HM Revenue & Customs (“HMRC”) have updated their manuals on long life assets (LLAs) to remind affected taxpayers that the concept of ‘entity’ or ‘entirety’ for the purposes of applying the LLA rules is a question of tax law and not accounting opinion.
For example, a capital allowance claim for an underground cable system (including television, telecommunications, or electricity supply systems) will often include the costs of excavating the land and providing ducting that houses the cables.
To reflect different rates of depreciation, the cabling and ducting may be recognised as separate components in business accounts (and depreciated accordingly).
Where the ducting is installed as a direct incident of the installation of the cabling, the costs of the ducting and the associated excavation are, for capital allowance purposes, part of the costs incurred on the provision of the cabling regardless of the treatment in the accounts. In these circumstances, if the cabling is not itself a LLA, the LLA rules are not separately applicable to the ducting.
What are Long Life Assets (LLAs)?
LLA’s are items of plant or machinery with a useful economic life (“UEL”) of 25 years or more from new.
The UEL test for tax purposes looks at the overall use in any business which can differ from your accountant’s test which normally only looks at UEL in the respective business involved.
Once an asset has been accepted as LLA (or not) it will generally remain so throughout the remainder of its life. A person that buys a second-hand asset should take reasonable steps to confirm the basis of LLA treatment with the Seller.
Where the total expenditure on the plant or machinery is less than or equal to £100,000 in the chargeable period the business may be able to ignore the LLA rules. The £100,000 monetary limit is reduced for groups of companies and is not available for a share in plant or machinery; contributions; leases of plant or machinery; and, assets held in trust or partnerships with companies.
Do the LLA rules apply to all plant or machinery?
Expenditure is not a LLA if it is incurred on the provision of plant and machinery which becomes a fixture in, or is provided for use, in any building used (including ancillary use) as a dwelling-house, hotel, office, retail shop or showroom.
Therefore, an advanced sprinkler system (e.g. nitrogen based) or telecommunications connection that has the potential to last the same life span of the building it serves could have a different LLA treatment in a retail warehouse compared to a factory.
Some industries (e.g. aviation, water and electricity) have specific agreements with HMRC on LLA treatment which can sit outside the normal rules. There are also special rules for cars and motor- cycles.
What are the consequences of LLA treatment?
The main consequence of LLA treatment is timing. Instead of being written of at 18% per annum, a LLA will be written of at 6% per annum (reduced from 8% for expenditure on or after 1 or 6 April 2019) on a reducing balance basis.
The current Annual Investment Allowance (“AIA”) of £1,000,000 enables most businesses to mitigate the effects of the LLA rules by allocating such expenditure against its AIA first. As the AIA is subject to periodic change, affected businesses should be prepared to monitor their approach to LLAs accordingly.
For further details on LLAs, or any other related matter, please do not hesitate to contact us.