Capital allowances are generally allowed for plant, machinery cars and industrial buildings. In addition, capital allowances have also been allowed by way of incentives, for such expenditure as hotels, hospitals and nursing homes, buidings in urban and rural renewal areas, third level buildings and childcare facilities.
There are different capital allowance rules for different categories of capital expenditure. Allowances for “plant” and machinery are available for all business. Plant and machinery are things, other than buildings which are part of the permanent apparatus of the business. They do not include stock nor do the include the building or so-called “setting” in which the business is undertaken. It can include fixtures and movable items, such as cars used for that purpose of the business .
Plant must play some function in the business. What is plant in one business, may not be so in another business. Structures such as partitions can constitute plant. A silo may be plant. However, the building or setting itself will not qualify as plant. In the case of a floating restaurant, the ship was not plant as it was the setting. It did not play a specific function in the business.
A distinction is made between the setting in which the business is undertaken and plant which is used in the business. The plant must be functional in some way, relative to the business. Similarly, stock should be contrasted to plant, as it is not part of the permanent apparatus of the business. That which might be setting in its own in one context, may be plant in another context.
Expenditure on hotel furniture, decorations, murals etc. which play a functional role in creating an atmosphere, have been accepted as plant. However, not everything that adds to the atmosphere of a hotel, is necessarily plant. Paintings and murals which are part of the walls are not plant, while murals being apparatus are more likely to be accepted as plant.
Where (in commencement or cessation years) the assessment is for less than a calendar year and the allowances are apportioned in the proportion that the periods bears to a whole year.
If plant or equipment is not in use in a particularl year because it is not used in a trade, it is deemed to have been claimed for purpose of it being reclaimed in later years. Capital allowances are granted in respect of expenditure, net of grant. Where the expense is met by a third person, an allowance is not available.
What constitutes plant depends on the nature of the business. In one business, the item may be part of the setting while in another it may play a function and constitue “plant”. The distinction between plant and setting can be difficult to make in some cases. Detachable murals installed in a hotel to create atmosphere were accepted as plant. Wallpaper may not be considered plant.
The following usually qualify as plant; partitions, heating and ventilation systems, lifts, special reinforced flooring, a sprinkler system and similar systems. There is limitation of the nature of the item. The question is the function it plays in the context of the trade or business. For example, plant can include law books in the case of a barrister.
Allowance for Plant
An annual allowance of 12.5% is allowed in respect of expenditure incurred on plant and machinery incurred after 2003 on a straight line basis (i.e. spread evenly over eight years). There are differing rates of allowance for different classes of expenditure in some cases.
In order to qualify for a deduction by way of capital allowance, it is necessary that the capital expenditure has been incurred and that the plant and machinery is being used for the purpose of the trade which is being carried out at the end of the basis periods (usually the end of the accounting period).
Capital allowances may be granted on the cost of the plant and machinery itself but also delivery, installation and commissioning costs. The cost of renewal improvement and reinstatement may also qualify. Where plant and equipment is used party for private and partly for business purposes, only the business is part is allowable .
Allowances are made by reference to expenditure net of any grant or reclaimable sums such as input VAT. The grant may be a state agency grant or may be by way of a subsidy from a third party supplier or customer or another.
Capital expenditure that would qualify for a capital gains tax deduction in calculating capital gains tax, does not qualify.
Assets that are leased or subject to hire purchase may qualify subject to conditions. Hire purchase may be treated as a means of financing. See the separate sections below on leasing.
Gaps & Non-Use
There are special rules when the periods on which the liability is based overlap or where is a gap, which can arise in certain circumstance such as commencement and termination of a trade. The key point in time is the end of the basis period. If the asset is in use at the end of the basis period, an allowance will be granted for that years.
Where plant and machinery is not in use in the tax year, or is partying use only a notional capital allowance may be granted. This reduces the tax written down valueby the full relevant percentage in the carrying value. The trade must be carried on continuously since the plant or machinery was acquired. It must be news for the purpose of the trade since acquisition.
