capital allowances

10 questions answering everything you want to know about transfer pricing

1. What is it? Transfer pricing is the charges made by one enterprise to another within the same group, (they don’t need to be legal entities)

2. Why is it important?

It is often used by businesses (enterprises) to move profits to low tax jurisdictions

3. What does it cover?

Sale of goods

Provision of services, including management fees

License of intangibles, patents

Use of money, interest rates and thin capitalised businesses

Use of tangible property

Or the non-charge for these

4. How does HMRC confirm the pricing is correct?

By using an “at arms lengths” test know as Comparable Uncontrolled Price (CUP). Of course this isn’t always available so the HMRC can also use

Resale price

Cost plus

Profit split

Residual profit split

Transactional net margin

5. Burden of proof

Is with HMRC, although governed by the OECD. Article 9 of the Model Tax Convention

forms the basis of bilateral tax treaties involving OECD member countries

Taxpayers are only expected to provide documentation which would be reasonable for them to have in their possession.

From the taxpayer’s point of view, the OECD guidance only requires documentation to be kept which would be consistent with the evaluation of any other business decision.

6. What records need to be kept?

Only the records that would normally be expected to be kept by a business. HMRC can’t ask for anything else.

Documentation must exist at latest by the time the Corporation Tax return is filed.

7.  What can be done to mitigate?

Entering into an Advance Pricing Agreement (APA) with HMRC, it’s preferable to a retrospective examination of the enterprise’s transfer pricing policies

It is binding on HMRC and the company over an agreed period, usually 3 to 5 years

8. Who needs to be worried?

Obviously all large organisations, medium enterprises are subject to power of direction, which means they don’t have to self-assess. The HM Revenue and Customs would only make a power of direction against one of these companies in exceptional circumstances.

A small enterprise is completely exempt from the transfer pricing rules, unless the other party is a related party in a country without a non-discrimination clause typically, a tax haven.

9.  So what’s the definition?

Enterprise Category

Headcount

Turnover

Balance Sheet Value

Medium

<250

Not to exceeding €50m

Not exceeding €43m

Small

<50

Not to exceeding €10m

Not exceeding €10m

Macro

<50

Not to exceeding €2m

Not exceeding €2m

10. To encourage UK businesses to not park their patents overseas HMRC introduced the Patent Box 10% CT rule.

The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions and certain other innovations. The relief will be phased in from 1 April 2013 and the lower rate of Corporation Tax to be applied will be 10 per cent.

Capital Allowances on Cars

If a business provides a company car, (not a van as this is treated through the general pool) the rules are dependent on when the car was purchased. On cars bought before April 2009, the allowances were restricted to the first £12,000 over 4 years, so £3,000 a year and adjusted for personal use.

After that date, the Capital Allowance was restricted to the CO2 omissions as stated on the V5 registration document of the car.

The table below only applies to cars with 100 per cent business use.

CO2 emissions Capital allowances treatment of expenditure
Over 160 grams per kilometre (g/km) Goes into the special rate pool and qualifies for writing-down allowances at the rate for the special rate pool, currently 8 per cent per annum.
160g/km or less but more than 110g/km Goes into the main pool and qualifies for writing-down allowances at the rate for the main pool, currently 18 per cent.
110g/km or less (but note that the first-year allowance for cars in this category is due to expire in 2013) You can claim up to 100 per cent allowance in the accounting period when they were bought, the balance (which may be nil) goes into the main pool in the next year. For detailed guidance, see the guide First-year allowances: the basics

The amount a business can claim for providing a company cars has always been complicated and many hours have been spent figuring out if it’s really worthwhile for an employee to have one. There are benefits and costs for both.  Sometimes it may be advantageous for all concerned to pay a mileage allowance which shortcuts the debates.

HMRC has approved allowances for using an employee’s vehicle for business purposes. It should be noted that the employee should confirm they are appropriately insured otherwise they could be in breach of their insurance.

