296 Balancing allowances and balancing charges: wear and tear allowances deemed to have been made in certain cases

Summary

This section applies for the purposes of calculating the amount of a balancing allowance or charge to be made to or on a person for a chargeable period in respect of machinery or plant. For those purposes, normal wear and tear allowances are deemed to have been made in respect of machinery or plant for every previous chargeable period in which the machinery or plant belonged to the person in circumstances in which it attracted no wear and tear allowance or a restricted wear and tear allowance. An example of the use of machinery or plant in such circumstances is where a motor vehicle is bought for trade purposes but in a chargeable period is used entirely or partly for private purposes.

Details

Notional wear and tear allowances deemed to have been made

(1) The section applies where a balancing allowance or charge in respect of machinery or plant is to be made to or on a person for a chargeable period in taxing a trade. In calculating the allowance or charge, a “normal” wear and tear allowance is deemed to have been made to the person in respect of the machinery or plant for every previous chargeable period (which is to be taken into account for the purposes of this section – see subsection (2)) in which the machinery or plant belonged to the person and no wear and tear allowance or a restricted wear and tear allowance had been made in respect of it.

A “normal” wear and tear allowance is the wear and tear allowance or greater wear and tear allowance, if any, that would have been made for the chargeable period if the conditions specified in subsection (3) had been fulfilled in relation to that chargeable period. The reference to greater wear and tear allowance is designed to cater for the case where a restricted wear and tear allowance is given because, for example, the machinery or plant is used partly for business purposes and partly for other purposes.

Previous chargeable periods to be taken into account

(2) The previous chargeable periods for which a notional wear and tear allowance is to be deemed to have been made are every chargeable period in which the machinery or plant belonged to the person and —

• during which the machinery or plant was not used for the purposes of the trade (for example, a period during which a car was used by a trader solely for private purposes),
• during which the trade was not carried on (for example, where a person on setting up a business uses in it a motor car previously used for private purposes),
• for which the profits of the trade were not fully taxable because (for example, the trader was solely resident in Britain or, in the case of a trade carried on abroad, because the trader was not resident in the State or, being resident, was not domiciled in the State so that the remittance basis applied under Case III of Schedule D),
  [However, excluded from this provision are trades which consisted wholly or partly of exempted trading operations within the meaning of Chapter I of Part XXV of the Income Tax Act, 1967 or Part V of the Corporation Tax Act, 1976, that is, trading operations in the Shannon Airport Area that were exempt from income tax and corporation tax. Section 315 contains special rules relating to balancing allowances and charges in the case of property used for such trades.]
• where the trade is that of mining non-bedded minerals the profits from which were wholly or partly exempt from tax, or
• in the case of a coal mining or a manufacturing exporting business, for which there was a complete or partial exemption from tax.

Principles on which normal wear and tear allowance is to be calculated

(3) The “normal” wear and tear allowance for a chargeable period is to be calculated on the basis that —

• the trade had been carried on by the person concerned ever since that person acquired the machinery or plant in such circumstances that the full amount of the profits or gains of the trade were chargeable to tax,
• the trade had at no time consisted wholly or partly of exempted trading operations within the meaning of Chapter I of Part XXV of the Income Tax Act, 1967 or Part V of the Corporation Tax Act, 1976 (that is, trading operations in the Shannon Airport Area that were exempt from income tax and corporation tax),
• since its acquisition by the person concerned the machinery or plant had been used by that person solely for the purposes of the trade, and
• a proper claim had been made by the person for a wear and tear allowance in respect of the machinery or plant for every relevant chargeable period.

(4) Where at any time after a company acquired machinery or plant it is not within the charge to corporation tax, any year of assessment or part of a year of assessment falling within that time is treated as a chargeable period as if it had been an accounting period of the company.

Limit on balancing charge

(5) Nothing in the section affects the standard rule that a balancing charge cannot, in any circumstances, exceed the aggregate of the capital allowances actually made in respect of the machinery or plant.

Relevant Date: Finance Act 2019