New tax
provisions are more comprehensive and subjective and might catch
you out

julia lloydA new anti-avoidance provision will be introduced by the
Finance Bill 2012 into the UK capital allowances regime with effect
from 1 April 2012 (for corporation tax purposes) or 6 April 2012
(for income tax purposes). This provision will be both more
comprehensive and more subjective than the existing rules in
relation to avoidance and, as a result, the implications of the new
test will need to be taken into account in a wider range of

Capital allowances
are available on UK plant and machinery at prescribed rates,
depending on the type of asset acquired. In addition, first-year
allowances and an annual investment allowance provide additional
allowances in relation to a limited range of qualifying plant and
machinery. The capital allowances regime restricts the amount of
expenditure which can qualify for capital allowances and also
denies first-year and annual investment allowances in circumstances
where there is a ‘relevant transaction’ (such as a sale, purchase
or assignment of contracts) which is a transaction to obtain


Historically, a
‘transaction to obtain allowances’ has been defined as a
transaction from which it appears that the sole or main benefit
expected to accrue is the obtaining of allowances. Following a
taxpayer victory in BMIF v Melluish in 1990, this provision has had
limited effect as it could normally be shown that capital
allowances were not the main benefit of a transaction.

As indicated, this
test is about to change. The ‘sole or main benefit’ test will be
replaced by a ‘main purpose’ test. Following comments made during
the consultation process, this test will relate to obtaining a tax
advantage and not, as was originally envisaged, obtaining
allowances. In future, a relevant transaction will therefore be a
‘transaction to obtain allowances’ if it is part of a scheme or
arrangement and the main purpose, or one of the main purposes, of
entering into the transaction is to obtain a tax advantage that
would not otherwise be obtained.

This revised test
is much more subjective than before. The tax advantage only needs
to be one of the main purposes of entering into the transaction. In
instances where buying one piece of plant and machinery over
another would give the purchaser a higher rate of allowances (such
as in relation to equipment qualifying for enhanced capital
allowances), it may be worth considering whether this could fall
within the new anti-avoidance provision, as one of the main
purposes of choosing that piece of plant and machinery could well
be the fact that it qualifies for enhanced capital


If, under the new
rules, the transaction is treated as one to obtain allowances, the
buyer’s expenditure will not qualify for the annual investment
allowance, or any first-year allowances. If the tax advantage
sought is obtaining allowances at a higher rate or at an earlier
date, the capital allowances will be calculated at the lower rate
or at a later date, as appropriate. If a different tax advantage is
sought, the qualifying expenditure will be reduced to cancel out
that advantage. The reduction in qualifying expenditure can be
higher in cases where a taxpayer has entered into a transaction
with a connected person or a sale and leaseback where the seller’s
disposal value is less than the taxpayer’s new qualifying

Other changes which
will be made include a new definition to make it clear that a
novation (all parties agreeing to changes in a contract) of a
contract is a relevant transaction.

The new
anti-avoidance provision is part of the overall theme of targeting
avoidance transactions generally, and as such it is not surprising.
It is clear that as a result of the change, more thought will need
to be given to the scope of the anti-avoidance provision on
transactions which historically no one would have thought could
fall foul of the avoidance provision. The key difference between
the ‘sole or main benefit’ and the new test of having a tax
avoidance purpose is that the new test will apply to a much wider
range of transactions, schemes or arrangements: the tax advantage
only needs to be one of the main purposes of entering into the
transaction – it does not have to be the ‘sole’ or ‘main’


This change
reflects the government’s concern that the old rules did not catch
transactions which were undertaken for both commercial purposes and
to obtain the benefit of capital allowances. However, when the
government first consulted on the revised provision, it suggested
that the avoidance test should be by reference to whether the main
purpose of a transaction was to obtain allowances (and not to
obtain a tax advantage). Clearly, the move away from a main purpose
to obtain allowances is very welcome, as this would have caught an
even wider range of transactions.

Julia Lloyd is
a senior associate at law firm Norton Rose