Employee vehicles: mileage payments for business travel

Type of vehicle Rate per business mile 2012-13
Car For tax purposes: 45p for the first 10,000 business miles in a tax year, then 25p for each subsequent mile

For NICs purposes: 45p for all business miles

Motorcycle 24p for both tax and NICs purposes and for all business miles
Cycle 20p for both tax and NICs purposes and for all business miles

If an employee is given a company vehicle they must pay benefit in kind on the use. This includes PAYE usually in the form of reducing the tax free allowance and Class 1 NIC. The rules are constantly changing, but suffice to say they are getting more restrictive.

Two final notes:

Pooled vehicles are cars that are used by any member of staff and stay at the company’s premises overnight; and where any personal mileage is incidental. Under these circumstances no employee pays any benefit in kind.

The benefit in kind for vans is £3,000 to the employee.

Depreciation for tax purposes

In the language of the taxman, depreciation is called “Capital Allowances” or sometimes ”wear and tear allowances”  and how we accountants report it differs in the management reports of businesses be they internal management accounts or for statutory reporting. So what purchases are covered by Capital Allowances? Not always an easy question to answer, but if you buy or make something either physical or intangible (for example software, although not internally generated intellectual property “IP” ), and it is used to produce economic benefit to the business or, put simply, kept long term for the benefit of the business then that will be considered an applicable purchase.

In accountants’ terms, we define Fixed Assets using various headings, for example Buildings, Motor Vehicles, Computers, Plant & Machinery and Fixtures and Fittings. Depending on the type of asset, the business may apply different rates of depreciation.

The taxman’s treatment of Fixed Assets is totally different. There is not a relationship at all, giving rise to a heading in a business’ statutory accounts as “Deferred Tax” being a timing difference between the accountant and the tax treatment.

HMRC starts with two headings, the main pool where most assets are classified and the special rate pool.

Once the purchase or construction has passed the test of being suitable to claim Capital Allowances, the asset is placed in the general pool, unless it qualifies as being classified elsewhere.

The special rate pool covers all assets that are integral to the business’ properties, (not the building itself though, that rule was phased out in 2006).

The assets which are now classed as integral features are:

* Electrical systems (including lighting systems)

* Cold water systems

* Space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems

* Lifts, escalators and moving walkways

* External solar shading

Over the years a number of exceptional pools were created, ostensibly to make the system more user friendly:

Small Pool Allowance

Two considerations.  If capital expenditure in either the general pool or special rate pool is less than £1,000 then it can be written off in the current year.

New expenditure of £1,000 or less, recorded separately in its own pool and written off in full in the current year.  Just in case you were thing of it, you can’t write off the first £1,000 of expenditure in this manner

 Annual investment allowance (AIA)

This was introduced in 2008 and covers plant and machinery, but not cars. The allowance has been a bit of a yoyo. When it was introduced in 2008, the allowance was £50,000, in 2010 this was increased to £100,000, then in April 2012 reduced to £25,000. It was announced in the Autumn statement that from the 1 January 2013 for two year only this allowance has been increased to £250,000

The AIA replaced the first year allowances which ceased to be allowable from 2008. Although there was a special first year allowance which was applied temporarily in 2009 to energy-saving and water-efficient equipment, cars with very low carbon dioxide emissions and goods vehicles with zero carbon emissions.

Type

Capital Allowance

Includes

1

Main Pool 18%  per annum since 6 April 2012 Until 2008 this was 25%, was previously 20% All assets not included elsewhere

2

Special Rate Pool 8% per annum Until 2008 this was 10% Long life assets

3

Annual Investment Allowance (AIA) £250,000 per annum since 1 January 2013 for 2 years When introduced in 2008 was £50K increased to £100K in in 2010. Down to £25,000 in April 2012 On plant and machinery only

4

First year allowance SME 50%, Medium sized businesses 40% Not  long life assets or leased equipment On plant and machinery only

Capital Allowances on motor vehicles rules are more complicated and are on a separate blog