, the words "expenditure on the provision of machinery or plant' exclude remote or indirect expenditure, or expenditure on any structure built to house the machinery or plant.
10. Also excluded is that part of the cost of machinery or plant which is met out of a grant paid under the provisions of Part III of the Agriculture (Guaranteed Prices and Financial Assistance) (Jersey) Law, 1965.
11. Expenditure must be capable of identification. If, for example, the machinery or plant was acquired along with other items for a global sum, mere guesswork cannot attribute expenditure to the machinery or plant. A proper valuation is necessary.
Paragraph 12 - Wholly & exclusively for the purposes of the trade
12. The machinery or plant must have been provided wholly and exclusively for the purposes of the trade. In cases of doubt the Comptroller may seek evidence of the purposes for which the machinery or plant was acquired. Expenditure on the provision of machinery or plant for the purpose of obtaining capital allowances will not satisfy the "wholly and exclusively" rule.
Paragraph 13-16 - Partly for purposes other than those of the trade
13. Despite the preceding paragraph, capital allowances may be granted even though the provision of the machinery or plant was partly for purposes other than those of the trade. The allowance to be granted is that which is just and reasonable having regard to all the relevant circumstances of the case: in particular, the extent to which the machinery or plant is to be used for those other purposes.
14. Examples include:
A car used by the trader partly for private purposes; the allowance in that instance will be restricted to the proportion of business use.
The purchase of an expensive car where there is reason to believe that personal choice has dictated the type of car acquired; in that case the allowance will be computed by reference to a notional cost.
15. With regard to the latter point, the notional cost to be applied to motor cars which first give rise to a claim to capital allowances for the following years of assessment is £22,000.
16. It should be noted that allowances for machinery or plant provided partly for purposes other than those of the trade are calculated separately and are not pooled with other items.
17. Subject to the following 2 paragraphs, the allowance to be granted is 25% of the amount by which qualifying expenditure (paragraph 18) exceeds any disposal value which needs to be brought into account (paragraph 22 et seq.). However, if the trade has been carried on for part only of the year of assessment, a proportionately reduced percentage is granted. For example, if a trader commences trade on 1 July his allowance for that year of assessment is one-half of 25%. The year for which the allowance is granted is determined by the basis period in which the expenditure is incurred. (See paragraphs 40 - 42).
18. A trader's qualifying expenditure is the aggregate of:
- a. any residue of capital expenditure brought forward from the preceding year of assessment (after deducting any allowances made for that year of assessment) and
- b. capital expenditure incurred in the basis period (see paragraphs 40 - 42) or previously (see paragraph 43) but excluding expenditure which has qualified for a previous basis period
Example 1
A trader commences business on 1 July, 1990 and makes up accounts for the year ended 30 June, 1991. He incurs capital expenditure on the provision of plant and machinery wholly and exclusively for the purposes of the trade as follows (there being no disposals):
£2,800 on 1 August, 1990
£5,000 on 13 November, 1990
£10,000 on 20 February, 1991
The basis periods (see paragraphs 40 - 42) of the assessments and the amounts of qualifying expenditure are:
The allowances are calculated as below:
This example illustrates that where 2 basis periods overlap the period common to both is deemed to fall in the first period only.
It also emphasises the point that allowances are restricted by reference to the length of time the trade is carried on during the year, not by reference to the length of time the equipment is owned or used.
Example 2
A hotelier who has been in business for many years submits accounts for the year ended 31 December, 1990, being the basis of his 1991 assessment.
In the accounting year he replaced his car (agreed private use one-third) for £8,400. He received £2,200 in part exchange for his old car, the residual value of which was £2,560.
The 1991 capital allowances in respect of the motor car total £1,640, as follows:
This example also illustrates how, in the particular situation described, a balancing allowance can be thrown up.
In the case of pooled expenditure, see the next section, a balancing allowance can only arise on cessation of the trade.
19. When calculating capital allowances the costs of all items of machinery or plant are added together without distinguishing individual items. This is known as "pooling" and the total expenditure is referred to as the "pool".
