Revenue Note for Guidance

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Revenue Note for Guidance

284 Wear and tear allowances

Summary

An annual allowance (known as a “wear and tear allowance”) is available to persons who incur capital expenditure on the provision of machinery or plant for the purposes of a trade. The allowance is given for a chargeable period (accounting periods in the case of corporation tax and years of assessment in the case of income tax) where at the end of the chargeable period or its basis period (that is, in the case of corporation tax, at the end of the accounting period and, in the case of income tax, at the end of the basis period for the year of assessment) the machinery or plant belongs to the person and is in use for trade purposes. While used for trade purposes, the machinery or plant must be wholly and exclusively so used.

The rate at which wear and tear allowances are given has changed on a number of occasions in recent years. The rate which applies in respect of any particular item of machinery and plant is determined by the date on which the expenditure is incurred as well as the category of machinery and plant which has been acquired.

Where expenditure is incurred on or after 4 December 2002, wear and tear allowances are granted on a straight-line basis over 8 years at the rate of 12.5 per cent per annum of the actual cost of the machinery or plant. This regime applies for both general machinery and plant and road vehicles. These rules do not apply to taxis and short-term hire vehicles which retain their 40 per cent per annum reducing balance arrangements. Furthermore, where expenditure was incurred on or before 31 January 2003 under a binding written contract which existed prior to 4 December 2002, the previous 20 per cent rate (see below) rather than the 12.5 per cent rate applies.

In general, as respects capital expenditure incurred on or after 1 January 2001 and before 4 December 2002 the allowances are granted on a straight-line basis over 5 years at the rate of 20 per cent per annum of the actual cost of the machinery or plant. This regime applies for both general machinery and plant and road vehicles.

As respects capital expenditure incurred prior to 1 January 2001, the allowances are granted on a straight-line basis over 7 years at a rate of 15 per cent of the actual cost of the machinery or plant for the first 6 years and 10 per cent of that cost for the final year. In the case of road vehicles, however, the allowances are given at the rate of 20 per cent per annum granted on a reducing balance basis.

However, taxpayers may elect to have the tax written-down value of all expenditure incurred prior to 1 January 2001 “pooled together” to qualify for write-off on a straight-line basis at 20 per cent per annum over the following 5 years. It is necessary to give taxpayers the option of sticking with the earlier regime. This is because the application of the 5-year write-off regime to tax written-down values could have resulted in smaller allowances being given for individual items of plant and machinery, depending on when the capital expenditure was incurred. In such cases, taxpayers choose between the easier computation rules of the “pooling system” and larger allowances for individual items of plant and machinery under the earlier regime. The “pooling arrangements” are available in respect of chargeable periods ending on or after 1 January 2002.

A special regime of wear and tear allowances (40 per cent per annum on a reducing balance basis) applies in the case of taxis and short-term hire vehicles (see section 286). In addition, certain fishing boats attract an enhanced regime of wear and tear allowances (see subsection (3A)).

The total wear and tear allowances and initial allowances (section 283) made to a person in respect of any machinery or plant cannot exceed the actual cost to the person of that machinery or plant.

Wear and tear allowances are also available where the machinery or plant is provided for the purposes of the renting or letting on bona fide commercial terms of furnished dwelling houses.

Details

Conditions for wear and tear allowance

(1) A person who carries on a trade in a chargeable period and who has incurred capital expenditure on the provision of machinery or plant for the purposes of the trade is, subject to conditions, entitled to a wear and tear allowance for the chargeable period in respect of that machinery or plant. The conditions are that —

  • at the end of the chargeable period or its basis period (that is, in the case of corporation tax, at the end of the accounting period and, in the case of income tax, at the end of the basis period for the year of assessment) the machinery or plant continued to belong to the person,
  • at the end of the chargeable period or its basis period the machinery or plant is in use for the purposes of the person’s trade, and
  • the machinery or plant while being used for the purposes of the trade was wholly and exclusively so used.

