312 Special provisions as to certain sales

Summary

For the purposes of certain capital allowances, where property is sold at a price other than its open market value price and the sale is between associated persons, or where it appears that the sole or main benefit which might appear to have expected to accrue from a sale was the obtaining of the capital allowances, the open market price is substituted for the actual sale price of the property. The capital allowances to which this rule applies are allowances in respect of industrial buildings or structures, machinery or plant, dredging, mining and scientific research.

The rule is essentially directed to protecting the various allowances from abuse by means of artificial transactions. For example, in the absence of the rule, a building might be sold by A to B at a merely nominal figure, thus enabling A to claim a balancing allowance which would represent an almost complete writing-off of the expenditure, thus anticipating all the allowances due to the given in respect of the building in the future. Again, A might sell a machine to B at a nominal price and become entitled to a balancing allowance which, with the wear and tear allowances already given, would amount to almost the entire cost. B does not use the machine but sells it to C at an inflated price – possibly more than the original cost – by reference to which C could claim wear and tear allowances and in due course a balancing allowance.

Although the rule is mainly aimed at cases of common control (for example, where the buyer is a body of persons over whom the seller has control, where the seller is a body of persons over whom the buyer has control, or where the buyer and seller are bodies of persons and some other person has control over both of them), it also applies even if there is no community of interest in the sense of common ownership so as to prevent abuse of the allowances by means of reciprocal sales of similar assets.

For example, assume that 2 manufacturers own exactly similar machines, each of which cost €10,000 and has attracted wear and tear allowances of €2,000. In the absence of the rule, if they were to sell their machines to each other for, say, €100, both would be entitled to a balancing allowance of €7,900 thus anticipating the wear and tear allowances which should be given over the next 4 years. Again, 2 traders could buy at the same time 2 exactly similar machines, each costing €10,000. Before using them each sells the machine to the other for, say, €20,000. In the absence of the rule, both would then be entitled to wear and tear allowances and, in due course, a balancing allowance by reference to a cost of €20,000.

Details

Meaning of control

(1) A person controls a body corporate if, through the holding of shares or the possession of voting power in or in relation to that or any other body corporate, the person can secure that the affairs of the body corporate are conducted in accordance with that person’s wishes. A person also controls a body corporate if, by virtue of any powers conferred by the articles of association or other document regulating that or any other body corporate, the person can secure that the affairs of the body corporate are conducted in accordance with that person’s wishes. A person controls a partnership if the person has a right to more than 50 per cent of the income or the assets of the partnership.

Application

(2) The section applies in relation to 2 kinds of sales of property. These are where —

• the buyer or seller (being a company or a partnership) is controlled by the other party to the sale or where both parties are controlled by a third party, or
• the sale appears to have been arranged primarily for the sake of obtaining a tax benefit by way of an allowance (particularly a balancing allowance), being an allowance in respect of an industrial building or structure, machinery or plant, dredging, mining or scientific research (this provision is intended to cover the case of the exchange of similar assets at prices above or below their proper value).

Substitution of open market price

(3) In the case of any such sale, if the property is sold at a price other than its market value, then, for the purposes of capital allowances in respect of industrial buildings or structures, machinery or plant, dredging, mining and scientific research, the sale is treated as if it were made at the open market price and not at the price actually paid. This rule may be varied in certain circumstances (see subsections (4) and (5)).

No initial allowance to be made

(4)(a)(i) Where the sale is of machinery or plant, no initial allowance under section 283 is to be made to the buyer. This provision is now of limited application, if applicable at all. The initial allowance is now available only in certain limited circumstances and, in general, in order to qualify for the allowance the machinery or plant must be new and unused and not secondhand. For the latter purposes, a ship is deemed to be new even if it has been used or is secondhand but, given the limited availability of the initial allowance, it is improbable that a ship could now qualify for the allowance.

Exception to open market price rule in case of certain sales of machinery or plant

(4)(a)(ii) There is an exception to the requirement of subsection (3) that open market price be substituted for the actual price paid on the sale. The exception applies where on the sale of machinery or plant (not other property) the open market price is greater than the amount which, for the purposes of calculating a balancing charge on the seller, would be taken into account as the seller’s original capital expenditure in providing the machinery or plant. (Normally this would be the amount of the expenditure actually incurred by the seller in providing the asset less any grants received, but in circumstances where the seller’s title to capital allowances was based on an amount other than the net of grant expenditure incurred it would be that other amount.) In any such case, the machinery or plant is to be treated as having been sold for an amount equal to that amount of expenditure and not at the open market price.

(4)(b) The exception does not apply to new machinery or plant sold in the ordinary course of a business which consists of the manufacture or supply of machinery or plant of that class. In such a case, the sale would be deemed to be at the open market price.

Option, in cases of common control, to have asset treated as sold at its tax written down value instead of open market price

(5) In a common control case (subsection (2)(a)(i)), the seller and buyer may make a joint election in writing to the inspector to have the sale of an asset treated as if it were made at its tax written down value instead of the open market price. Such an election may only be made where the tax written down value of the asset is less than the open market price and subsection (2)(a)(ii) does not apply (that is, it is not a sale the sole or main benefit of which is to obtain a capital allowance). In any such case, the seller will not have a balancing charge and the buyer will effectively be granted capital allowances on a reduced amount over the remainder of the writing-down period of the asset. However, in computing any future balancing charge to be made on the buyer in respect of the asset, account will be taken not only of the capital allowances granted to the buyer but also of the capital allowances granted to the seller.

The tax written down value of an asset is, in the case of an industrial building or structure, the residue of the capital expenditure on its construction immediately before the sale (see section 277) and, in the case of machinery or plant, the amount of the expenditure on its provision still unallowed immediately before the sale (see section 292).

(6) A joint election to have the sale of an asset treated as if it were made at its tax written down value instead of the open market price may not be made if, at the time of the sale, any of the parties to the sale are not resident in the State. This rule does not apply if the non-resident party or parties is or are entitled to a capital allowance, or subject to a balancing charge, as a result of the sale. This would arise where a non-resident company is carrying on a trade in the State through a branch or agency.

Relevant Date: Finance Act 2021