Where the plant and machinery is not in use in the relevant year, no capital allowance is granted. However a notional allowance applies. The notional allowance is disregardedfor the purpose of the calculation of a balancing charge. This reduces the balaicning charge to reflect the fact that tax was not allowed in the relevant year.
Balancing Charges and Allowances
Where an asset on which capital allowances have been claimed, is sold, an adjustment must be made so that the actual amount allowed as capital allowances equates to the actual cost. If the amount allowed exceeds the difference between the purchase and sale price, so that too much by way of capital allowances has been allowed, a balancing charge applies in the year of sale for the excess.
Balancing allowances or balancing charges are calculated net of grant value. Any grant is subtracted from the tax written down value. A balancing charge or allowance may arise where the trade is permanently discontinued.
Balancing charges do not arise on the disposal of plant and machinery, where the proceeds are less than €2,000, provided that the transaction is not to a connected person.
There is deemed to be a wear and tear allowance for every year which the taxpayer owned the plant and machinery, for the purpose of calculating the balancing charge, irrespective of whether he did in fact use the plant or claim the wear and tear allowance. In the absence of this provision, a balancing allowance might otherwise be available on sale or a balancing charge would be less than it should otherwise be.
Postponement & Election
Plant is deemed to be sold at market value, if the trade ceases and the plant and machinery is not disposed of, if sold at less than market value, gifted or transferred to private use.There was provision for postponement of a balancing charge ,where plant or machinery is gifted or sold at undervalue.
A joint election must be made to the Revenue Commissioners and the Inspector of Taxes must agree to the treatment. The donor or seller must be connected with the recipient / purchaser. There are exceptions by way of anti-avoidance in the case of transfers by individuals to companies which would otherwise take advantage of the lower rate in companies.
Market value is applied to sales and transfers of property between connected persons, if the sole or main benefit is to obtain capital allowances, which might not otherwise be available.
Balancing Charges Amount
The balancing charge is not to exceed the allowances granted. The balancing charge is effectively subject to income tax. Where the sale proceeds do not exceed €2000 and a sale to an unconnected party the balancing charge is not taxed.
If on a sale, the price is such that the amount allowed is less than the difference between purchase and sale prices, a balancing allowance is given. This is an additional allowance, which is allowed in the year of disposal. The balancing allowance effectively reduces the amount chargeable to tax.
Balancing charges and balancing allowance also apply on the following occasions;
• the plant and machinery is disposed of, otherwise than by sale;
• it ceases to be used for the business;
• the trade/business is discontinued .
In these circumstances, the plant and machinery is deem to be sold at market value.
Unlike the case with industrial buildings, plant and machinery does not have a tax life. Therefore if the asset is sold after its tax life is fully expired (seven years) a balancing charge or allowance will apply.
Where plant or machinery is replaced, it is possible to set the balancing charge against the cost of replacement. In this case, the amount allowed on the replacement is reduced by the amount of the balancing charge. Therefore, the amount ultimately allowed on the replacement, is reduced so that the balancing charge is effectively spread over a number of periods.
Where a trader succeeds another they may agree to have the plant and machinery transferred at its tax written down value.
Where the lessor claims capital allowances, the lessee may not do so. There are anti-avoidance provisions which prevent lessors from using excess capital allowances against other income. There are limited exceptions by way of industrial and economic incentives.
A wider range of allowances and incentives were allowed in the past, by way of industrial and economic incentives. Most of these incentive type allowances are no longer available for new cases, although the relevant life of the allowances may continue for many years after restriction or abolition.
The lessee may claim wear and tear allowances where burden of wear and tear falls on it. The lessee is deemed to have incurred the expenditure and may claim the allowances. This possibility is available only where the lease is a finance lease under accounting practice. It must transfer all the benefits and risks of ownership to the lessee.
