What is the purpose of capital allowances?
Capital allowances are provided to give a business tax relief for capital expenditure on qualifying assets
Who may claim capital allowances?
Capital allowances are available to persons who buy qualifying assets i.e. plant and machinery on for use in a trade or profession.
Who are capital allowances not available to?
Capital allowances are not available to unincorporated businesses which use the cash basis
What is capital allowances given on?
Capital allowances are given on the original cost of a capital asset and all subsequent qualifying expenditure of a capital nature (e.g. improvements).
How is relief given for capital allowances?
- An allowable deduction in calculating the tax adjusted trading profit
- Calculated for a trader’s period of account (i.e. the period for which they prepare accounts).
What is the meaning of machinery?
Machinery’ has a commonly understood meaning. It includes all machines, computers, office equipment, etc.
What is the meaning of plant?
The term ‘plant’ however, is not clearly defined in the tax legislation. HMRC has however codified some rules based on decided court cases and has specifically deemed certain types of expenditure to be plant and machinery.
What is an active function?
Apparatus with which the business is carried on
What is a passive function?
The setting in which the business is carried on
What are the certain types of plant expenditure that are allowable?
Cost of alterations to buildings for the installation of plants
Expenditure on acquiring computer software.
What can not be plant for capital allowances?
Statute also makes it clear that land, buildings and structures cannot be plant for capital allowance purposes.
What type of cards are included in the main pool?
New or second hand cars with CO2 emissions between 76 g/km and 130 g/km or Second hand cars with CO2 emissions of 75 g/km or below
When an asset is disposed of, how does this affect the pool?
The pool value is reduced by the sale proceeds.
What are not included in the main pool? (5)
- New motor cars with CO2 emissions of 75 g/km and below or
- New or second hand cars with CO2 emissions in excess of 130 g/km
3, Assets that are used partly for private purposes by the owner of the business
- Expenditure incurred on short life assets where an election to de pool is made
- Expenditure incurred on items that form part of the ‘special rate pool’.
What is the AIA?
The annual investment allowance (AIA) is a 100% allowance for the first £200,000 of expenditure incurred by a business on plant and machinery.
What are the key rules for capital allowances? (6)
- Available to all businesses
- Available on acquisitions to both pools
- Not available on cars
- Limit of £200,000 in each 12 month period
- For long/short periods, this is prorated
- Not available in the accounting period in which the trade ceases
What happens when a business claims over £200,000 of AIA?
Any amount of £200,000 will qualify for WDA
What can you claim for new cars instead of AIA?
A 100% first year allowance (FYA) is available on the purchase of new low emission cars. - 75 or less grams
How is the first year allowance given? (6)
- In the period of acquistion, 100% FYA is given instead of WDA.
- Do not time apportion
- Does not need to be claim all.
- If only partially claimed, the balance of cost goes into the main pool but is not entitled to any other allowance in that year.
- Not given in final period of trading
- If the low emission car is not new (i.e. second hand) it is treated in the same way as a car with CO2 emissions of between 76 – 130 g/km.
How WDA given?
18% on a reducing balance basis in the main pool
What is WDA given on? (4)
- The unrelieved expenditure in the main pool brought forward at the beginning of the period of account (i.e. tax written down value) (TWDV),
- Any additions on which the AIA or FYA is not available, plus
- Any additions not covered by the AIA (i.e. exceeding the limit)
- After taking account of disposals
What does TWDV mean?
Tax written down value
What does TWDV brought forward include?
Includes all prior expenditure, less allowances already claimed.
What an asset is sold scrapped, how is this calculated?
- Disposal value is deducted form the total pf TWDC B/F on the pool plus additions to the pool not qualifying for AIA or FYA, or qualifying but not covered by AIA.
- WDA for the year is then calculated on the remaining figure
- If sale proceeds exceed original cost, sale proceeds are deducted from the pool restricted to the original cost of the asset.
In a summary, how is disposal treated in the pool?
On a disposal always deduct from the pool the lower of the sale proceeds and the original cost.
What is a balancing charge?
A balancing charge reduces the capital allowances claim in the period.
When a business ceases to trade, how is this claimed? (5)
- . Add in any additions made in the final period.
- Do not calculate any AIAs, WDAs or FYAs.
- Deduct any disposals made in the final period and any sale proceeds on the ultimate disposal of plant and machinery.
- Calculate a balancing charge (BC) or balancing allowance (BA) as appropriate.
- There should not be any balances carried forward at the end of trade.
At cessation if there is still a balance of unrelieved expenditure in the pool, how is this claimed?
When is the only time a balancing allowance will occur?
What is the balancing allowance?
The excess of the pool balance at the end of the final period of account over the sale proceeds received on all disposals, including on the ultimate disposal of plant and machinery.
What is classed as a low emission car?
75g/km or less
What is classed as a standard emission car?
What is classed as a high emission car?
130g/km or more
What can you claim for low emission cars?
If purchased new: eligible for 100% FYA
If second hand: treat as a standard emission car
What can you claim for standard emission cars?
Included in main pool as an addition not qualifying for AIA or FYA
What can you claim for high emission cars?
Include in the ‘special rate pool’ as an addition not qualifying for AIA or FYA
What is AIA not available for?
When an asset is used by the owner of the business, how is this treated?
Only the business proportion of the available capital allowances is available as a tax deduction.
How do you calculate allowances on capital used by the owner?
The AIA, FYA or WDA on the asset is based on its full cost but only the business proportion of any allowance is deductible in computing the taxable trading profit.
What is the WDA rate in the special rate pool?
8% for a 12 month period
What type of assets go in the special rate pool?
- Long life assets
- Integral features of a building or structure
- Thermal insulation of a building
- High emission cars
What are long life assets?
Plant and machinery assets with an expected working like of 25 years or more, with a total cost of £100,000 for a 12 month period
What things can not be classed as long life assets?
- Motor cars
2. Plant and machinery situated in a building that is used as retail shop, showroom, hotel or office.
What are classed as integral features? (6)
- Electrical systems
- Cold water systems
- Heating systems
- External solar shading
- Powered systems of ventilation, air cooling or air pollution,
- Lifts, escalators or moving walkways
What is the most beneficial order for claiming AIA?
- Special rate pool
- Main pool
- Short life assets
- Private use assets
When the balance on the main/special rate pool is £1000 or less before WDA, how can this be claimed?
The balance can be claimed as a WDA and written off in that year.
What is the limit for the small pool?
£1,000 limit for a 12 month period.
How is the small rate pool treated for different periods of time?
What is the short life asset election?
Enable businesses to accelerate capital allowances on certain qualifying expenditure.
What is qualifying expenditure for short asset relief?
All plant and machinery (with the exception of motor cars) which would normally go in the main pool
What should the intention be for short asset relief?
Where it is the intention to sell or scrap the item within eight years of the end of the period of account in which the asset is acquired.
What is the process for short life assets?
Each asset is subject to its own pool, on disposal within 8 years, a balancing allowance is calculated. The election must be made to enable assets to be treated separately by 1st 31st Jan. If no disposal within 8 years, move to main pool on first POA following 8 year anniversary.