Revenue Tax Briefing Issue 42 (part 2), 2000
Premises are often let fully fitted out. The fit out will involve expenditure on plant. These lettings give rise to queries in relation to the manner of charging the income from the letting of the plant to tax, the entitlement to allowances in respect of the expenditure incurred by the lessor on plant, and the manner of making the allowances.
Before we consider those issues the manner in which the income from the letting of the plant is assessed needs to be clarified.
Where a composite payment made under a lease relates partly to premises and partly to items of plant the full payment is regarded as rent for the purposes of tax and is chargeable under Schedule D Case V (Section 96 TCA 1997). This applies whether or not the plant is integral to the building.
Where the plant is let under a separate lease a separate tax charge is made in respect of the income from the letting of plant. Income from leasing in the course of a trade is chargeable under Schedule D Case 1. It is a question of fact whether a trade of leasing is being carried on in any particular situation.
Income from leasing plant which is not chargeable under Case 1 or Case V is chargeable under Case IV.
The manner of making an allowance in respect of expenditure incurred on plant located in a building which qualifies for industrial building allowances may differ depending on whether the plant is integral to the building or not.
Plant which is integral to a building is plant which is not normally removed by the owner if the property is sold.
The Revenue Commissioners are prepared to allow taxpayers, who incur capital expenditure on the provision of plant which is an integral part of an industrial building or a commercial building which qualifies for industrial building allowances, the option of electing to claim capital allowances on such expenditure either as part of the cost of the construction of the building (industrial building allowance) or as plant.
If expenditure incurred on the provision of plant is treated as part of the cost of the construction of the building the ringfencing provisions of Section 403(5) will not apply. As a consequence the cost of that plant is effectively available for offset against all other income, subject to the £25,000 cap provided for in Section 409A.
Section 298(1) TCA 1997 provides that where plant is let on such terms that the burden of wear and tear of the plant falls directly on the lessor, the lessor is entitled to a wear and tear allowance. The lease of the premises therefore must not only refer to the plant but must provide in express terms that the burden of wear and tear of the plant falls on the lessor.
Capital allowances in respect of plant which is not included in an industrial building allowance claim may be claimed under this section.
The allowances are available where the plant is in use by the lessee for the purposes of a trade, profession, employment or office of profit.
Section 305(1)(a) TCA 1997 provides that where an allowance is to be made to a person which is to be given by means of discharge or repayment of tax, and is to be available primarily against a specified class of income, the amount of the allowance is be deducted from or set off against the person’s income of that class.
In strictness, the specified class is the income from the letting of plant and machinery (Section 300(2)). However, to avoid unnecessary apportioning the specified class, in the case of plant situated within the State, may be regarded as income from the letting of the premises. Accordingly, the allowance made under Section 298 may be deducted from or set off against such income.
Section 305(1)(b) TCA 1997 provides that where wear and tear allowances are greater than income from the letting of the premises the excess allowances may be offset against all other income. But Section 305(1)(b) does not apply to allowances for expenditure incurred on plant after 25 January 1984 (Section 403(5)). The wear and tear allowances in respect of expenditure incurred after that date are ringfenced. As indicated above, in the case of plant which is let with a building, the ring-fence may be applied by reference to the income from the letting of that building.
A wear and tear allowance is available in respect of capital expenditure incurred on the provision of plant in a house which is let furnished and the income from which is chargeable under Case V Schedule D (Section 284(6)).
The allowance is made in charging a person’s income under Case V (Section 300(4)). Accordingly, the allowance may be deducted or set off against all rental income chargeable under Case V.
The common areas of commercial centres and office blocks are generally retained by the landlord. These areas contain items of plant such as escalators, lifts, ventilation heating and sprinkler systems. The landlord charges the tenant for the use of such plant by way of a service charge.
Where the building qualifies for industrial building allowances such plant will generally be included in the industrial building allowances claim as being integral to the building. Otherwise, Revenue regard such plant as coming within Section 298 if the burden of wear and tear is borne by the landlord and the building is in use for the purpose of a trade or profession.
Section 278 TCA 1997 provides that industrial building allowances are available primarily against income chargeable under Case V of Schedule D. As mentioned above, the allowance made under Section 298 may be deducted from or set off against income from the letting of the premises and which is chargeable under Case V. The order of set off of the allowances is at the discretion of the claimant.
This article applies to machinery as it does to plant. Reference to industrial building allowances includes a reference to industrial building writing down allowances.