Finance Act 1967 Section 27(3): Capital Allowances and Apportionment

Section 27(3) of the Finance Act 1967 is a crucial provision concerning capital allowances, specifically addressing situations where assets used for qualifying activities are also utilized for other purposes. It dictates how the expenditure and allowances must be apportioned in such mixed-use scenarios.

The core principle of Section 27(3) is that when an asset is used partly for the purposes of a trade (or another qualifying activity that attracts capital allowances) and partly for other purposes (such as private use), the capital allowances available are restricted. The restriction ensures that only the portion of the expenditure that is genuinely attributable to the qualifying activity is eligible for capital allowance claims.

The legislation mandates a “just and reasonable” apportionment of the expenditure incurred on the asset. This apportionment determines the amount of expenditure that qualifies for capital allowances. The remaining portion, representing the non-qualifying use, is not eligible for allowance claims.

The “just and reasonable” apportionment is a factual determination based on the specific circumstances of each case. There is no prescribed formula, and the apportionment must reflect the actual usage of the asset. Factors that might be considered include:

• Time Usage: The proportion of time the asset is used for the qualifying activity versus other purposes.
• Physical Usage: If applicable, the proportion of physical use dedicated to the qualifying activity. For example, square footage of a building.
• Output or Throughput: The amount of output or throughput attributable to the qualifying activity compared to overall output.
• Turnover: The proportion of turnover generated by the activity that benefits from the asset.

It’s important to note that the onus is on the taxpayer to demonstrate that the apportionment is fair and reasonable. Adequate records must be maintained to support the apportionment method used. Failure to provide sufficient evidence may result in the tax authorities rejecting the apportionment and potentially disallowing part of the capital allowance claim.

Furthermore, Section 27(3) extends beyond the initial expenditure. It also applies to any subsequent expenditure incurred on the asset, such as repairs or improvements. These expenditures must also be apportioned according to their usage between the qualifying activity and other purposes.

The provision is particularly relevant for businesses or individuals who work from home, use vehicles for both business and private purposes, or own assets that are used for a mix of business and personal activities. Proper application of Section 27(3) is essential for accurate tax reporting and ensures that capital allowances are claimed only for the portion of the asset’s use that genuinely relates to the qualifying activity.

In summary, Section 27(3) of the Finance Act 1967 ensures that capital allowances are only granted for the portion of expenditure attributable to qualifying activities when an asset is used for mixed purposes, requiring a “just and reasonable” apportionment based on the specific facts of the case.