UK: Capital Allowances - January 2013

Last Updated: 4 February 2013
Article by Smith & Williamson


This briefing note discusses the current capital allowance environment and the practical issues in applying recent changes. There have been significant developments in capital allowances since Finance Act 2008. This briefing note contains a table summarising the rates available. The note excludes the capital allowance aspects of North Sea oil & gas 'ring fence'.


Type of allowance

From April 08

From April 09

From April 10

From April 12


% allowance

% allowance

% allowance

% allowance

Land Remediation Relief





Annual Investment Allowance (AIA)





Temporary First Year Allowances (for 12m)





Business Premises Renovation Allowance





Enhanced Capital Allowances (ECA)





Flat Conversion Allowances (FCA)*





Research & Development Allowances (RDA)





Know How Allowances





Patent Allowances





Plant & Machinery Allowances (general)





Mineral Extraction Allowances (MEA)

10 / 25

10 / 25

10 / 25

10 / 25

Integral Features





Long Life Assets





Dredging Allowance





Assured Tenancy Allowance





Industrial or Agricultural Buildings Allowances (IBA, ABA)

Phased reduction

Phased reduction

Phased reduction


Deferred Revenue expenditure

Accounting Depreciation rate

*Flat conversion Allowances will be abolished from 1 April or 6 April 2013.


3.1 Introduced in April 2008

  • An annual investment allowance (AIA) of £50,000 for plant & machinery expenditure, available to all businesses, though restricted in the case of associated businesses (see below for change with effect from April 2010 and April 2012).
  • Abolition of first year allowances (FYAs) for small & medium-sized enterprises (the 40% and 50% rates in existence prior to April 2008).
  • A reduced WDA rate for the general plant & machinery pool (from 25% to 20%, though see below for further changes due in April 2012).
  • The ability to write off the balance of expenditure on small pools (those with balances of £1,000 or less).
  • A new special rate pool for integral features (a new category of allowance) and long life assets, with a 10% writing down allowance (though see below for further changes due in April 2012).
  • Phased withdrawal of industrial buildings allowances (IBAs) and agricultural buildings allowances (ABAs).
  • Payable Enhanced Capital Allowances (ECAs).

3.2 Introduced with effect from April 2009

  • A temporary first year allowance of 40% for general plant or machinery expenditure for all businesses for 12 months from 1 April or 6 April 2009.
  • Changes to capital allowance for cars, providing for greater pooling and allowances based on CO2 emissions.

3.3 Introduced with effect from April 2010

  • The AIA was increased from £50,000 to £100,000 with effect for expenditure incurred on or after 1 April 2010 for companies and 6 April 2010 for unincorporated businesses. The change was accompanied by anti-avoidance provisions to prevent sideways loss relief being obtained where a property loss is generated and has a capital allowance connection. The anti-avoidance precludes sideways loss relief for the amount of the loss applicable to the AIA where the main purpose or one of the main purposes of arrangements entered into (on or after 24 March 2010) was to obtain sideways loss relief in respect of the property loss.
  • Changes were made to the ECA list of qualifying expenditure from a date appointed by Treasury order. The change will introduce two new energy efficient sub-technologies (permanent magnet synchronous motors and Biomass fired warm air heaters), while removing compact heat exchangers and liquid pressure amplification and tightening certain criteria in the water technology list.

3.4 Changes announced at Finance (No 3) Act 2010

The following changes will apply with effect from 1 April 2012 for companies and 6 April 2012 for unincorporated businesses:

  • a reduction in the AIA from £100,000 to £25,000 (included in Finance Act 2011);
  • rates of writing down allowance on qualifying capital expenditure will fall from 20% to 18% for expenditure qualifying for the main pool, and from 10% to 8% for expenditure qualifying for the special rate pool (included in Finance Act 2011).

As with previous capital allowance rate changes where a chargeable period crosses the date of change, a hybrid rate will need to be calculated and applied to the pool balance.

  • 100% allowances for expenditure on new zero emission goods vehicles with effect for expenditure incurred between 1 April 2010 and 31 March 2015 for companies and between 6 April 2010 and 5 April 2015 for unincorporated businesses. To comply with EU state aid rules this allowance will not be available to businesses in financial difficulty, to those involved in fisheries, aquaculture or waste management, and will be limited to €85m of expenditure per undertaking over the five year period.

3.5 Further changes in Finance Act 2011

The life of short life asset pools will be extended to the eighth anniversary of the end of the chargeable period in which the expenditure was incurred for expenditure incurred on or after 1 April 2011 for companies and 6 April 2011 for unincorporated businesses.

3.6 Further changes in Finance Act 2012

Finance Act 2012 contained a number of changes affecting capital allowances as follows:

