CA23722 - How to determine the useful economic life
Source: gov.uk (2025-03-19)


CAA01/S91

The long-life asset test looks at the expected life estimated by reference to the facts when capital allowances are first claimed or when the asset was first brought into use if earlier.

The useful economic life begins when any person first brings the asset into use. Do not treat:
- holding the asset as trading stock; or
- construction of the asset
as use for this purpose.

The useful economic life ends when the asset ceases to be used, or to be likely to be used, by any person as a fixed asset of a business, for any business purpose.

The definition of useful economic life for PMA purposes differs from the accounting definition in one important respect: The accounting definition is the period over which an asset is expected to be available for use by a particular business or the number of production (or similar) units expected to be obtained from the asset by a particular business. By contrast, the definition of useful economic life in CAA01/S91(1) looks at the overall period of use in any business. If the asset is bought new and is likely to be scrapped at the end of its use in that business, the definitions will be the same and you should accept the economic life used for accounting purposes unless it is clearly not reasonable. However, if an asset has been bought second hand or is likely to be sold in working order for any business purpose, whether in the UK or overseas, you must take account of the periods of use by other owners.

Example

Brian purchases a seagoing cargo vessel for use in his shipping business. The vessel is expected to be seaworthy for 20 years and Brian treats the asset as having a useful life of 20 years for accountancy purposes. It is likely that when the vessel is no longer seaworthy, it will be sold to another business to use as a diver training vessel in a harbour for at least another 10 years. As the asset has an overall expected useful economic life of at least 25 years, it is a long-life asset for PMA purposes.

Note that once an asset has been treated as a long-life asset it continues to be treated as one even if its ownership changes except where the use by the new owner comes within the exclusions CA23750 (https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca23750).

The useful economic life may be influenced by expected physical deterioration through use or effluxion of time, reduced by economic or technological obsolescence, or directly governed by extraction or consumption as in the case of equipment in a mine. In cases of doubt, it might be helpful to consider the manufacturer’s specifications, industry press, insurance reports, financial forecasts/models and other professional evaluations of the asset. Furthermore, if the asset is not novel, it might be helpful to establish for how long similar assets have operated in practice, although it is possible that technological developments may result in newer models either having a longer or shorter economic life than their older counterparts. For example, if the rate of technological advancement has sped up in recent years and is likely to continue to progress, this may make it more likely that the asset will soon become obsolete. Conversely, developments in the durability of the materials used in the manufacture of an asset may mean that utilising the asset within a business remains viable for a longer period than might previously have been the case. Where the new asset replaces an existing asset the age of the old asset and what happened to it following disposal may be useful in considering the expected economic life of the new asset.