MEMORANDUM SUBMITTED BY THE LAW SOCIETY
CORPORATION TAX SUB-COMMITTEE
1. We welcome the publication of the Capital
Allowances Bill. We believe that it does represent a significant
improvement upon the existing legislation.
2. However, as we commented in our previous
comments of 2 October 2000 (Annex), a review of the Bill highlights
the complexity of the policy behind the legislation. We believe
that there should be a wider review of the capital allowances
code with a view to simplifying the underlying policy.
3. We believe that there could have been
more policy simplification and a greater degree of clarification
of parts of the existing legislation which cause difficulty in
practice. Examples are the points we raised in our comments of
2 October 2000 on Clause 2.1.2 (now Clause 12), Clause 8.4.2 (now
Clause 480) and Clause 12.6.2 (now Clause 572).
4. We remain unclear why it was not possible
to incorporate the parts of Schedule 12 to the Finance Act 1997
relating to capital allowances. It would have been preferable
to incorporate these provisions in the Capital Allowances Bill
so that the Bill dealt comprehensively with capital allowances.
5. On a minor point, we continue to believe
that in Clause 268(7) of the Capital Allowances Bill the word
"were" should be "included" so that account
is also taken of any previous disposal values of the beneficiary,
as well as those of the deceased.
6. We consider that there are a number of
cases where greater signposting would have been helpful. Examples
are the comments we made on 2 October in relation to Clause 2.5.7
(now Clause 58), Clause 2.14.25 (now Clause 196) and Clause 3.12.2
(now Clause 357). It would also have been helpful in Clauses 208
and 211 to have explained that the disposal value is calculated
in accordance with item 7 of the table in Clause 61(2).
7. In summary, we welcome the publication
of the Capital Allowances Bill. We hope that in future re-written
Bills there will be a greater degree of review of the underlying
policy in order to simplify and clarify where possible.
24 January 2001
COMMENTS ON THE DRAFT CAPITAL ALLOWANCES
We are very pleased to have the opportunity
to comment on the draft Capital Allowances Bill published by the
Tax Law Re-Write project in July 2000. We welcome the publication
of this Bill, and believe that it does represent a significant
improvement upon the existing legislation. However, a review of
the draft Capital Allowances Bill highlights the complexity of
the policy behind the legislation and we believe that there should
be a wider review of the Capital Allowances code with a view to
simplifying the underlying policy.
In our comments on Exposure Draft No 3, we commented
that far too much use of deeming provisions was made in the rewrite.
In our view, this remains the case.
We have set out our detailed comments by reference
to the numbering of the Clauses in the draft Bill:
Clause 2.1.2 follows section 83(2) of the Capital
Allowances Act 1990 in referring to expenditure incurred for the
purposes of a qualifying activity "by a person about to carry
on" the activity. The use of the word "about" could
imply that the expenditure is incurred immediately before the
qualifying activity is carried on. So far as we are aware, the
Inland Revenue have not applied the legislation so restrictively
in practice. We consider that it would be clearer, and in line
with existing practice, to refer to "expenditure incurred
for the purposes of a qualifying activity by a person before he
carries on the activity".
We did not think it very helpful to define the
management of an investment company as "consists of pursuing
those purposes expenditure on which would be treated as expenses
of management within section 75 of ICTA".
It would be helpful to add a cross-reference
to the special rules for finance leasing contained in Clause 2.17.9.
In Clause 2.5.7(7) it would be helpful to explain
the circumstances in which only some of the balance is to be allocated
to a pool.
It would be helpful to add a signpost to the
special rules for finance leasing contained in Clause 2.17.8.
We consider that Clause 2.8.5(1) should have
a counterpart to Clause 2.16.1(c). We believe that this is the
effect of the cross-reference to section 80 in section 34(5) of
the Capital Allowances Act 1990.
We find the reference to the "main pool
for a qualifying activity consisting of special leasing"
very confusing. It appears to suggest to the reader that all assets
used for special leasing are pooled together. In fact this is
not the case since Clause 2.2.5(2) makes it clear that each special
leasing of plant or machinery is a separate qualifying activity.
It would be less confusing to refer to a special leasing single
The word "to" before "allocated"
in the first line of Clause 2.10.12(2)(b) is surplus and should
See the comment in relation to the previous
clause and the reference to the main pool for a qualifying activity
consisting of special leasing.
We refer to the previous comments on the use
of the term "the main pool for a qualifying activity consisting
of special leasing".
The reference in the first line to "designated
purpose" should be to "designated period".
Clause 2.13.3(1) is expressed to be subject
to sub-sections (5) and (6). There is in fact no sub-section (6).
In Clause 2.13.7(3)(a), we think that the reference
to the "relevant abandonment cost for the chargeable period
in which the former trader ceased to carry the ring-fence trade"
should be to the "relevant abandonment cost for the post
We consider that it should be made clearer that
Clause 2.14.14(4) applies also where there is more than one past
owner in relation to which a disposal event has occurred.