  • The introduction of a mandatory pooling requirement in order to establish entitlement to claim capital allowances on fixtures acquired second-hand where a previous owner was able to claim capital allowances. It takes effect in a staged manner between April 2012 and April 2014. This is a significant change and is covered in more detail below.
  • Introduce 100% allowances available to companies within the charge to corporation tax on new (unused and excluding replacement) plant or machinery used in either a trade or a mining or transport activity in an assisted area (development areas specified in SI2001/107, there are none in London) that is within an enterprise zone (Birmingham and Solihull; Sheffield City Region; Leeds City Region; Liverpool City Region; London; Greater Manchester; West of England; the Black Country; Derby and Nottingham; Tees Valley and the North East; Humber Estuary Renewable Energy Super Cluster; Daresbury Science Campus, near Warrington and Runcorn; Newquay AeroHub in Cornwall; The Solent Enterprise Zone at Daedalus Airfield in Gosport; MIRA Technology Park in Hinckley Leicestershire; Rotherwas Enterprise Zone in Hereford; Discovery Park in Sandwich, Kent and Enterprise West Essex in Harlow; Science Vale UK in Oxfordshire; Northampton Waterside; Alconbury Airfield, near Huntingdon in Cambridgeshire; Great Yarmouth in Norfolk, and Lowestoft in Suffolk. The expenditure must be incurred between 1 April 2012 and 31 March 2017. Certain expenditure will not qualify (for example expenditure for primary agricultural production and expenditure on a means of transport). Also the allowance will be clawed back if within a period of five years beginning with the date the plant or machinery was first brought into use (or held for such use if earlier), the plant or machinery is primarily put to use in an area outside the designated area by the person who incurred the expenditure or a person connected with them. There is a cap on expenditure per person, per designated area, of up to 125m euros.
  • 100% ECAs will not be available for expenditure on qualifying energy saving plant or machinery if either (i) a feed-in tariff payment is received in respect of electricity generated by it, or (ii) a renewable heat incentive payment is made in respect of heat, gas or fuel produced by the plant or machinery. This will take effect from 1 April 2012 for companies and 6 April 2012 for unincorporated businesses, except that it will only take effect in 2014 for expenditure on a combined heat and power system.
  • From 1 April 2012 for companies and 6 April 2012 for unincorporated businesses, expenditure on solar panels will be designated as 'special rate expenditure' for capital allowance purposes.
  • Where organisations such as housing associations are considering using solar panels to reduce electricity costs to tenants and to generate other income from the supply of electricity to the grid, it may be necessary to incur expenditure on solar panels in a separate trading company in order to qualify for capital allowance claims. This would be on the basis that a trading activity of electricity generation was being undertaken, in contrast to the activity (and installation of solar panels) being regarded as having a primary purpose of use in a dwelling if incurred by the company owning the building and undertaking residential letting.
  • It has also been announced that the period in which expenditure qualifying for business premises renovation allowances can be incurred, will be extended from 10 April 2012 to 1 or 6 April 2017 depending on whether for corporation tax or income tax purposes, and introduces a limit per project (please refer to BN30 for more information).
  • With effect from 1 April 2013 for companies and 6 April 2013 for unincorporated businesses, capital allowances on expenditure for safety at sports grounds and flat conversion allowances will disappear. Land remediation relief will however be retained.
  • As previously announced, there will be changes to the anti-avoidance rules affecting capital allowances claimed on plant or machinery bought using hire purchase arrangements where there is a tax avoidance purpose. The changes take effect from 1 April 2012 (for corporation tax) and 6 April 2012 (for income tax), except that the exclusion from the anti-avoidance where plant or machinery is acquired from a manufacturer will be removed with effect from 11 August 2011.
  • An anti-avoidance measure resulting from a DOTAS disclosure, so that when considering the disposal value for capital allowances under the special long funding leasing rules, in addition to any 'relevant rebate' a lessee takes into account, they will also need to consider any other relevant lease-related payment. This measure is effective for 'relevant events' occurring on or after 21 March 2012.
  • from April 2013 the following changes will apply to capital allowances on cars:
    • The 100% FYA for low fuel emission cars will extend to 31 March 2015 and the CO2 emission rate for qualifying cars qualifying for 100% FYA's will reduce from 110gms/km to 95 gms/km.
    • The emission rate for cars qualifying for the main pool will reduce from 160 gms/km to 130 gms/km.

3.7 Changes proposed for Finance Bill 2013

  • The annual investment allowance has been increased to £250,000 for a two year period commencing 1 January 2013.
  • Legislation is proposed to extend the 100% first year allowance for expenditure on gas refuelling equipment for two years to 31 March 2015.
  • 100% first year allowances on cars with low carbon dioxide emissions will be extended a further two years to 31 March 2015. Cars that are to be leased will be excluded from this first year allowance. From 1 or 6 April 2013 the emission rates will be reduced so that 100% allowances will be available where emission rates are 95g/km or less (previously 110 g/km) and vehicles emitting between this level and 130g/km will be eligible for the main pool (previously an upper limit of 160g/km). The emission limit above which there is a restriction disallowing 15% of car lease payments will also reduce to 130 g/km.


The allowance is available to qualifying persons which include:

  • individuals;
  • partnerships consisting of individuals (note that a partnership with a member who is a company or trust does not qualify);
  • companies.

There are restrictions to the availability of the AIA which are slightly different for companies and for unincorporated businesses.

For companies the basic rule is that one AIA is available per company. However, only one AIA is available:

  1. between all companies that are part of a corporate group;
  2. between two or more groups controlled by the same person and where the groups are related (see below);
  3. between two or more companies that are under common control and that are related (see below).

"Group" in relation to companies means the parent company and subsidiaries in which it holds a greater than 50% interest. Control in this context is defined in s574 CAA2001 (by share capital, or voting power, or articles of association or similar document). Related companies or groups are defined as those which operate from the same premises or have 50% or more of the same category of turnover (using the EU NACE1 classification). The same premises test is met if at the end of the chargeable period the company or group operates from the same premises.

For unincorporated businesses the basic rule is that one AIA is available per business. However only one AIA is available to more than one business where:

  1. a person other than a company carries on the businesses;
  2. the businesses are controlled by the same person; and,
  3. the businesses are related (see below).

For control purposes a business is treated as controlled by the person who carries it on, and control in relation to a partnership means the right to a share of more than half of either the assets or the income of the partnership. Unincorporated businesses are related if at the end of the chargeable period they operate from the same business premises or undertake the same EU NACE classification of activity (there is no turnover test).

Where a business owner operates a company and also operates a partnership (which has only individuals as partners), then both the partnership and the company would be entitled to an AIA.

