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Capital allowances anti-avoidance measure is brought forward

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A measure to prevent the acceleration of first year allowances will take effect from 12 August 2011 or earlier, rather than next April, because of evidence that the delay could result in the loss of ‘significant revenue’.

HMRC’s consultation document Changes to the capital allowances anti-avoidance rules for plant and machinery, published in May, proposed a number of changes including the repeal of CAA 2001 s 230 (exception for manufacturers and suppliers) from April 2012 to counter arrangements using the exception to side-step anti-avoidance rules.

That consultation closes at the end of August. At least one scheme has been promoted to take advantage of the s 230 exception – in a way that was not intended – before it is repealed, HMRC said on Friday.

‘Although the government is acting swiftly today to put a stop to the scheme before it is known to have been used or implemented, should it emerge subsequently that the scheme or similar schemes exploiting the s 230 exception have been used causing a loss of tax then the government will consider whether the repeal needs to have effect in relation to time prior to the date of this announcement,’ HMRC said.

Draft legislation is available on the HMRC website and a written ministerial statement will be made after MPs return from the summer recess on 5 September.

‘The government is determined to reduce tax avoidance in order to protect the Exchequer, which provides funding for public services, and maintain fairness for the taxpayer,’ said Justine Greening, Economic Secretary to the Treasury. ‘By ending this loophole today we will preserve important revenue while maintaining a fair system of capital allowances to support business investment.’


‘Company X Ltd is to buy a significant item of purpose built plant or machinery (P&M) with a cost in the order of £2bn. The P&M qualifies for 100% first-year allowances. The P&M is acquired from the manufacturer and would, absent any tax avoidance motivated restructuring of the transaction, be paid for in instalments over the 4 year construction period. X Ltd would be able to claim first-year allowances on the expenditure as it is incurred over the 4 year period.

‘To accelerate the capital allowances available two steps are inserted into this transaction. Firstly, the rights and obligations under the contract to acquire the P&M are assigned to a subsidiary of X Ltd which is a procurement company, and secondly, a hire purchase agreement is put in place between X Ltd and the procurement company, structured so that an upfront balloon payment (of almost the entire £2bn) is made by X Ltd. X Ltd becomes entitled to claim 100% first-year allowances on the full £2bn when paid at the start of the contract rather than on the amounts actually paid to the manufacturer over the 4 year period.

‘X Ltd and the procurement company are connected parties so section 214 CAA together with section 217 should deny X Ltd 100% first year allowances in respect of the acquisition of the P&M from the procurement company. However, section 230 provides an exception from section 217 because the procurement company’s business is the supply of plant and machinery of that class.’

Source: HMRC technical note Plant and Machinery Capital Allowances: Anti-Avoidance, 12 August 2011