What does section 244 of the Capital Allowances Act 2001 do?

Section 244 prevents additional VAT liabilities from being treated as qualifying expenditure for capital allowances where the lessor does not bear the non-compliance risk. It extends the section 225 restriction so that subsequent VAT adjustments connected to restricted expenditure cannot generate new qualifying expenditure, closing a potential circumvention route.

How does section 244 interact with the section 225 restriction on leasing arrangements?

Where section 225 restricts qualifying expenditure because more than half the lessor's risk has been removed, section 244 ensures any additional VAT liability arising on that restricted expenditure is also blocked. This applies whether the additional VAT liability is incurred by B or by the lessor, maintaining the integrity of the section 225 restriction.

What is an additional VAT liability in the context of capital allowances?

An additional VAT liability typically arises when the VAT treatment of an asset changes after initial expenditure — for example, a change of use triggering an adjustment under the capital goods scheme. Normally it can count as qualifying expenditure for capital allowances, but section 244 blocks this where the underlying expenditure was already restricted under section 225.

Can B claim capital allowances on additional VAT liabilities incurred by the lessor under section 244?

No. Section 244 blocks additional VAT liabilities from being qualifying expenditure regardless of whether they are incurred by B or by the lessor, provided they relate to expenditure already restricted under section 225. This prevents either party's subsequent VAT adjustments from creating fresh capital allowances entitlements in non-compliant leasing arrangements.

Capital Allowances Act 2001 section 244

B's qualifying expenditure if lessor not bearing non-compliance risk

Section 244 prevents an additional VAT liability from being treated as qualifying expenditure for capital allowances purposes where the lessor is not bearing the non-compliance risk in a leasing arrangement.

Where section 225 applies because more than half the risk to the lessor has been removed, any additional VAT liability connected to the restricted expenditure is also blocked from being qualifying expenditure.
This applies to additional VAT liabilities incurred by B (the person claiming allowances) in respect of B's own expenditure that is subject to the section 225 restriction.
It equally applies to additional VAT liabilities incurred by the lessor in respect of the lessor's expenditure that falls within the section 225 restriction.
The effect is to ensure that the section 225 restriction cannot be circumvented through subsequent VAT adjustments generating fresh qualifying expenditure.

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