I act for a large company in the construction industry. A major part of its activities involves the erection and maintenance of scaffolding at various third party building sites around the country. On occasions, some of this scaffolding will be in place for many years. Ladders and boards may need periodical replacement along with replacement of shackles, etc. In some instances, after dismantling, some of the scaffolding becomes unusable as it may have become radioactive.
I act for a large company in the construction industry. A major part of its activities involves the erection and maintenance of scaffolding at various third party building sites around the country. On occasions, some of this scaffolding will be in place for many years. Ladders and boards may need periodical replacement along with replacement of shackles, etc. In some instances, after dismantling, some of the scaffolding becomes unusable as it may have become radioactive.
My client does not keep a specific fixed assets register of the location of the scaffolding and by its very nature some of the scaffolding, boards, ladders, etc. may 'walk' over the years and may need to be replaced or become unusable when dismantled.
As a result of the above, my client is constantly buying new scaffolding equipment which, in the past, has been capitalised and written off over ten years. Physical verification is almost impossible. Capital allowances have been claimed on the equipment.
My client would like to change the accounting policy and to take a valuation of the existing scaffolding equipment and to adopt a renewals basis for subsequent acquisitions, which would be written off to repairs and renewals of fixed assets.
Would the fact that capital allowances have been claimed on the initial capital expenditure jeopardise the deduction for the renewals under the new accounting policy?
Query T16,601 — Screw Loose.
Reply by 'Southern Man'
I seem to recall a tongue in cheek suggestion from a scaffolding client many years ago that there appeared to be a 'national pool' of scaffold poles, planks, fittings, etc. and that some of this just happens to be in the possession of certain firms at any particular time, but does not mean that it might not be in the possession of a completely different firm in a few days time!
In its Tax Bulletin 66, the Revenue accepted that the provision of building access services — which appears to be the case with Screw Loose's client, rather than simply the supply of equipment — would be eligible for first year allowances. However, Screw Loose does say that he acts for a large company, so one might presume that this will not fall within the definition of small or medium-sized enterprises, which would be eligible for first year allowances and which would probably help make a capital allowances claim more advantageous than a renewals basis claim.
TA 1988, s 74(1)(f) prohibits a deduction against profits for capital expenditure. TA 1988, s 74(1)(d) allows a deduction 'for the supply, repairs or alterations of any implements, utensils or articles employed for the purposes of the trade profession or vocation', but prohibits any amount 'beyond the sum actually expended for those purposes'.
The term 'supply' in the legislation equates to replacement, the Inland Revenue notes the term as in 'supply teacher', so the cost of any element of improvement would not be allowed.
The Revenue's Business Income Manual at BIM46935 explains the renewals basis and splits this into a 'statutory basis' and a 'non-statutory basis'. The section starts by explaining that s 74(1)(d) is the statutory authority for the renewals basis with regards to 'implements, utensils and articles' and the Revenue suggests that this would relate to 'loose tools and other similar assets', presumably revenue items. However, BIM46935 then goes on to explain that 'the renewals allowance was extended to machinery and plant assets outside the narrow range to which TA 1988, s 74(1)(d) applies', i.e. to capital plant and machinery items and it sets out the conditions under which such a claim might be accepted and the first of these is that 'no capital allowances are due for the cost of the original asset'.
There was an Extra-statutory Concession, ESC B1, which provided for a change from renewals basis to capital allowances claims and I have seen it stated that there is no provision for the reverse process. However, the Business Income Manual at BIM46950 does deal with this scenario; but, there appears to be a subtle difference depending upon whether the 'statutory' or 'non-statutory'' basis has been used. Regarding the former, the Revenue states:
'When assets within TA 1988 s 74(1)(d) (implements, articles and utensils) are replaced, a revenue deduction can be taken for expenditure on the replacement assets (subject to the normal renewals rules about improvement, etc.). This applies even if machinery and plant capital allowances were claimed on the expenditure on the assets which are now being replaced. But the taxpayer can, alternatively, have machinery and plant allowances.'
Regarding capital items dealt with under the non-statutory basis, the Revenue advises that the renewals basis cannot be claimed in respect of an 'entirety', say the whole scaffolding stock, where:
- the original asset was outside the statutory renewals basis (BIM46935); and
- capital allowances were claimed on the original asset.
This is because the expenditure on the replacement asset is capital expenditure which, under ordinary principles, cannot be deducted in a revenue computation, except under the terms of the renewals practice. But it then says:
'The taxpayer can make the change to renewals basis only by accepting that there is no deduction for the initial expenditure on renewals basis assets. This is not attractive because of the delay in obtaining relief.
'The bar on a renewals deduction for non-statutory renewals basis assets applies where, on ordinary principles, capital expenditure is incurred on the replacement asset. It will not apply where revenue expenditure is incurred and this includes cases where the replacement is machinery or plant.'
On the basis that the new scaffold poles are capital assets, it seems that renewals basis could therefore be claimed, but not on the first replacement purchase.
Finally, with regard to the mathematics of the claim I would draw Screw Loose's attention to BIM46940, which explains the 'valuation basis' of claims for a renewals allowance.