It should be noted that the allowance is available even if the machinery or plant is acquired and put into use for trade purposes towards the end or, indeed, on the last day of the chargeable period or its basis period. Thus, in the case of a chargeable period or its basis period of 12 months ending 31 December, if machinery or plant is provided and put into use for trade purposes on 31 December, title to the full wear and tear allowance still exists. See, however, subsection (2)(b) which restricts the allowance where the chargeable period or its basis period is less than one year in length.

Rate of allowance

(2)(a) As respects capital expenditure incurred before 1 January 2001, a wear and tear allowance for a chargeable period will be of an amount equal to —

  • (i) in the case of machinery or plant other than road vehicles, 15 per cent of the actual cost of the machinery or plant, including in that cost any capital expenditure on the machinery or plant by means of renewal, improvement or reinstatement. [Effectively, this means a straight-line 7-year write-off period with allowances of 15 per cent for the first 6 years and 10 per cent in year 7.]
  • (ii) in the case of road vehicles, 20 per cent of their value at the commencement of the chargeable period.
    [Effectively, this means that the cost is written off on a 20 per cent reducing balance basis.]
    (2)(aa) As respects capital expenditure incurred on or after 1 January 2001 but before 4 December 2002, a wear and tear allowance for a chargeable period will be of an amount equal to 20 per cent of the actual cost of the machinery or plant, including in that cost any capital expenditure on the machinery or plant by means of renewal, improvement or reinstatement.
    [Effectively, this means a straight-line write-off of the cost over a 5-year period at 20 per cent per annum.]
    (2)(ab) However, where for any chargeable period ending on or after 1 January 2002 a wear and tear allowance would be due to be made to a person in respect of plant and machinery at the rate of 15 per cent per annum (10 per cent in year 7) on a straight-line basis in accordance with subsection (2)(a)(i) or, in the case of road vehicles, at 20 per cent per annum on a reducing balance basis in accordance with subsection (2)(a)(ii), the person may make an election in respect of each and every item of the plant and machinery concerned. The election is to the effect that, instead of having the amount of the wear and tear allowances for that chargeable period in respect of the plant and machinery determined in accordance with subsection (2)(a), the amount of the allowances for that chargeable period and any subsequent chargeable period will be —
  • in the case where the allowances would otherwise be determined in accordance with subsection (2)(a)(i), an amount equal to 20 per cent of the amount which is still unallowed (defined in section 292) in respect of the capital expenditure incurred on the plant and machinery at the commencement of the chargeable period for which the election is made, and
  • in the case where the allowances would otherwise be determined in accordance with subsection (2)(a)(ii) (i.e. road vehicles), an amount equal to 20 per cent of the value of the plant and machinery at the commencement of the chargeable period for which the election is made. Such value is determined in accordance with subsection (3), as modified by section 374 which restricts capital allowances where cars cost over a certain amount.
    In essence, therefore, taxpayers will be allowed to elect to have the tax written-down value of all pre-1 January 2001 expenditure on plant and machinery “pooled together” to qualify for write-off on a straight-line basis at 20 per cent per annum over the following 5 years.
    (2)(ac) Any election made under subsection (2)(ab) will be irrevocable, and will have to be included in the taxpayer’s annual tax return for the first year of assessment or accounting period for which wear and tear allowances in relation to the plant and machinery concerned are to be made under the pooling arrangements.

(2)(ad) Where capital expenditure is incurred on or after 4 December 2002 on the provision of machinery or plant a wear and tear allowance for a chargeable period will be of an amount equal to 12.5 per cent of the actual cost of the machinery or plant, including in that cost any capital expenditure on the machinery or plant by means of renewal, improvement or reinstatement.

[Effectively, this means a straight-line write-off of the cost over an 8-year period at 12.5 per cent per annum.]

However, this rate will not apply in the case of —

  • machinery or plant (certain fishing vessels) covered by subsection (3A),
  • machinery or plant consisting of a car within the meaning of section 286 used for qualifying purposes within the meaning of that section, that is, taxis and vehicles used for short-term hire purposes, and
  • machinery or plant provided under the terms of a binding contract evidenced in writing before 4 December 2002 and where the expenditure incurred on the provision of such machinery or plant is incurred on or before 31 January 2003.