The AIA is not available where disqualifying arrangements are entered in to. Disqualifying arrangements are those where the main reason for entering in to them is to obtain entitlement to the AIA for a business which would not otherwise be entitled to an AIA. Where there is entitlement to AIA, it is possible to choose how the allowance is allocated between the companies within a group, or the businesses within a related group of businesses.

As a result of the introduction of the AIA, First Year Allowances (FYA) for small and medium-sized enterprises (SME) were withdrawn from the relevant dates (1 April 2008 for corporation tax, and 6 April 2008 for businesses subject to income tax). The AIA will provide a 100% FYA for expenditure to the relevant limit. The limit has changed as follows:

Expenditure between

AIA limit

1 or 6 April 2008 to 31 March 2010 or 5 April 2010

£ 50,000

1 or 6 April 2010 to 31 March 2012 or 5 April 2012


1 or 6 April 2012 to 31 December 2012

£ 25,000

1 January 2013 onwards


There are intricate rules to follow where an accounting period crosses the date of change, to determine the amount of allowances available. A separate briefing note has been prepared to cover this.

There are certain exclusions from plant & machinery qualifying for the AIA and these include:

  • expenditure incurred in the chargeable period when qualifying activity ceases;
  • expenditure on cars;
  • expenditure incurred for the purpose of a ring fence trade;
  • expenditure incurred in connection with a change in the nature or conduct of a trade where obtaining the allowance is the main (or one of the main) benefit(s) of making the change;
  • expenditure arising from the expiry of a long funding lease, as a result of a gift, or which has been transferred into a qualifying activity from a non-qualifying activity.

Any capital expenditure on plant and machinery over the limit will be dealt with through the standard regime for capital allowances. 100% FYA will continue to be available for plant or machinery with environmentally favourable credentials, business premises renovation allowances, flat conversion allowances and research & development allowances.

It is possible to choose which plant or machinery expenditure qualifies for the AIA. Thus if there is capacity within the AIA limit and qualifying expenditure is incurred that would otherwise attract the 'special rate' (see below) , the full AIA could be used. In this case the plant or machinery on which the AIA had been claimed would be allocated to the special rate pool, so that any proceeds on a subsequent sale would result in a clawback of allowances given from that pool. Unused AIA relief in any year cannot be carried forward to future years, so if possible the timing of expenditure qualifying for relief should be planned so that allowances are maximised.

It should be noted that the computation of amount of AIA available will depend on how the accounting period crosses the date of change of amount of allowance, as the amount of allowance is time apportioned from the date of change. This can lead to important timing considerations for qualifying capital expenditure.

In relation to losses generated by property businesses who have claimed an AIA, there is a restriction on sideways loss relief for the amount of any AIA claimed where arrangements are entered into on or after 24 March 2010 with the main purpose (or a main purpose) of securing sideways loss relief as a result of claiming AIA.


For chargeable periods beginning on or after the 'relevant date' (1 April 2008 or 6 April 2008) it will be possible to take an amount of allowance up to the remaining balance for "small" P&M general pools, or special rate pools (see below for special rate pool). A 'small pool' is a pool with a balance of £1,000 or less. It will therefore be possible to choose to write off the whole pool balance for tax purposes, or any amount up to that pool value. Taking the full write down will remove the need to account for small pool balances for tax purposes for extended periods of time.


This Where an accounting period straddles the effective date of change, allowances for the general plant or machinery pool (PMA) are apportioned, by applying a hybrid rate. This is calculated using the number of days before and after the relevant date, and rounding up the allowance to two decimal places. For instance, a company with a year end of 31 December 2008 had a hybrid rate for WDA for plant and machinery of 21.25% (91/366 x 25% = 6.2158% plus 275/366 x 20% = 15.027% = 21.2431% = 21.25% rounded). It is expected that similar transitional rules will be introduced when the main pool writing down allowance rate changes from 20% to 18% in April 2012.

The AIA is applied to expenditure from the 'relevant date' (see above), with time apportionment where the accounting period crosses the relevant date. On an ongoing basis the AIA will be reduced pro-rata for short accounting periods or where the accounting period straddles the relevant date. Taking the example of a company with a year end of 31 December 2008, it was entitled to an AIA of £37,671, being 275/365 x £50,000 (the £50,000 annual allowance ran from 1 April 2008, which was not a leap year). Similar calculations will be required with respect to the £100,000/£25,000 limits where accounting periods straddle the April 2010/April 2012 introduction dates.

The transitional rules for the change in long life asset (LLA) WDA rate (6% to 10% on introduction of the 'special rate') work in a similar way to those for the general pool. It was possible, however, to obtain the full WDA rate of 10% for LLA expenditure incurred before the April 2008 'relevant date' but allocated to the special rate pool after the relevant date. Any balance left in the LLA pool will be transferred to the 'special rate pool' the day after the end of the transitional year.

In view of the change in rates around the 'relevant date' it is important to remember the definition of when expenditure is incurred for capital allowances. Capital expenditure is treated as incurred on the date when there is an unconditional obligation to pay for it (CAA2001 s5). Where the unconditional obligation comes into being as a result of the issue of a certificate (for example a building certificate on a long term refurbishment contract), and the certificate is issued within one month of the end of a chargeable period, then provided the asset has become the property of the taxpayer before the end of the chargeable period, the expenditure is treated as incurred immediately before the end of that period. However, where there is agreement that payment for an asset is not required until more than four months after the date of obligation to pay, then the date of payment takes precedence. Where a debt is paid more than four months after it is due, this does not necessarily mean that the payment date will be treated as the date capital expenditure is incurred.


