When does section 402 of the Capital Allowances Act 2001 apply to pre-trading expenditure on plant or machinery?

Section 402 applies where a person incurs expenditure on plant or machinery for mineral exploration and access, that plant or machinery was used at a particular source, and it was sold, demolished, destroyed or abandoned before the mineral extraction trade formally begins. This is the only circumstance under Part 5 where such expenditure qualifies.

How is qualifying expenditure calculated under section 402 if mineral exploration is still continuing?

If mineral exploration is still continuing at the relevant source on the first day of trading, the full amount of pre-trading expenditure on the plant or machinery qualifies as qualifying expenditure. However, any relevant receipts such as sale proceeds, insurance money or capital compensation must be deducted from that amount.

What is the six-year time restriction for qualifying expenditure under section 402?

If mineral exploration has already ceased at the source before the trade starts, only expenditure incurred within the six-year period ending on the first day of trading qualifies. Any relevant receipts must still be deducted. Expenditure incurred more than six years before the first day of trading does not qualify.

What are relevant receipts that must be deducted from qualifying expenditure under section 402?

Relevant receipts include net sale proceeds if the plant was sold, net amounts received for remains plus insurance money and capital compensation if demolished or destroyed, and insurance money together with other capital compensation if abandoned. These deductions ensure qualifying expenditure reflects only the net economic cost borne by the person.

Capital Allowances Act 2001 section 402

Pre-trading expenditure on plant or machinery

Section 402 deals with how pre-trading expenditure on plant or machinery used for mineral exploration and access can qualify for capital allowances when that plant or machinery is disposed of before trading begins.

Pre-trading expenditure on plant or machinery used for mineral exploration qualifies for relief only if the asset is sold, demolished, destroyed or abandoned before the trade commences
If mineral exploration is still continuing at the source on the first day of trading, the full amount of pre-trading expenditure (less any relevant receipts) is qualifying expenditure
If mineral exploration has ceased at the source before the trade starts, only expenditure incurred within the six years ending on the first day of trading (less any relevant receipts) qualifies
Relevant receipts — which must be deducted from the expenditure — include sale proceeds, amounts received for remains after demolition or destruction, and any insurance money or capital compensation received on demolition, destruction or abandonment

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