(2)(b) Where the chargeable period or its basis period (the accounting period for corporation tax purposes and the basis period for the year of assessment for income tax purposes) is less than a year long, the wear and tear allowance is reduced proportionately.

(3) For the purposes of wear and tear allowances for road vehicles, the value of the vehicles at the commencement of the chargeable period is the actual cost to the person of the vehicles reduced by the total of the wear and tear allowances made to the person in respect of the vehicles for previous chargeable periods. This provision is not relevant to expenditure incurred on road vehicles on or after 1 January 2001 since such expenditure is written off on a straight-line and not a reducing balance basis.

Certain fishing vessels

(3A) Fishing vessels are regarded as machinery or plant for capital allowance purposes and as such are entitled to the general regime of wear and tear allowances under subsection (2). However, certain fishing vessels are entitled to a special enhanced year 1 regime of allowances. The vessels in question are those on the Register of Fishing Boats and in respect of which capital expenditure is incurred in the 3-year period from 4 September 1998 (“the appointed day”) to 3 September 2001. The expenditure must be certified by Bord Iascaigh Mhara as having been incurred for fleet renewal purposes in the polyvalent and beam trawl segments of the Irish fishing fleet. The allowances consist of 50 per cent of the actual cost in year 1 with the balance (the other 50 per cent) being written off at the rate of 15 per cent per annum of the balance in years 2 to 7 and 10 per cent of the balance in year 8. Allowances are apportioned where a chargeable period or its basis period is less than one year in length.

Provision is made for an extension to 3 September 2004 (i.e. 6 years from 4 September 1998) of the period in which capital expenditure qualifying for the enhanced regime of allowances must be incurred.

Moreover, a different enhanced regime of allowances applied in the case of capital expenditure incurred on or after the date of the coming into operation of section 52 of the Finance Act, 2001 (but not later than 3 September 2004). This regime consisted of an allowance of 50 per cent in year 1 with the balance (the other 50 per cent) being written off at 20 per cent per annum of the balance in years 2 to 6. The allowances will be apportioned where a chargeable period or its basis period is less than one year in length.

Length of basis period for year of assessment 2001

(3B) For the purposes of computing wear and tear allowances, the length of the basis period for the short tax “year” 2001 is deemed to be the lesser of the length of that period, as determined under section 306, and 270 days. [270 days is the length of the short tax “year” 2001, i.e. 6 April to 31 December 2001.]

Limit on wear and tear allowance

(4) A wear and tear allowance to be made to a person for a chargeable period in respect of machinery or plant cannot exceed such sum as when added to —

  • the wear and tear allowances made to the person in respect of the machinery or plant for previous chargeable periods, and
  • any initial allowance made to the person under section 283 in respect of the machinery or plant,

exceeds the actual cost to the person of the machinery or plant, including in that cost any capital expenditure on the machinery or plant by means of renewal, improvement or reinstatement. This secures that the total wear and tear allowances and initial allowances cannot exceed that actual cost.

No wear and tear allowance in respect of industrial buildings or structures

(5) No wear and tear allowance is to be made in respect of capital expenditure incurred on the construction of a building or structure which is or is deemed to be an industrial building or structure within the meaning of section 268.

Machinery or plant provided for the purposes of the letting of furnished dwelling houses

(6) & (7) Wear and tear allowances are also available in respect of capital expenditure incurred on fixtures and fittings (for example, furniture, kitchen appliances, etc) provided by a lessor for the purposes of furnishing rented residential accommodation. The allowances are available only where the expenditure is incurred wholly and exclusively in respect of a house used solely as a dwelling which is, or is to be, let as a furnished house on bona fide commercial terms in the open market.

Aer Rianta

(8) Aer Rianta (now known as the Dublin Airport Authority and including the Cork Airport Authority and the Shannon Airport Authority where relevant) is deemed to have incurred, on the vesting day (1 January 1999), capital expenditure on the provision of machinery or plant on a net amount which is arrived at by deducting from the original cost of the machinery or plant the amount of any wear and tear allowance that would have been made to Aer Rianta had an appropriate claim been made and allowed.

Relevant Date: Finance Act 2017