One of the key challenges when claiming capital allowances is determining whether qualifying expenditure relates to plant and machinery or to a building or structure. This distinction is important because expenditure on plant and machinery may qualify for immediate relief through the Annual Investment Allowance (AIA) or writing-down allowances, whereas expenditure on buildings and structures generally does not.

Where expenditure does not qualify as plant and machinery, it may instead qualify for relief under the Structures and Buildings Allowance (SBA), subject to the relevant conditions being met.

Buildings – Section 21 CAA 2001

A fundamental principle of capital allowances is that buildings are generally regarded as the setting in which a business is carried on, rather than the equipment with which the business is carried on. As a result, expenditure on buildings does not normally qualify for plant and machinery allowances.

Section 21 CAA 2001 reinforces this principle by providing a statutory list of assets that are treated as part of a building. These include:

• Walls, floors, ceilings, doors, gates, shutters, windows and stairs.
• Mains services and systems for water, electricity and gas.
• Waste disposal systems.
• Sewerage and drainage systems.
• Shafts and similar structures.
• Fire safety systems.

Expenditure on these items is generally treated as expenditure on a building and does not qualify for plant and machinery allowances unless a specific statutory exception applies.

Structures and Land – Section 22 CAA 2001

Section 22 CAA 2001 extends the exclusion from plant and machinery allowances to certain structures and land alterations.

The legislation provides that expenditure on the provision of structures or other assets listed in List B, together with expenditure on works involving the alteration of land, is not expenditure on plant and machinery.

Examples of assets included in List B are:

• Tunnels, bridges and viaducts.
• Roads, pavements and car parks.
• Canals and basins.
• Dams and reservoirs.
• Docks, harbours and wharves.
• Dikes and sea walls.

Accordingly, expenditure on these assets will not normally qualify for plant and machinery allowances unless they fall within one of the statutory exceptions discussed below.

Statutory Overrides – Section 23 CAA 2001

While Sections 21 and 22 exclude many assets from plant and machinery treatment, Section 23 provides a number of important exceptions.

The exclusions do not apply to:

• Thermal insulation of buildings.
• Personal security assets.
• Integral features.
• Software and rights to software.
• Certain assets listed in List C.

Importantly, Section 23 does not automatically make these assets plant and machinery. Instead, it removes them from the building and structure exclusions so that they can be considered under the normal plant and machinery rules.

List C Assets

List C contains specific assets that are preserved from the exclusions in Sections 21 and 22. Many of these items reflect principles that were originally established through case law and have since been incorporated into legislation.

An asset included in List C is not automatically plant and machinery. It must still satisfy the ordinary legal tests for plant established through case law.

Examples of assets included within List C are:

• Manufacturing and processing equipment.
• Storage equipment, including cold rooms.
• Display equipment, counters and checkouts.
• Computer, telecommunications and surveillance systems.
• Refrigeration and cooling equipment.
• Fire alarm and sprinkler systems.
• Burglar alarm systems.
• Safes and strong rooms.
• Moveable partition walls.
• Advertising signs and displays.
• Cold stores.
• Silos and storage tanks.
• Certain pipelines, ducts and tunnels used primarily to carry utility conduits.

The inclusion of fire alarm and sprinkler systems is a good example of how List C operates. Although fire safety systems are initially treated as part of a building under Section 21, they are subsequently rescued from that exclusion by Section 23 and List C.

List C applies only to the specific assets identified in the legislation and should not be extended by analogy to similar assets.

Integral Features

The boundary between plant and machinery and a commercial building is not always straightforward. Historically, the distinction was developed through case law, which drew a line between assets with which a business is carried on and the premises in which a business is carried on.

To provide greater certainty, CAA 2001 introduced the concept of integral features. These are assets that form part of a building but are nevertheless eligible for plant and machinery allowances.

The following assets are treated as integral features:

• Lifts, escalators and moving walkways.
• Space heating systems.
• Air conditioning and air cooling systems.
• Hot and cold water systems (excluding toilet and kitchen facilities).
• Electrical lighting and power systems.
• External solar shading.

Although integral features qualify for plant and machinery allowances, they receive different tax treatment from most plant and machinery expenditure because they are allocated to the special rate pool.

Special Rate Pool

Certain categories of expenditure are allocated to the special rate pool rather than the general pool. These include:

• Integral features.
• Thermal insulation of business premises.
• Solar panels.
• Cars with CO₂ emissions above the relevant threshold.

Assets in the special rate pool are generally eligible for the Annual Investment Allowance (AIA), allowing 100% relief where sufficient AIA is available apart from the cars.

Any expenditure not covered by AIA is allocated to the special rate pool and qualifies for writing-down allowances at 6% per annum on a reducing-balance basis, compared with 18% for assets in the general pool.

Where both general pool and special rate pool expenditure is incurred in the same accounting period, it is usually beneficial to allocate available AIA to special rate expenditure first, as these assets would otherwise receive relief at the slower 6% rate.

Fixtures

Specific legislation in Chapter 14 of Part 2 CAA 2001 deals with fixtures.

A fixture is an asset that is installed in or attached to a building in such a way that it becomes part of the property in law.

Whether an asset is a fixture depends largely on the purpose of its installation. If it is intended to provide a permanent improvement to the property, it is likely to be a fixture. If the attachment is temporary and no more than is necessary for the asset’s use, it will generally remain a chattel rather than a fixture.

The legislation specifically treats boilers and radiators forming part of a heating system as fixtures. Other common examples include:

• Lifts and escalators.
• Heating, lighting and electrical systems.
• Alarm systems.
• Sanitary appliances.
• Hot and cold water systems.
• Telephone and data installations.

A fixture can still qualify for plant and machinery allowances provided it satisfies the relevant statutory conditions. Many fixtures, such as lifts, heating systems and electrical installations, are also classified as integral features and therefore fall into the special rate pool.

Key Takeaway

When analysing capital expenditure, the starting point is to determine whether the asset forms part of a building or structure under Sections 21 and 22 CAA 2001. If it does, plant and machinery allowances will generally be denied unless the expenditure falls within one of the statutory overrides in Section 23, such as integral features or List C assets. Where plant and machinery treatment is unavailable, relief may still be available through the Structures and Buildings Allowance regime.

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Identifying qualifying expenditure for capital allowances can be complex, particularly where buildings, fixtures and integral features are involved. Our specialist tax advisers can help you maximise available reliefs, review property acquisitions and refurbishments, and ensure that capital allowance claims are made correctly and efficiently. Contact us today to discuss your circumstances and find out how we can help.