Commentary on Sections Glossary Structure of Part 2 Section 240: Additional VAT liability
856.This section is based on section 37(4A) of CAA 1990. It applies if an additional VAT liability is incurred in respect of plant or machinery on which a short-life asset election has been made under section 85.
857.If a balancing allowance has been made following a disposal event in respect of a short-life asset pool, this section provides that a subsequent additional VAT liability may give rise to a further balancing allowance.
858.Normally, it is not possible for an additional VAT liability to be qualifying expenditure if it is incurred after the disposal of the plant or machinery. However, this section provides an exception if:
	the plant or machinery was subject to an election under section 85;
	a balancing allowance has arisen in the short-life asset pool;
	an additional VAT liability is incurred after the end of the chargeable period in which the balancing allowance was incurred; and
	the additional VAT liability was not taken into account when calculating the balancing allowance.
	Example
	S is a partially-exempt trader for VAT purposes. On 24 March 2002, S acquires a computer which is subject to the capital items legislation. For capital allowances, S elects for the expenditure on the computer to be allocated to a short-life asset pool.
	Suppose S prepares accounts to 30 June each year, but S’s VAT year ends on 31 March. Suppose S prepares quarterly VAT returns. On 1 May 2006, the computer is destroyed by fire. S is not insured for this loss. Suppose also that initial use of the computer was 90% for taxable supplies but this fell to 50% from 1 January 2006.
	Under the provisions of section 61, S brings in a nil disposal value into account in the short-life asset pool. This will give rise to a balancing allowance in the chargeable period ending 30 June 2006. Under the capital items legislation, S must account for an additional VAT liability to reflect the reduction in use for taxable supplies in the period before the computer’s destruction.
	This must be accounted for in respect of the VAT year ending 31 March 2007 and will be shown on the VAT return in respect of the quarter ending 30 September 2007.
	For the purposes of this section:S was entitled to a balancing allowance for the final chargeable period for the short-life asset pool (which ends on 30 June 2006),S incurred after the end of that period an additional VAT liability (on 31 March 2007); andS did not bring the additional VAT liability into account in determining the amount of the balancing allowance.
	As a result, this section entitles S to a further balancing allowance in respect of the additional VAT liability. Provided that the VAT return is made on time (and that S’s trade has not been discontinued before this time) the further balancing allowance will be made in the chargeable period ending 30 June 2007.