Capital Allowances

11

24A.1.8    Choice of Allowances

A capital expense may fall within more than one category of allowance. In the absence of any express provision the taxpayer can choose the most favourable category, subject to general rules designed to prevent double allowances.⁷⁰

24A.1.9    Capital Allowance and Revenue Expense Compared

It is worth setting out the ways in which a capital allowance differs from a deductible expense as follows:

1. the allowance must be an item of capital expenditure as distinct from revenue;
2. whereas a revenue expense is deductible unless statute otherwise directs, a capital allowance is only made if the statute permits;
3. whereas an allowance may be claimed in respect of expenditure incurred before a trade or other qualifying activity commences (although only when the activity begins),⁷¹ an expense so incurred is deductible only if it is incurred within 7 years of the trade beginning (see above §20.6);
4. an expense incurred partly for trade and partly for other purposes is not deductible, whereas such duality results in an apportionment of capital expenditure;⁷²
5. a revenue expense is deductible at once and in full, whereas allowances are made only at specified rates and often over several years;
6. a revenue expense must be taken into account at the proper time, whereas there is no obligation to claim a capital allowance.

24A.2    Plant and Machinery

24A.2.1    Elements

24A.2.1.1    Outline

The present scheme of capital allowances for Plant and Machinery was first enacted by FA 1971; the Act has been much amended. The basic structure consists of first year allowances⁷³ and annual writing down allowances.⁷⁴ For some time up to 1984, first year allowances were given at a rate of 100%. These were abolished by FA 1984, but were revived for particular purposes subsequently such as the lower rate temporary allowance because the economy was in recession (1992–1993)⁷⁵ or out of a wish to help small or medium-sized enterprises (each year since 1997),⁷⁶ or to encourage investment by small enterprises in plant or machinery which is either to do with information and communication technology (ICT),⁷⁷ or by an enterprise of any size in energy saving.⁷⁸ The rate—and scope—of these revived first year allowances has varied. First year allowances were at one time also available under transitional relief for certain regional projects in development areas.⁷⁹

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