Finance Act 2009 introduced a 40% temporary first year allowance for plant or machinery expenditure qualifying for the general pool of expenditure (otherwise qualifying for the 20% rate of allowance). The expenditure must have been incurred in the 12 months from 1 April 2009 (companies) or 6 April 2009 (unincorporated businesses), and there is no limit to the amount of qualifying expenditure for which relief can be claimed. Certain expenditure is excluded from this allowance, such as:

  • Special rate expenditure (see next section).
  • Cars.
  • Assets for leasing.

Businesses will need to review which first year allowances to claim. Where possible it may be advantageous to claim at rates of 100% (e.g. AIA and ECA), before considering the temporary 40% FYA. For qualifying expenditure in excess of amounts claimable at rates of 100%, or which cannot otherwise be claimed at these favourable rates, the temporary FYA is a consideration. For example the allowance is available to each company in a group, to partnerships with companies or trusts as partners, and to businesses which are associated with other businesses.


The special rate pool is a new pool for the following categories of expenditure incurred on or after the relevant dates (1 April 2008 (Corporation Tax), or 6 April 2008 (Income Tax)):

  • thermal insulation expenditure;
  • integral features;
  • long life assets (unless used in a ring fence trade);
  • long life assets (unless used in a ring fence trade) which have not yet been allocated to the LLA pool.

With effect from 1 April 2012 and (Corporation Tax), or 6 April 2008 (Income Tax) expenditure on solar panels is classified as special rate expenditure.

Special rate pool expenditure incurred on or after the relevant date will attract a full 8% WDA for the chargeable period, provided there is a 12 month accounting period (even in the transitional period). The allowance will be apportioned where the accounting period is less than 12 months. The rate of allowance fell from 10% to 8% with effect for expenditure incurred and pool balances on or after 1 April or 6 April 2012. Transitional rules operate to determine the rate of allowance for accounting periods that straddle the date of change of rate, in a similar way to that described for the transitional rules above for the general pool.

8.1 lntegral Features

The new category of integral features (which may or may not be fixtures) includes some items previously qualifying for the main PMA rate, and some new categories. The integral feature categories are:

  • electrical systems (including lighting systems);
  • cold water systems;
  • space or water heating systems, powered systems of ventilation, air cooling or purification and any floor or ceiling comprised in such systems;
  • lifts, escalators and moving walkways;
  • external solar shading;
  • Solar panels for expenditure incurred on or after 1 or 6 April 2012.

While this is a simple list, it does not remove the need for judgement in determining which category of allowance (general pool, integral feature, or none) the asset falls within. New section 33A para 1 CAA2001 applies integral feature plant or machinery classification to that used in a building or structure which is used for a qualifying activity. Thus the plant itself does not have to be specifically used in the trade. This permits capital allowances to be available for expenditure which previously did not attract such allowances (for example certain cold water systems and external solar shading). It also permits this type of expenditure to attract enhanced capital allowances (ECA for which the rate of allowance is 100%) where the equipment otherwise qualifies.

The majority of plant included in a lease of a building is excluded from the long funding lease rules (which transferred the availability of capital allowances from the lessor to lessee) by the 'background plant exemption'. This exemption permits the lessor to retain the right to capital allowances on certain plant or machinery included in a building leased under a lease which would otherwise come within the long funding lease rules introduced in April 2006. With the introduction of new categories of plant, however, there will be a requirement to check closely whether the plant included in a lease still comes within the background plant exemption so that capital allowances can be claimed.

The question of when renewal expenditure on assets falling into the integral features category is to be treated as capital or revenue was clarified in the 2008 Budget. Expenditure will be 'replacement expenditure' (i.e. capital) where more than 50% of the replacement cost of the asset is incurred within a 12 month period. The 'more than 50%' test is by reference to the replacement cost of the asset when expenditure is first incurred in that 12 month period. In the case of major repair work, it has always been necessary to determine whether the expenditure is of a revenue nature (i.e. a repair, or a replacement on a 'like for like' or 'nearest modern equivalent' basis), or whether it replaces an 'entirety' and is capital for tax purposes. In providing more precise boundaries, the room for dispute around differences in judgement on whether expenditure is revenue or capital for tax should be less than otherwise, but still remains.

Compliance in this area may, therefore, require a formal estimate of replacement cost of integral feature items when repairs are carried out. When the integral feature legislation was introduced, the then Treasury Secretary, Angela Eagle, clarified that where a landlord owns a property with three floors and replaces the electrical system on one floor – that would be regarded as a repair under the new rules, not a capital replacement. She also clarified that disparate water and electrical system assets of the water processing and supply industry and electrical undertakings would be not be caught by the new integral features definition. The integral feature definition would apply to systems for the use and consumption of water and electricity, not their production and distribution.

HMRC's guidance on integral features is to be found at manual reference CA22300. While explaining the new rules, in relation to integral features, the guidance provides no definitive boundary between general plant and integral features, nor what is and what is not part of a system. HMRC also published a Revenue Brief in January 2009 which said that areas other than communal areas in University halls of residence would be classified as dwelling houses (this was in contrast to the view expressed in its manuals at CA11520, as at July 2009). The view expressed in the Revenue Brief was never formally put into practice, with the interpretation as expressed in CA11520 continuing to apply. Since then HMRC's guidance at CA11520, CA20020, CA20040 and CA23060 has been updated and Brief 45/10 set out its updated view of what constituted a dwelling. Its interpretation is still based on the particular facts of each case, but is now based on the Planning Regulations 'Use Classes Order' so that they regard a house in multiple occupation that would come within use classes C3 or C4 as dwelling houses for capital allowance purposes. To be classified as a dwelling the property would need to have the ability to provide the facilities required for day to day private domestic existence. The transitional period for managing the change to the new interpretation is:

Expenditure incurred on or after 29 December 2008, but before 22 October 2010

  • HMRC will accept claims for capital allowance based either on the manuals in existence prior to 22 October 2010, or on the interpretation as set out in Revenue & Customs Brief 66/08.

