Introduction
Income tax is a tax on income; it's not a tax on capital. Capital expenditure is therefore not deductible in arriving at the balance of profits chargeable to tax. However, the Income Tax Law recognises that relief should be given for certain assets whose value depreciates. These assets are plant and machinery and glasshouses. Capital allowances are also available to qualifying companies for expenditure on regulatory compliance technology (RegTech).
Capital allowances are available to those:
- carrying on a trade
- who have incurred capital expenditure on plant or machinery that is used wholly and exclusively for the purpose of the trade, and
- because of this expenditure, own or have owned the asset
Meaning of plant and machinery
The term ‘plant and machinery’ is not defined in the Income Tax Law. The words must be interpreted in their ordinary commercial sense, subject to the guidance given in a number of judicial decisions in United Kingdom tax cases.
To qualify as plant, assets typically must be:
- apparatus used for carrying on the businesses
- not a stock in trade, and
- kept in permanent employment in the business
Business premises are not plant. However, certain apparatus may qualify as plant if it performs a specific function in the trade. For example, floodlighting in a football stadium is likely to qualify as plant.
Capital expenditure
Where a trader has incurred capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of the trade, they qualify for capital allowances provided that the machinery or plant belongs, or has belonged, to them.
Items acquired by hire purchase or conditional sale agreement are treated as belonging to the trader.
Expenditure is treated as incurred when the obligation to pay arises. This accords with normal accountancy practice. Expenditure excludes any indirect expenditure, or expenditure on any structure built to house the machinery or plant.
Capital allowances are not available for any leased assets other than hire purchase or conditional sale agreements.
Lease and hire purchase contracts tax guidance
Wholly and exclusively
Generally, plant or machinery must have been obtained wholly and exclusively for the purpose of the trade to qualify for capital allowances. Capital assets acquired by sole traders that are used for both business and personal use must be apportioned on a just and reasonable basis to ensure tax relief is not given for the non-business use of the assets.
Assets acquired by companies, such as a company car, which are used by individual employees do not have capital allowances restricted in this way. Use of a company car by an employee for private purposes may however give rise to a taxable benefit in kind for that employee.
Benefits in kind
Calculating capital allowances
Capital allowances for plant and machinery are given at a rate of 25% of the balance of unrelieved expenditure in the relevant capital allowance pools. Allowances are given on a reducing balance basis. The rate of allowance will be apportioned during the first and last year of trade.
Pooling
Qualifying plant and machinery are all added to the general pool. Expensive cars, Regtech, glasshouses and assets only used partly in the trade are all pooled separately.
Example
Trade commenced 01 January 2024.
| Opening balance | 0 |
| Add: Plant and machinery additions in the year | 10,000
|
| Less: Plant and machinery disposals in the year | 0 |
| Balance of unrelieved expenditure | 10,000 |
| Capital allowances (25%) | (2,500) |
| Tax written down value carried forward | 7,500
|
| Opening balance | 7,500 |
| Add: Plant and machinery additions in the year | 0
|
| Less: Plant and machinery disposals in the year | 0 |
| Balance of unrelieved expenditure | 7,500 |
| Capital allowances (25%) | (1,875) |
| Tax written down value carried forward | 5,625
|
New assets
Any assets that were previously owned by the trader and are introduced to the business at minimal cost are treated as having incurred capital expenditure equal to their open market value.
Expensive cars
Established in UK case law, it is a held principle that a business cannot claim the full cost of expensive cars if there was an element of personal choice that went over and above the requirements of the business. In Jersey, this means that the capital allowance for a vehicle, other than a commercial vehicle, is capped at £22,000.
Disposal of assets
When an asset on which capital allowances have been claimed is disposed of, any proceeds must be deducted from the capital allowance pool. If the disposal price is lower than the market value, the market value is considered the disposal value.
Where the unrelieved expenditure in any pool is less than any disposal proceeds received in the relevant accounting periods, there will be a balancing charge, adding the excess of the proceeds to the trading profit. If an asset is destroyed, the disposal value is the net of the amount received for the remains plus any insurance monies or capital compensation.
Glasshouses
Glasshouses are kept in a separate pool as they receive allowances at a rate of 10%. The allowance is not available for the land on which the glasshouses is built. All glasshouses can be pooled together; for the purpose of capital allowances, glasshouses include polythene tunnels and any other tunnels made of similar materials.
Accounting periods
The 25% capital allowance is for a 12 month accounting period. Where a basis period is longer, or shorter, the allowance is proportionately increased or reduced. For example, a basis period of 18 months would receive a capital allowance of 37.5% ((18/12) x 25%).
GST considerations
Businesses registered for GST should use the GST exclusive price in their capital pool as GST on the purchase can be reclaimed as input tax. Businesses not registered for GST should claim the GST-inclusive price.
Excess allowance
Businesses may carry forward any capital allowances that exceed the tax-adjusted trading profit for that year of assessment.
Discontinuing a trade
In the final year in which a business trades, the capital allowance available is the total of the excess qualifying expenditure divided by any disposal value. Any assets that are sold for less than market value will have a deemed disposal value equal to the market value. If the sale proceeds are larger than the tax value brought forward, a balancing charge is created.
If the trade is taken over by a successor, and both parties apply to the Comptroller to allow the transfer not be treated as a disposal, the seller receives their allowance as calculated, and the successor is treated as receiving the remaining pool of expenditure as its opening balance.
Regtech
An enhanced capital allowance of 150% is available to qualifying companies for qualifying expenditure on Regtech.
RegTech super-deduction
Concessions
Investment holding companies
Concessions B5 and B6 extend capital allowances to investment holding companies, including those with rental income. Allowances can only be claimed for qualifying plant and machinery used in the property rental business; for example, a lawnmower purchased by a rental business that owns a property with a large garden. Allowances are not available for the cost of the building.
Furnished property
Concession B7 allows a 10% deduction against income from fully furnished lettings properties. This is available as an alternative to claiming capital allowances on assets within the property.
Replacement allowances
Concession B2 allows for tax relief to be granted on the cost of the replacement of plant or machinery as an alternative to claiming capital allowances for the asset. It is only available if no capital allowance was claimed for the original asset. All plant and machinery used in the trade must be subject to the replacement allowance.
Concessions and practices for tax
gov.je