20. The only items that cannot be pooled are:
Machinery or plant provided partly for purposes other than those of the trade (because the private element must be identified).
Glasshouses (for the reasons explained in paragraphs 35 to 37).
21. Allowances which exceed the assessable profit for the year of assessment are carried forward and deducted, so far as may be, in the assessment of the profit for the next succeeding year, any balance being carried forward and dealt with in like manner in the following year and so on until exhausted. NB Unused wear and tear allowances under the old system will continue to be carried forward until exhausted.
22. A disposal value is to be brought into account by a trader on the first occurrence of one of the following events, namely -
- a. the machinery or plant ceases to belong to him (eg he sells it or gives it away)
- b. he loses possession of the machinery or plant in circumstances where it is reasonable to assume the loss is permanent (eg the asset is stolen)
- c. the machinery or plant ceases to exist as such (as a result of destruction, dismantling or otherwise);
- d. the machinery or plant begins to be used wholly or partly for purposes which are other than those of the trade (eg it is transferred to private use)
- e. the trade is permanently discontinued or is deemed under any provision of the Income Tax Law to be permanently discontinued
The following paragraphs explain what disposal value is to be brought into account in the circumstances shown.
23. If the machinery or plant is sold at arm's length the disposal value normally equals the net proceeds of sale. Most cases will come under this heading and there will generally be no difficulty in determining the disposal value.
24. Exceptionally, insurance moneys or compensation may be receivable in connection with a sale. The Comptroller will need to know about this in order to decide whether such sums affect the disposal value.
25. If the machinery or plant is sold at a price lower than the open market price (for example, the trader sells a motor car to his son for a nominal sum), the disposal value equals the price which the machinery or plant would have fetched if sold in the open market.
26. If the machinery or plant is destroyed (or demolished), the disposal value equals the net amount received for the remains of the machinery or plant, together with any insurance monies and sums, of a capital nature, received by way of compensation of any description.
27. If the machinery or plant is permanently lost the disposal value equals the insurance moneys received in respect of the loss and, so far as it consists of capital sums, any other compensation of any description.
28. In any of the other events covered in paragraph 22 (including gifts) the disposal value equals the price which the machinery or plant would have fetched if sold in the open market at the time of the event.
Example
A company which has been trading for many years enters into the following transactions:
- i. In June 1989 it purchases an item of machinery for £20,000, receiving £5,000 for the replaced item in the open market
- ii. In December, 1990 the managing director gives his son one of the company cars for his birthday
Accounts are made up to 31st December each year and the market value of the company car is agreed at £4,000.
The residual value of capital expenditure brought forward after the 1989 capital allowances is £35,000.
The computation is:
29. It is important to note that the disposal value of a particular item cannot exceed its cost. In the event that an item is sold for a sum which exceeds its cost, the disposal value is restricted to the cost.
30. In the year of assessment in which occurs the permanent discontinuance of the trade, the allowance ("balancing allowance") equals the whole of the excess of qualifying expenditure over any disposal value which needs to be brought into account.
Example 4
The company mentioned in the preceding example buys some machinery for £10,000 in January, 1993 and ceases to trade in June, 1994.
Shortly after cessation all its machinery and plant is sold in the open market for £8,000. The 1993 assessment falls to be made on the profits of the year ended 31st December, 1992.
The computation is:
This example also serves to illustrate that where there is a discontinuance of a trade resulting in one year's profit not forming the basis of any year's assessment (in this case the 1993 profits) capital expenditure in that year nevertheless qualifies for allowances.
31. Disposals of machinery or plant other than at cessation of trading do not give rise to a balancing allowance except in the following circumstance. An item of machinery or plant which is provided partly for purposes other than those of the trade is the subject of a separate calculation. Upon the disposal of that item, a balancing allowance (or a balancing charge - see paragraph 32) is thrown up, unless by coincidence the disposal value equals the balance of qualifying expenditure.