Expenditure incurred before 29 December 2008 for capital allowance claims made in returns for open years and filed before 22 October 2010

  • HMRC will accept claims for capital allowance based on the R&C Brief 66/08 interpretation. It is a presumption that a claim based on the previous HMRC manual guidance would also be acceptable.
  • There is no comment on what might happen if the claim is filed after 22 October 2010 for expenditure incurred before 29 December 2008. For example a company might have a 31 March 2009 year end and have incurred qualifying expenditure between 1 April 2008 and 28 December 2008. A claim for capital allowances can be made by a company for the year ended 31 March 2009 at any time up to 31 March 2011. It is not clear whether the previous HMRC manual guidance would be accepted. In previous communications, however, HMRC has indicated that its new interpretation of dwelling house for capital allowance purposes would only apply for expenditure incurred on or after 22 October 2010. It would therefore seem appropriate to assume that an interpretation based on the previous manual guidance (in contrast to R&C Brief 66/08 or the current Brief 45/10) would be acceptable in this instance.

A tax case clarifying the determination of the amount qualifying for capital allowances in the context of capital expenditure on the fitting out and refurbishment of commercial premises was the case of JD Wetherspoon plc ((i) JD Wetherspoon plc v HMRC [2008] SPC 657 and (ii) JD Wetherspoon plc v HMRC TC00312 [18 December 2009], with a further hearing at the Upper Tribunal (iii) [2012] UKUT 42 (TCC), 31 [January 2012]). It discussed the extent to which alterations of an existing building might be incidental to the installation of plant or machinery and therefore treated as expenditure on that plant or machinery, as well as the method of allocating overhead costs across the categories of expenditure (where a reasonable method of allocation is permissible).

Integral features will not qualify as short life assets, (no special rate pool expenditure does). Where refurbishment programmes are normal business practice it will be relevant to consider short life asset elections for plant or machinery expenditure (that would otherwise qualify as integral feature expenditure) incurred up to the relevant date. Short life asset elections offer the opportunity to accelerate capital allowances where qualifying plant is sold or scrapped for less than tax written down value within a five year period. For companies there is a two year period in which to make such elections, being two years from the end of the accounting period in which the expenditure is incurred. For unincorporated businesses the time limit for elections is the normal time limit for amending the tax return for the tax year in which the accounting year ends (i.e. 12 months from 31 January following the end of the tax year).

As noted above if a mandatory pooling of fixtures is required within a short timescale after acquisition, this will increase the urgency for a capital allowance review of all property acquisitions within any transitional period and within the required timescale after purchase.

8.2 Transfers of lntegral Features between connected persons

For expenditure transferred between connected persons it is not possible to generate an entitlement to integral features allowance where previously there was none because the expenditure was incurred before the relevant date. Connected persons are defined using s575 CAA2001. For individuals this includes relatives, spouses or partners, while companies are connected with other companies or persons through control as defined by s416, ICTA 1988 (more than 50% of assets, income, issued shares and voting rights).

Where what is now an integral feature is transferred between connected parties, but is not qualifying expenditure as it was incurred before the relevant date, the expenditure may previously have qualified for PMA. Where companies transfer such an asset, the buyer and seller may elect (s16 -17 Sch 26, FA2008) within two years of the date of sale for the expenditure to remain in the plant or machinery (P&M) pool on transfer at tax written down value (TWDV). The buyer will then need to keep records of the seller's original cost (which might be greater than TWDV on transfer) to ensure the correct value for future disposal proceeds allocated to a pool. This will affect flexibility around the values for sl98 elections on transfers within a group. In the absence of an election the expenditure will need to be transferred from the buyer's P&M pool to an integral feature pool.

For similar transfers involving individuals and trusts, however, reclassification will have to take place in any event. Where a sale takes place between unconnected parties with a s198 election, the buyer must undertake an apportionment exercise (which the seller may not have to do for its own tax compliance). Buyers should therefore ensure that s198 elections specify the value attributable to integral features, whether or not the seller claimed integral feature allowances. It is understood that HMRC will no longer apply the concession mentioned in the Capital Allowances manual (CA26850 which accepts a degree of amalgamation of assets in certain s198 elections) so that s198 elections will need to identify the relevant assets more precisely now that integral feature legislation has been introduced.


Finance Act 2012 included provisions that will have significant implications for claiming capital allowances on fixtures. Fixtures qualifying for plant or machinery allowances are most likely to consist of integral features, though there may be other items which are not integral features but are legally regarded as fixtures. The new rules only apply to second hand fixtures – i.e. those that have been owned by someone prior to the current owner.

9.1 Period before 1/6 April 2012

The current system applies so that there is no requirement to pool expenditure or agree disposal/acquisition values between the parties to a property transaction. However a purchaser seeking to claim allowances will need to verify whether any previous owner has claimed capital allowances, and if so what disposal value the most recent past owner was required to bring into account (s185). If no claim has previously been made, then an apportionment of purchase price using a just and reasonable apportionment (s562) is required to determine qualifying expenditure. If there was a previous owner who was required to bring in a disposal value (which cannot exceed that owner's original cost) any claim for allowances cannot exceed the disposal value of the most recent previous owner required to bring a disposal value into account. However, if no previous owner has claimed since before 24 July 1996, then a full apportionment of acquisition price can be applied, regardless of original cost, and whether or not an owner prior to 24 July 1996 claimed capital allowances on those fixtures.

If the vendor has owned the building since before 1/6 April 2008, they will not have been able to claim integral features. Thus this is new expenditure for any acquirer, and expenditure will be an apportionment of the purchase price (using the procedure in s562).