A cross-reference should be added to the general
limitation on disposal value contained in Clause 2.5.11.
The references to item 4 of the table in Clause
2.14.28(1) and (2) should be to item 5 in each case.
Clause 2.15.4(2)(a) requires a disposal value
to be brought into account for the relevant chargeable period
in relation to the single asset pool but does not state the amount
of the disposal value. Provision should be added to deal with
the amount of the disposal value.
Similarly, Clause 2.16.3(4) requires a person
to bring disposal value into account for the chargeable period
in which the partial depreciation subsidy is paid but does not
state the amount of the disposal value. This should be stated.
Although there does not appear to be a substantive
difference between Clause 2.16.4(4) and Clause 2.15.3(5), the
wording is different. We are unclear why the same wording has
not been used in both sub-clauses.
The word "were" in the penultimate
line of Clause 2.20.6(8) should be "included" so that
account is also taken of any previous disposal values of the beneficiary,
as well as those of the deceased.
In relation to Clause 3.5.2(4), we refer to
the comment which we made on Clause 2.1.2, which is equally relevant
The beginning of this Clause should read "for
the purposes . . .".
In sub-clause 3.9.2(2), the word "to"
is missing after the words "in relation".
Clause 3.11.1(3) provides that in relation to
qualifying enterprise zone expenditure on commercial buildings,
3.11.1(1) has effect as if the reference to the profits of a person's
trade were a reference to the profits or gains of a person's profession
or vocation. We consider that it should provide that sub-section
3.11.1(1) has effect as if the reference to the profits of a person's
trade included a reference to the profits or gains of a person's
profession or vocation. Both traders and professionals may incur
qualifying enterprise zone expenditure.
We consider that this Clause should be signposted
earlier in the main provisions dealing with qualifying expenditure
and proceeds from balancing events.
We consider that Clause 6.3.4(2)(b) should provide
that if the disposal event occurs before the person begins to
carry on the relevant trade, the chargeable period is the first
chargeable period in which the person carries on the trade. The
trade may, of course, be carried on in more than one chargeable
In relation to Clause 8.2.2(2), we refer to
our comment on Clause 2.1.2, which is equally relevant here.
Clause 8.3.2(5) should refer to the final chargeable
period for a pool containing qualifying trade expenditure. Qualifying
non-trade expenditure is dealt with in the next sub-clause.
The words "the amount of" should be
deleted in the second line of Clause 8.3.3(5).
The cross-reference in Clause 8.3.4(2)(a) should
be to sub-section (1)(a) and the cross-reference in Clause 8.3.4(2)(b)
should be to sub-section (1)(b).
This Clause refers to paragraph 11 of Schedule
12 to the Finance Act 1997. We consider that, in order that the
Capital Allowances Bill should deal comprehensively with capital
allowances, the Capital Allowance provisions in Schedule 12 to
the Finance Act 1997 should be brought within the Bill.
For clarity, Clause 8.3.6(2) should refer to
the total amount of the disposal values to be brought into account
"in respect of sales of parts of those patent rights".
We note that Clause 8.4.2 proceeds on the basis
that section 145 of the Capital Allowances Act 1990 does not apply
to excess capital allowances in respect of non-trading patents.
We note the explanation given in paragraph 4.863 of the Commentary
on the Draft Bill. This seems to be borne out by the legislative
history of these provisions and, in particular, the relevant provisions
of the Income Tax Act 1952. As a matter of policy, however, we
can see no reason why the rules in Section 145 CAA 1990 should
not apply to excess capital allowances in respect of non-trading
patents. We therefore consider that Clause 8.4.2 should be extended
so as to give equivalent relief to that given by Section 145 CAA
We believe that Clause 12.5.7(1) is more restrictive
than the equivalent provisions of the Capital Allowances Act 1990.
This is because Clause 12.5.7(1) only allows that parties to a
sale to elect for it to be treated as being for the lower of market
value and the specified consideration if the sale would otherwise
be treated as being at market value under section 12.5.5(2) or
12.6.3(3). Section 12.5.5(2) only applies to a sale of property
that is not in fact at market value. We believe that the effect
of section 158(1) of the Capital Allowances Act 1990 is that an
election can be made even where property is in fact sold at market
value. Clause 12.5.7 should be amended so that an election can
be made where the sale is actually at market value.
Although we recognise that this goes beyond
the existing law, we consider that it would be helpful to clarify
whether references to capital expenditure and capital sums include
non-monetary consideration such as the issue of shares. It is
not uncommon for companies to agree to acquire capital assets
in consideration of the issue of their shares. The question then
arises whether the issue of the shares amounts to capital expenditure
and, in the case of fixtures, a capital sum, so that capital allowances
can be given.