HM Revenue & Customs (HMRC) have confirmed that they will accept the decision in the First-teir Tribunal (FTT) case of DAARASP LLP and BETEX LLP for the application of the Long Life Asset (LLA) exclusion as it relates to First Year Allowances (FYAs) for the new 130% and 50% deductions announced in Budge 2021.
This is significant because it effectively makes the LLA general exclusion redundant for the purposes of the Super Deductions and related FYAs by limiting its application to expenditure incurred before 26 November 1996.
This means LLA expenditure should be eligible for the 50% reduced super deduction instead of the normal 6% writing down allowance. Unfortunately, since LLAs are automatically regarded as 'special rate pool' assets they will still be excluded from the 130% super deduction.
Subject to some limited exceptions for fixtures and low value investments (<£100k), a LLA is an item of plant and machinery (P&M) with a useful economic life of at least 25 years. Given that many large P&M assets can often sit on the cusp of the 25 year trigger point this is welcome confirmation.
An Odd Exclusion
The above case concerned the availability of FYAs for a software licence with a term of 25 years and amongst other issues, the application of General Exclusion 5 of s46 CAA 2001 which seeks to deny FYAs: -
“The expenditure would be long life asset expenditure but for paragraph 20 of Schedule 3 (transitional provisions)”
Both parties accepted that the software licence was an LLA, the issue in dispute was the wording and operation of the above.
A Divided Opinion
HMRC argued that the software licence clearly fell within the LLA rules, it was not within paragraph 20 of Schedule 3 and could therefore not qualify for FYAs.
Paragraph 20 of Schedule 3 is headed “Long-Life Assets, Long-life asset expenditure” and is itself an exclusion provision, taking certain expenditure outside the scope of the long life asset rules, stating:
“20(1) Chapter 10 of Part 2 [the long-life asset chapter of the CAA 2001] does not apply to
any expenditure incurred –
(a) before 26th November 1996, or
(b) before 1st January 2001 in pursuance of a contract entered into before 26th November 1996”.
The taxpayer argued that HMRC was wrong; indeed, had the intention been to exclude all LLAs as HMRC’s interpretation would afford, it would have been drafted in much narrower terms as it is elsewhere in CAA 2001.
A Curious Result
FTT agreed with the taxpayer stating that the first question to ask is; does this expenditure fall within paragraph 20 of Schedule 3 (i.e. pre-26 November 1996 expenditure)?
“On balance and not without some misgivings because of the rather curious result which this achieves, we agree with Mr Thornhill that the better construction of general exclusion 5 is that it only operates to exclude long-life asset expenditure which is otherwise excluded by paragraph 20 of Schedule 3. It therefore does not apply to the expenditure on the Daarasp Software licence and does not operate to deny the Appellant’s claim for first year capital allowances.”
Little attention was paid to this unusual decision at the time because it was not the deciding factor in the case and FYAs were generally limited to energy and water efficient assets (abolished from April 2020) which invariably had lives of < 25years.
Conclusion
With the introduction of the new super deductions, the application of General Exclusion 5 is going to be much more important and this clarification of interpretation from HMRC is welcome.
It is not all good news; however, if we were to use the example of the above software costs, and they were acquired for licensing or sub-licensing the claim may still be caught by the general leasing inclusion (CA23110) and be ineligible for FYAs.
We understand that HMRC Technical are in the process of preparing more detailed guidance on the new FYAs and have published a brief factsheet - we look forward to sharing more official details as they emerge.
If you have questions on this, or related tax matters, we will be delighted to hear from you.