This disposal value for fixtures in different circumstances is set out in the table at s196(1). Where the vendor (who has claimed allowances) disposes of the qualifying interest in land, the usual disposal value will be according to item 1 – that part of the sale price treated as qualifying expenditure by the purchaser. s62 limits this to the maximum of the vendor's acquisition cost. However, where the purchaser and vendor have not agreed what that disposal value is, the vendor is always open to a potential adjustment of their tax return if the purchaser includes a higher value (but not exceeding the vendor's original cost) than the vendor accounted for, and the higher value can agreed as a just and reasonable apportionment. If HMRC discovered the higher value after the enquiry period for the tax return is closed, its ability to make a discovery would depend on the level of disclosure of the disposal event in the submitted tax return, and its willingness to pursue a discovery might be influenced by the significance of any potential adjustment. Provided the vendor has not been careless in submitting the return, then for a company an enquiry can only be raised within four years of the end of the accounting period if there was insufficient disclosure of the disposal terms in the tax return. This time limit rises to six years in the case of careless behaviour and twenty years in the case of deliberate misstatement.

Similar conditions would apply to a disposal value required to be brought into account by a lessor as a result of a lessee paying a capital sum for a lease that includes an amount attributable to the fixture (item 5 in the table at s196(1)).

The vendor and purchaser can jointly elect for any value up to the full disposal value to be treated as the disposal value by making a s198 election (for a s196(1) item 1 disposal event) or a s199 election (for a s196(1) item 5 event), if the election is made within 2 years of the date of the disposal, and the election (or notice) must accompany the tax return for the accounting period when the election is effective.

In relation to integral features, if a vendor was unable to claim allowances because the owned the fixtures at 1/6 April 2008, then any new purchaser can apportion the acquisition price to that expenditure using the s562 procedure.

9.2 Period from 1/6 April 2012 to 1/6 April 2014

The transitional provisions provide that where the previous owner of the plant or machinery referred to in new s187A(1)(b) acquired and disposed of their interest in the fixtures before the commencement date (1 or 6 April 2012), then that period of ownership is treated as 'not occurring at a relevant earlier time' (see para 13 (1) of the draft legislation). This means that for the current owner, the existing capital allowance rules apply with respect to fixtures and integral features, so that there is only a requirement to pool the expenditure if there is a desire to make a claim, and there is no new time limit (within the current owner's period of ownership of those fixtures, even if that lasts beyond 1 or 6 April 2014) by which that pooling has to be achieved. However the notes below discuss the implications if the current owner wishes to sell their interest on or after 1 or 6 April 2012 and the requirements to be met by vendor and purchaser if the new purchaser is to be able to claim capital allowances on those fixtures.

From 1/6 April 2012 it will be possible to make a s198 election in respect of a s196(1) table item 9 disposal event (permanent discontinuance of a qualifying activity followed by a disposal of the qualifying interest), in addition to an item 1 disposal event.

For the transitional period between 1 or 6 April 2012 and 1 or 6 April 2014, those who sell/acquire fixtures will not be required to meet the pooling condition. This will mean that an acquirer in this period will only be able to preserve the value of allowances in respect of such expenditure if:

  • The vendor did not pool the expenditure (in which case the s562 apportionment process will apply for an acquirer able to claim allowances, subject to any previous owner having claimed when s185 and s62 will limit the capital allowance acquisition value for the purchaser); or
  • The vendor pooled the expenditure and either the fixed value or disposal value statement requirements are met. If the vendor has pooled the expenditure, in the majority of cases this will mean that the ability to claim allowances on this qualifying expenditure will be lost unless a s198 or s199 election is made. If it is not possible to agree values or get a s198/s199 election signed, then there will be recourse to the s563 Tribunal process.

Prior to 1/6 April 2012 the s563 procedure for referral to a Tribunal requires both parties to make the application. The new proposals amend this requirement, so that only one of the parties need apply. The mechanics of the Tribunal process are still being worked out and it is expected guidance will be issued in due course. The latest indications are that the application will be heard before the First Tier Tribunal, and each party will bear their own costs. It is expected that the majority of such Tribunal cases should be relatively straightforward and could be dealt with under the simplified process by written submissions from both sides. More complicated cases will require a hearing, and even though land values may be required to determine the capital allowance position, it is not envisaged these hearings will need to be heard before a land tribunal.

The new s187A will not apply to an owner at 1/6 April 2012 in relation to their previous purchase of the building for that owner's own purposes, as the transitional rules mean that any expenditure of a previous owner before the commencement date is not treated as having been incurred at a 'relevant earlier time'. Thus if the existing owner is unaware of certain qualifying fixture capital allowances and on sells the building after 1 April 2012 having owned it continuously since that date, despite the fact that they could have claimed allowances on that expenditure if they had known about it, this will not prevent the new acquirer from claiming under the s562/s185 procedure.

In relation to integral features, if a vendor was unable to claim allowances because they owned the fixtures at 1/6 April 2008, then any new purchaser at 1/6 April 2012 onwards will be able to apportion the acquisition price to that expenditure using the s562 procedure, as it will not come within the new s187A.

From 1/6 April 2012 if a purchase is made from a vendor who was able to claim capital allowances on fixtures either (i) because they pooled the expenditure before sale and the fixed value condition nor disposal value statement conditions are not met, or (ii) they have acquired the expenditure on or after 1/6 April 2014, and either not pooled the expenditure, or pooled the expenditure but the fixed value condition and disposal value statement conditions are not met, then neither the current nor any future owner will be able to claim allowances in respect of that expenditure.

If the vendor in a transaction on or after 1/6 April 2012 is a non-taxpayer, further work will need to be done to determine the value of allowances claimed depending on the tax status of owners prior to them, and the date any qualifying expenditure was incurred.

