Budget Notes

BN24 CAPITAL ALLOWANCES BUYING AND ACCELERATION: ANTI-AVOIDANCE

Who is likely to be affected?

1. Companies selling trades where the market value of the plant or machinery used in the trade is substantially less than its tax written down value.

General description of the measure

2. Legislation will be included in Finance Bill 2008 to prevent avoidance of corporation tax through schemes that use arrangements intended to crystallise a balancing allowance on plant or machinery used for the purposes of the trade to make it available to a profitable group not intending to carry on the trade for the long term.

3. The measure will have effect, for example, where a loss-making company is sold to an unconnected profitable group prior to the trade (rather than the company) being sold to a third party a short time later. The measure will prevent the sale of the trade leading to a balancing allowance in the hands of the profitable group.

Operative date

4. The measure will have effect where a company sells its trade, and so ceases to carry it on, on or after 12 March 2008.

Current law and proposed revisions

5. As a general rule, where a company ceases to carry on a trade, and where the market value of the plant or machinery used in the trade is less than its tax written down value, the company becomes entitled to a balancing allowance equal to the difference between the market value of the plant or machinery and its tax written down value. However, section 343 of the Income and Corporation Taxes Act 1988 (ICTA) provides that this general rule does not apply where a company (the predecessor) ceases to carry on a trade and the same trade begins to be carried on by another trader (the successor) where the two companies are under common control.

6. The avoidance that this measure is designed to counter relies on a trading company being acquired by a profitable group and, as part of the arrangements, the trading company selling its trade to an unconnected buyer a short time later. When the company is acquired by the profitable group capital allowances are unaffected. However, when the trade is sold, and if the market value of the plant or machinery is substantially less than its tax written down value, the existing rules can lead to a substantial balancing allowance that becomes available to the profitable group. This can accelerate the rate at which expenditure is written off for tax purposes.

7. The overall effect is that, as well as allowing the capital allowances to be used by a profitable group that has no long-term interest in the trade, they are available sooner than they would have been had the trading company simply been sold by the original owner to the ultimate buyer.

8. The measure will counter this avoidance. It will have effect where a trade ceases to be carried on by one company and begins to be carried on by another company where the cessation:

•    would generate a balancing allowance; and

•    is part of arrangements the main purpose, or one of the main purposes of which, is to create that balancing allowance.

9. The measure will also have effect where the transfer of part of a trade would create a balancing allowance.

10. Where the measure has effect the transfer of the trade will be treated as falling within section 343(2) of ICTA. This will mean, for capital allowances purposes, treating the trade as if it had been continuously carried on. No balancing allowance will be generated and the capital allowances will become available to the person buying the trade for the long term.

11. This measure will not affect the transfer of a trade, even where a balancing allowance arises, unless it is part of wider arrangements designed to create a balancing allowance.

12. Draft legislation and explanatory notes have been published today on the HM Revenue & Customs website.

Further advice

13. If you have any questions about this change, please contact Paul Lane on 020 7147 2637 (email: paul.lane@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk