Revenue Note for Guidance

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Revenue Note for Guidance

297 Subsidies towards wear and tear


This section is concerned with the case where a person using machinery or plant for the purposes of a trade receives from another person payment by way of compensation for the depreciation resulting from such use and that payment is not taken into account as the income of the person concerned in computing the profits or gains of the trade. In the computation of a balancing allowance or charge in any such case, the amount of the expenditure unallowed in respect of the machinery or plant immediately before the event giving rise to the allowance or charge is reduced by a notional wear and tear allowance equal to the total of the payments received on account of the depreciation of the machinery or plant. In effect, this decreases the balancing allowance or creates or increases a balancing charge. However, the amount of any balancing charge cannot exceed the aggregate of the capital allowances actually made to the person concerned in respect of the machinery or plant.


Notional wear and tear allowance deemed to have been made

(1) The section applies where —

  • a balancing event occurs in relation to machinery or plant used by a person for the purposes of a trade, and
  • the person concerned received or is entitled to receive any sum in respect of or on account of the wear and tear of the machinery or plant by reason of such use and that sum is not taken into account as the person’s income or in computing the profits or gains of the person’s trade.

In determining in any such case the amount of any balancing allowance or charge to be made, a notional wear and tear allowance is deemed to have been made to the person for the chargeable period related to the event, that is, in the case of corporation tax, for the accounting period in which the event occurred and, in the case of income tax, for the year of assessment in the basis period for which the event occurred. The amount of this notional allowance is the amount of the sums received or receivable by the person on account of the wear and tear of the machinery or plant to the extent that such sums were or are not taxable in the person’s hands.

Although the provision is expressed to relate to trades, in practice the position envisaged is most likely to arise in the case of employees and office holders to whom the provisions of this Chapter are extended by section 301. For example, where an employer pays a sum to an employee in respect of the depreciation of a motor car belonging to the employee and used by him/her in the course of his/her employment, then, such sum is, prima facie, not taxable in the employee’s hands for the reason that, unless the payment exceeds the amount of the employee’s loss through depreciation, no profit can be said to have arisen to the employee. This position is not altered by section 117 which imposes a liability under Schedule E in respect of a sum paid “in respect of expenses” as depreciation is not an expense in the income tax sense.

In such a case the wear and tear allowances made to the employee would normally be reduced to an amount which is just and reasonable.

In the absence of a special provision in relation to balancing allowances or balancing charges, however, the position would be that if any wear and tear allowances, however small, were made to the employee for any year, then, on selling the car, he/she would become entitled to a balancing allowance. The balancing allowance would be equal to the cost less the sale price plus any wear and tear allowance given (despite the fact that the “wear and tear subsidy” paid to the employee by the employer had not been treated as income in the employee’s hands). In effect, the employee would obtain, for tax purposes, an allowance for depreciation the cost of which would have been borne, not by the employee but by his/her employer, and which would have been allowed as an expense of the employer’s trade.

Section 297 caters for such situations by providing that where subsidies towards wear and tear are received or to be received, the person concerned is to be treated as having been granted wear and tear allowance equal to the total amount of the subsidy; that is, in addition to the wear and tear allowances which have, in fact, been granted to that person.

Limit on balancing charge

(2) In no case will a balancing charge exceed the amount of the allowances actually given.

Relevant Date: Finance Act 2021