9.3 Period from 1/6 April 2014

For transactions taking place on or after 1/6 April 2014 there will be a mandatory pooling requirement for the vendor in order for the purchaser to establish entitlement to claim capital allowances on fixtures acquired second-hand where a previous owner was able to claim capital allowances. This will mean that no allowances can be claimed on fixtures unless:

  1. Neither the vendor nor a previous owner was able to claim capital allowances on the fixtures (so mandatory pooling condition cannot be met and the new CAA01 s187A does not apply); or
  2. The pooling condition is met - the expenditure has been allocated to a pool by the vendor before the date of disposal, or a first year allowance has been claimed in respect of that expenditure, and either of the following two conditions is met;

    1. Fixed Value: the vendor has been required to account for a fixed value for the disposal under items 1, 5 or 9 of the table in CAA01 s196, and that value has been reached either (a) by determination of a Tribunal as a result of an application under CAA01 s563, where the application to the Tribunal is made within two years of the date of disposal/acquisition, or (b) a s198 or s199 election is made within two years of the date of disposal/ acquisition, or (c) if the vendor was a person not entitled to claim allowances, that the purchaser has obtained a written statement from the past owner (the most recent person able to pool the expenditure) that evidences the disposal value that was required to be brought into account; or
    2. Disposal Value Statement: the vendor has been required to bring a disposal value into account under item 2 or 3 of the table in s196 or item 7 of the table in s61, and has made a written statement of that value to the purchaser within two years of the date of the disposal to the purchaser.

As pooling is only required before disposal, there should not be undue pressure on existing owners to pool expenditure within a minimum period of time after acquisition. However a vendor who has pooled expenditure and who is interested in certainty for tax would be advised to agree with the purchaser the disposal value they will be required to account for (through s198/s199 elections) to minimise any possible balancing allowance or risk of enquiry. If no s198/199 election is made post April 2012 that does not mean the disposal value for the vendor is necessarily nil or £1.

From a negotiating perspective if it is the potential buyer who finds value in potential capital allowance claims, the buyer may be willing to incur the vendor's expenditure to identify and pool them to reserve the allowances. However where there is more than one potential buyer, this process may lead to excessive costs being incurred for unsuccessful buyers. Vendors seeking to identify all possible value in their property, however, may want to identify all possible capital allowance expenditure prior to sale, to make the building more attractive to a potential purchaser who is interested in the allowances and in an attempt to maximise the sale price.


For plant and machinery capital allowance purposes a furnished holiday letting business (which can include property located in the European Economic Area) is regarded as a trade and a qualifying activity. Typical P&M that qualifies for capital allowances in an FHL can include:

  • all loose furniture and equipment;
  • fitted kitchens and bathrooms;
  • swimming pools;
  • heating, ventilation and air conditioning installations;
  • aspects of electrical systems (depending on when the expenditure was incurred).

However, if plant and machinery on which capital allowances are claimed is partly used for private purposes (for example outside the holiday letting season) an appropriate fraction only of the capital allowances will be due, as with any capital allowances claim where there is private use. Where a single price has been agreed for the purchase of a property it may be possible to agree an appropriate apportionment of that purchase price to P&M qualifying for capital allowances. Some capital allowance specialists have indicated that for furnished holiday letting properties, typically, somewhere between 12% and 30% of the purchase price of a property could be treated as P&M depending on the property spec (subject to any adjustment for private use).

The tax treatment of furnished holiday letting businesses changed with effect from 1 April 2011 for companies and 6 April 2011 for unincorporated businesses. There are new provisions providing that an election can be made for certain underused accommodation to be treated as if it had met the furnished holiday letting requirements for a maximum of two years. Where this election is made, capital allowances can still be claimed on qualifying equipment. Where a property moves from being qualifying to non-qualifying, or vice versa, however, there is a disposal (or acquisition) event where the plant or machinery is treated as disposed or (or acquired) at market value on the date of change (this will be the relevant year of assessment for a furnished holiday let property).


Extensive consultation took place on the taxation of cars used for business purposes before the Finance Act 2009 changes were introduced. Prior to that, FA 2008 reduced the CO2 emissions levels of cars qualifying for 100% FYA on cars purchased on or after 1April 2008 from 120 g/km to 110 g/km, extending the availability of this particular allowance from 31 March 2008 to 31 March 2013. Finance Bill 2013 will extend this FYA to 31 March 2015.

The expensive car category of allowance in existence prior to April 2009 has been removed for new expenditure after the relevant date (1 April 2009 for companies and 6 April 2009 for unincorporated businesses), and replaced with a pooling system based on CO2 emissions. Transitional rules will operate for expensive car pools in existence on the date of change for a period of five years, where the single asset pools will continue to attract a 20% writing down allowance. Any balance in these pools remaining at the beginning of chargeable periods commencing on or after 1 April 2014 (companies) or 6 April 2014 (unincorporated businesses) will be transferred to the general pool. Anti-avoidance provisions preclude certain schemes from accelerating capital allowances on pools containing cars.

The following table sets out the capital allowance treatment for expenditure on cars in different categories incurred in each of the three years 2007/08 to 2013/14.

