Capital Allowances

Question 1

What are two types of expenditure which are specified in legislation as qualifying for capital allowances on plant and machinery?

Answer 1

1. Building alterations incidental to the installation of plant and machinery
2. Licence to use computer software

Question 2

Who is entitled to capital allowances?

Answer 2

Capital allowances are available to a taxable person who incurs capital expenditure on assets to be used for the purposes of a trade carried on by that person.

Question 3

Are capital allowances for a sole trader or a partnership calculated for each period of account and not for each tax year?

Answer 3

Yes

Question 4

what is a balancing adjustment?

Answer 4

Depending on the asset concerned, a balancing adjustment may arise in the year of disposal. This resembles a profit, or loss, on disposal for tax purposes.

A balancing charge may arise if the asset is sold for more than its tax carrying value (in other words, a profit on disposal).

A balancing allowance may arise if it is sold for less than its tax carrying value (in other words, a loss on disposal).

Question 5

what is a private use asset pool?

Answer 5

capital allowances are calculated separately for each asset that is partly for the private use of the business owner. Only the business use proportion of the allowance may be claimed

Question 6

What do you understand by the tax written down value?

Answer 6

This is the equivalent of the opening/closing carrying value for tax purposes. It represents the cost of assets acquired in prior periods which still have to be or have been written off for tax purposes.

Question 7

Is an AIA available for cars?

Answer 7

no

Question 8

What is the treatment for assets with private use by sole trader or partner?

Answer 8

seperate column

Question 9

What is the treatment of assets with private use by employees?

Answer 9

treat as normal with full allowances

Question 10

When does a balancing charge arise?

Answer 10

when the disposal value exceeds with TWDV b/f

Question 11

when does a balancing allowance arise?

Answer 11

when the TWDV b/f exceeds the disposal value

Question 12

Which allowances are given when trading ceases?

Answer 12

are no AIA, WDA or FYA instead add any additions and disposals and calculate a balancing adjustment on each pool to bring the TWDV\ C/F on each pool to nil

Question 13

What are capital allowances?

Answer 13

A form of depreciation for tax purposes, calculated at a standard rate. They are deducted from tax adjusted trading profits

Question 14

How do capital allowances differ from depreciation?

Answer 14

As the rate is standardised across businesses, capital allowances are less subjective than depreciation

Question 15

What are capital allowances only available for?

Answer 15

Plant and machinery
1. Plant - Fixtures, fittings, furniture and equipment
2. Machinery - All machines, motor vehicles and computers

Question 16

Define plant and machinery:

Answer 16

Assets with which the business operates rather than in which the business operates

Question 17

What does case law state about building alterations?

Answer 17

Building alterations which are incidental to the installation of plant and machinery also qualify as capital allowances

Question 18

What are the two categories of plant and machinery?

Answer 18

Private use asset pool
Main / General Pool

Question 19

What are the four types of capital allowances?

Answer 19

• Writing Down Allowance - WDA
• Annual Investment Allowance - AIA
• First Year Allowances - FYA
• Balancing Adjustments - BA

Question 20

What does AIA apply to?

Answer 20

All assets other than cars

Question 21

What is AIA?

Answer 21

Tax relief of up to 100% on qualifying expenditure in the year of purchase
There is a maximum AIA of £1,000,000 in a 12 month accounting period (should be scaled for shorter or longer periods)

Question 22

What happens if expenditure exceeds the maximum available AIA?

Answer 22

The remaining balance is eligible for WDA

Question 23

Can AIA be carried forward?

Answer 23

no

Question 24

What is WDA?

Answer 24

• An allowance of 18% x TWDV per accounting period
• This figure can be claimed as capital allowance and is deducted from the pool balance
• This is like the annual depreciation charge for tax purposes.

It is given on a reducing balance basis.

Question 25

What is exclusive for WDA and AIA?

Answer 25

It is not restricted by length of ownership

Question 26

What is FYA applicable to?

Answer 26

• New and unused zero-emission cars and goods vehicles
• Charging points for electric vehicles
• The FYA is never time apportioned for the length of the period or the length of ownership of an asset in the period.

Question 27

What is FYA?

Answer 27

Tax relief at 100% on certain assets in the year of purchase

Question 28

What is the limit of FYA?

Answer 28

There is no limit

Question 29

When disposing of an item from the main pool, what is deducted?

Answer 29

The lower of disposal proceeds or the original costs

Question 30

What is the small pool WDA?

Answer 30

If the balance on the mail pool is less £1,000 or less, the whole amount can be claimed

Question 31

What are proceeds assumed to be if the asset is not sold?

Answer 31

• The market value on the date of transfer (eg the asset is permanently removed for sole private use)
• The scrap value / compensation received

Question 32

What is the restriction on the Small Pool WDA?

Answer 32

• It is not available to private use assets
• and is time apportioned for periods not equal to 12 months and not given in the tax tables

Question 33

What adjustment is required when disposing of private use assets?

Answer 33

A balancing adjustment is required as there will be nothing else in the asset column therefore must reach zero

Question 34

Under what circumstances is no AIA, WDA or FYA applicable?

Answer 34

When a business is permanently discontinued

Question 35

What are the steps for capital allowance computation when a business cesses trade?

Answer 35

• Add in additions made in the final period
• Deduct any disposals made in the final period
• Calculate a balancing adjustment on each pool to bring the TWDV carried forward to £Nil.