After 2010, both lessor and lessee must elect jointly for in order for the lessee to claim allowances. A deduction may be claimed, only in accordance with generally accepted accounting practice. The total claimed by the lessee is limited to the capital elements of the lease payment due under the lease. This is the total amount of lease payments less the amounts that are allowed as a rental expense deduction.
Leased plant and machinery
The cost of leased equipment may be allowed as a capital allowance to the lessor. The lessor is entitled to capital allowances, if the burden of wear and tear is on it and if the lessee uses it in a trade, in the manner described above. This can lead to favourable financing terms, by which the lessor’s tax benefit can passed back to the lessee who uses it in a trade.
If the equipment is part of the building the full income may be deemed rental income and taxed accordingly. In this case they will be subject to rental (Sch D Case V) capital allowances.
The burden of wear-and-tear falling on the lessor requires that he sufferers the economic loss on the deterioration of the asset during its natural life. The lessor would thereby usually be obliged to repair and replace the equipment where it no longer functions.
The trade of leasing equipment is regarded as a separate trade. Allowances are available only against the income of the trade some minor exceptions.
The finance lease is in essence a financing arrangement. The risks and rewards of ownership are transferred to the lessee. The lessee will be entitled to capital allowances
- if both lessor and lessee jointly opt to Revenue
- the lessee uses the asset for the purpose of its trade
- the lessee bears the burden of wear-and-tear and is obliged to deliver the plant and machinery in good condition at the end of the lease
Capital allowances cannot exceed payments made.
Interest may still be allowable as a deduction from trading profits. Capital payments do not receive other relief than the allowances. At the end of the lease term if there is any adjustment between the lessor and the lessee, a balancing allowance or charge may arise.
Motor vehicles include vehicles for the carriage of persons, passengers or goods. There is a restriction on the maximum amount that can be claimed by way of capital allowance for a private car. This cap varies periodically. This is the maximum amount that may be claimed, irrespective of the actual expenditure incurred.
For lower emission vehicles, the allowance is €24,000 irrespective of the cost of the car. Between certain emissions thresholds, the maximum allowance is 50% of the current threshold. Beyond a defined high emissions level, no allowances are granted at all. Where the car is sold, the balancing allowances and charges are themselves restricted in the same manner.
The restriction does not apply to vehicles used in the course of a trade or for hiring to the public. Where it is used partly for business and private purposes, it is apportioned relative to the amount of business and non- business use.The rate of wear and tear allowance is doubled for taxis and other vehicles used for short-term hire. The car must be available for use for a qualifying purpose, for at least 75% of the relevant period.
Wear and tear allowances are available for capital expenditure on plant and machinery as deduction in relation to the lettings of residential property. This will usually comprise furniture and fittings.
Cars and other vehicles which are used in a business may qualify for capital allowances as plant and equipment. The rate allowed is 12.5% on a straight line basis. They are subject to special capital allowance rules. The rules restrict the amount available on the cost of a car to a maximum of €24,000. This is the maximum capital allowance available for a car.
Where there is as personal and business use, part only is allowed. The allowances and the ultimate balancing allowances in charge should be based on the percentage business use
The calculations are based on or restricted by the relevant percentages mentioned below. The annual writing down allowances are based on the percentages of the cost mentioned rather than the actual cost.
There are different allowances for cars and vehicles based on carbon emissions. The percentage capital allowances is based on these figures For the most efficient categories, A B & C rating, €24,000 is allowed even if the cost is more or less. For D and E categories, the allowance is 50% of the cost or 50% of €24,000 (€12,000) if the cost is higher . For the least efficient categories F & G, no allowances are available at all.
The sale proceeds received is restricted by the same percentages for the purpose of calculation of the bouncing allowance or the balancing charge.
Taxis and hackneys qualify for a 40% allowance.Two annual allowances of 40% and a final allowance of 20% is available in respect of taxis and passenger cars used for short-term rental. It must be used at least 75% for a qualifying purpose throughout the period.