Car category



2009/10 to 2012/13


Low CO2 emission cars

100% if emissions do not exceed 120g/km

100% if emissions do not exceed 110g/km

100% if emissions do not exceed 110g/km

100% if emissions do not exceed 95g/km

Inexpensive cars

If cost does not exceed £12k, allocate to general pool – 25% WDA

If cost does not exceed £12k, allocate to general pool – 20% WDA



Expensive cars

If cost exceeds £12k allocate to single asset pool – 25% WDA, restricted to max £3k

If cost exceeds £12k allocate to single asset pool – 20% WDA, restricted to max £3k



Cars with CO2 emissions not exceeding 160 g/km (130g/km for 2013/14)



Allocate to general pool – 20% WDA

Allocate to general pool – 20% WDA

Cars with CO2 emissions exceeding 160 g/km (130g/km for 2013/14)



Allocate to separate pool attracting special rate WDA

Allocate to separate pool attracting special rate WDA

Note a consequence of the combined pooling for cars in 2009/10 is that there will be no balancing allowance on the disposal of cars allocated to the pools, in contrast to the situation for expensive cars currently allocated to a single expensive car pool. However cars with an element of private use (which could cover business cars in unincorporated businesses, but not companies) will continue to be allocated to single asset pools, and so will still be subject to a balancing charge or allowance on disposal.

On 24 March 2010 the government announced that new and unused goods vehicles would qualify for a 100% writing down allowance from 2010/11 to 2014/15 provided they could not produce CO2 emissions. This covers expenditure between 1 April 2010 and 31 March 2015 for companies and 6 April 2010 and 5 April 2015 for unincorporated businesses. The total expenditure permitted for each undertaking will be €85m over the five year period and there are other EU state aid conditions. The legislation can be found at Finance (No 3) Act 2010 Schedule 7.


With the reduction in rates of allowance for general plant or machinery and some categories of plant or machinery being reclassified from qualifying for main pool allowances to qualifying for the 10% special rate pool, it will be worth considering whether to specify equipment qualifying for 100% ECAs in any refurbishment programme.

With effect from 1 April or 6 April 2012 ECAs will not be available if the plant or machinery is used in a business which attracts feed-in tariffs (FITs) or renewable heat incentives (RHIs). The water technology and energy technology lists should be checked to confirm that the plant or machinery is on the list when the expenditure is incurred and the claim made. The lists (which are updated periodically) can be accessed at

The payable ECA credits introduced by Finance Act 2008 permit the part of a company loss generated by expenditure on ECA qualifying equipment to be surrendered in return for a repayment calculated at 19% of the loss surrendered.

Adjustments to the payment may occur in subsequent periods (e.g. where an ECA certificate is revoked, where an amended claim is submitted, or where ECA qualifying equipment is sold within four years of the end of the chargeable period in which the original claim is made). Where the adjustment reduces the amount of payable ECA the associated loss will be reinstated. However, where the company realises a loss on disposal of ECA qualifying equipment on which it has obtained an ECA payment, it will be able to retain the portion of the ECA payment relating to the realised loss.

The tax repayment cannot exceed the larger of:

  • the company's PAYE and NIC liabilities for payment periods ending in the chargeable period;
  • £250,000.

A loss can only be used once and a company may choose how much of the loss to surrender. In addition a loss can only be surrendered if other forms of loss relief are unavailable (such as relief against other or earlier profits, group or consortium relief). The rate of tax by which the repayment is calculated is 19% (this compares with11% for financial year beginning 1 April 2012 for R&D tax credit and 16% for Land Remediation (LRR) tax credit). Thus the maximum loss that can be surrendered for a payment under the ECA loss facility is £1,315,789, regardless of the PAYE/NIC liabilities, or more if the PAYE/NIC liabilities are greater than £250,000. It will not be possible to use the same loss to claim for tax credit repayment under the ECA, R&D and LRR facilities.


Finance Act 2008 phased out IBAs and ABAs so that those allowances are no longer available from April 2011, and as a reminder no balancing adjustments on disposal of industrial or agricultural buildings have been available since 21 March 2007. The allowances were phased out as follows:

  • 2008/09 75% of previous full rate;
  • 2009/10 50% of previous full rate;
  • 2010/11 25% of previous full rate.

These rates are time apportioned where the accounting period straddles 1 April (for corporation tax) or 5 April (for income tax) each year, although there is no rounding to two decimal places as for P&M transitional allowances. Where the full rate of allowance was previously 4% prior to 2008/09 or there is new expenditure, the rate of allowance for 2008/09 will be 3%. The reductions work in a similar way for the other years.

While IBA legislation is removed from April 2011, clawback of allowances via a balancing charge is retained for enterprise zone allowances (EZAs) where there would have been a balancing event within seven years of the first use of the building. Thus if a claim to EZA was made in 2010, and the building was first used on 1 December 2010, there would be a risk of a balancing charge if the building was disposed at a time before 1 December 2017.

Anti-avoidance measures have also been introduced with effect from 12 March 2008 to prevent connected parties from obtaining multiple WDAs by transferring properties to connected entities with different year ends in order to claim extra IBAs. Any such transactions will now have a time apportionment feature to restrict the IBAs available.

In view of the phasing out of relief it will be worthwhile reviewing any open tax returns to ensure all balancing allowances have been claimed where qualifying expenditure has been disposed or replaced, and that all capitalised revenue expenditure has been properly identified.

With respect to fixtures in a building that was an industrial building for the purpose of what was CAA01 part 3, the amount of plant or machinery allowances which a new owner can claim for is restricted according to the residual qualifying expenditure at acquisition (CAA01 s186). This section has been amended so that references to CAA01 part 3 become references to Part 3 immediately before its repeal by FA08 s 81 (see FA08 Sch 27(5)). However this restriction does not apply to what are former agricultural buildings to which CAA01 part 4 applied, and it does not apply to plant or machinery where expenditure was incurred before 24 July 1996.


The legislation covered in this briefing note has introduced various anti-avoidance measures that stop avoidance arrangements involving chains of leases, the interaction of the capital allowance and long funding lease rules on disposals and sale and finance leaseback arrangements. These arrangements are not dealt with in this briefing note.


1 NACE classification means the first level of economic activities classification published in European Union Regulation (EC) No 1893/2006

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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