32. If the disposal value for any basis period exceeds the qualifying expenditure a balancing charge arises.
Example 5
A trader disposes of his machinery and plant in 1990, perhaps replacing them by leased assets.
The computation, based on accounts for the two years to 31st December, 1990 is:
33. A balancing charge is made on the trader by means of an assessment on the profits of his trade.
Extending the example in paragraph 32, and assuming the assessable profits are £15,000 and £16,000 respectively, the assessments will be:
1990: £15,000 less Capital Allowances, £800
1991: £16,000 plus balancing charge, £300 = £16,300
34. Where a person incurs capital expenditure on the provision of a glasshouse used for the purposes of his trade and, as a result, the glasshouse belongs, or has belonged, to him, he is treated as having incurred expenditure on the provision of machinery or plant.
35. In consequence, capital allowances are available to him in respect of a glasshouse used for the purposes of the trade but the rules are modified by the following 2 paragraphs, with the result that expenditure on glasshouses cannot be pooled in the same way as expenditure on machinery or plant.
36. Whereas the rate of allowance for machinery or plant is 25%, the rate of allowance for a glasshouse is 10%.
37. Where any glasshouse ceases to belong to a trader and commences to belong to some other person, the glasshouse is treated as having been sold for a sum equal to the residual value of the glasshouse in the capital allowances computation of the previous owner at the time he ceased to own it.
38. The purpose of this provision is to avoid a situation where a balancing charge extinguishes relief previously granted by way of capital allowances. The new owner may nevertheless claim capital allowances by reference to the cost to him of the glasshouse.
39. It is important to bear in mind that it is the cost of the glasshouse only, ie the structure, that represents qualifying expenditure. The cost of the land must be left out of account.
40. For the purpose of computing allowances and charges, the "basis period" is the period on which the profits for the year of assessment are finally computed. If, therefore, the primary period of computation is replaced by another, the latter is the basis period.
41. Where 2 basis periods overlap, the common period is deemed to fall in the first basis period only. The practical effect of this rule is demonstrated in Example 1. The first 6 months of trading fall into the basis periods of all three years of assessment 1990, 1991 and 1992. In consequence, the capital expenditure of the initial six months first generates allowances for 1990 but it is excluded from being brought into the computation a second and third time.
42. Where there is an interval between the basis periods for two successive years of assessment:
- a. if the second of the years is not the year of permanent discontinuance, the interval is deemed to be part of the second period
- b. if the second year is the year of permanent discontinuance, the interval is deemed to be part of the first period
43. Where a person incurs capital expenditure on the provision of machinery or plant otherwise than for the purposes of his trade and later brings that machinery or plant into use for the purposes of that trade, he is treated as having incurred capital expenditure equal to the open market value of the machinery or plant on the date when he so brings it into use.
44. Where machinery or plant is given to a person by a trader who, in consequence of the gift, was required to bring into his capital allowances computation a disposal value equal to market value at the time of the gift (see paragraph 28), the recipient of the gift is entitled to capital allowance as if he had paid open market value for the machinery or plant at the time he brings it into use for the purpose of his trade.
45. The capital allowances rules are extended by statute to professions, vocations, employments or offices and by concession to those sources in respect of which wear and tear allowances were concessionally granted, in particular letting; and investment holding by a company entitled to management expenses.
46. Where all his machinery or plant is transferred by a trader to the successor to his trade, the capital allowances will, by concession, be calculated as if the trade continued, provided that both parties agree.
47. As mentioned in paragraph 1, capital expenditure is not deductible in arriving at chargeable profits. However, by long-established concession, relief is granted for the cost of the replacement of machinery or plant, provided that no deduction of any kind was claimed for the original item now being replaced. This practical treatment remains available as an alternative to capital allowances but a switch from the statutory to the non-statutory basis is, as before, prohibited.
48. A sum equal to 10% of the income arising from letting furnished property may be deducted in arriving at the balance of profits assessable to income tax. This deduction is in lieu of annual claims to wear and tear, capital or replacement allowances.
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