L5 Capital allowances

Question 1

are capital allowances and depreciation allowable deductions against trading profits?

why is it important to calculate capital allowances?

Answer 1

no

Because calculating capital allowances is the second step to calculating trading income.

Question 2

what are given to businesses against adjusted trading profits?

Answer 2

capital allowances

Question 3

why is it important to think about small businesses in regard to this topic?

Answer 3

L4 we spoke of how small businesses can opt for a cash accounting basis for calculating their taxable profits and as a result most capital expenditure, excluding cars, will be an allowable expense for these small businesses

Question 4

why is it a problem to ID P&M?

Answer 4

statute doesn’t provide a definition of plant and machinery and therefore it has been left to case law to determine whether the expenditure qualifies. (i.e. capital allowances)

Question 5

what is the general rule to qualify for capital allowances under plant and machinery?

Answer 5

the expenditure must perform a function in the trade, and not simply provide a setting.

you use the item to carry on the trade, not provide a setting

YOU DO BUSINESS WITH P&M NOT IN IT

Question 6

HOW DID THE COURT CLASSIFY THE FOLLOWING EXPENSE:

“Dry dock for the repair and maintenance of ships”

Answer 6

function so capital allowances allowed

Question 7

HOW DID THE COURT CLASSIFY THE FOLLOWING EXPENSE:

“moored ship used as a floating resteraunt”

Answer 7

setting so capital allowances not allowed

Question 8

HOW DID THE COURT CLASSIFY THE FOLLOWING EXPENSE:

“swimming pool in a holiday camp”

Answer 8

function so capital allowances allowed

Question 9

HOW DID THE COURT CLASSIFY THE FOLLOWING EXPENSE:

“false ceiling to hide electrical cables”

Answer 9

setting so capital allowances not allowed

Question 10

HOW DID THE COURT CLASSIFY THE FOLLOWING EXPENSE:

“petrol station canopy”

Answer 10

setting so capital allowances not allowed

Question 11

HOW DID THE COURT CLASSIFY THE FOLLOWING EXPENSE:

“football stand”

Answer 11

setting so capital allowances not allowed

Question 12

HOW DID THE COURT CLASSIFY THE FOLLOWING EXPENSE:

“decorative screens in building society window with name of society displayed on them”

Answer 12

function so capital allowances allowed

Question 13

HOW DID THE COURT CLASSIFY THE FOLLOWING EXPENSE:

“golf putting green”

Answer 13

setting so capital allowances not allowed

Question 14

how are capital allowances calculated?

Answer 14

they are calculated on the cumulative value of a pool of expenditure at the period end.

Question 15

how many pools exist and what are they?

Answer 15

There are two pools. the special rate pool and the main (general) pool.

also there may be a non pooled assets that need their own column or are grouped together in a diff pool

Question 16

what pool will most assets that qualify for capital allowances go in?

Answer 16

the main (general) pool

Question 17

what do you do if an item is scrapped or sold during the year?

what if the sale proceeds show a profit has been made?

Answer 17

the sale proceeds are removed from the pool.

if profit has been made you only deduct the cost of the asset.

so the rule is you take the lower of the sale proceeds and the cost of the asset and deduct this.

Question 18

what kind of assets go in the special rate pool?

Answer 18

in this pool is assets that attract capital allowances at a different lower rate.

Question 19

what assets are known to go in this special rate pool?

Answer 19

1. Cars with CO2 emmisions greater than 110g/k. (note that cars with CO2 emmisions 50-110 go in to general pool, and below 50g/km a special first year allowance applies).
2. ‘integral features - electrical systems, water systems, escalators, lifts, heating and air conditioning.
3. Thermal insulation
4. Assets expected to have a useful life of >25 years only if the business spends £100,000 or more on such assets each year.

Question 20

what would go in the non-pooled assets pool?

Answer 20

These are assets that need to be kept seperate from the main and general pool. They will be kept seperate in a pool or column of their own.

Question 21

when would you need to create a seperate pool (so away from main and special)

Answer 21

when it has an element of private use.

Question 22

when can you claim a Written down allowance (WDA) and what on

Answer 22

you can make a claim for a WDA for each chargeable period on each pool and all non-pooled assets

nb for sole traders and parternships the chargeable period will generally be the accounting period.

Question 23

how do you calculate a WDA

Answer 23

calc’d on the bf balance of the pool plus additions and less disposals.

Question 24

for a WDA calculation:

What would additions include

Answer 24

• Bring in at cost
• Only include VAT if it cannot be recovered
• Individuals may bring their own, personally owned assets into the business. When this happens, the acquisition cost for capital allowances purposes is taken as market value when first used in the business.

Question 25

for a WDA calculation:

what would disposals include?

Answer 25

• Bring in at lower of sale proceeds and price paid

* If taken out of business by owner or given to employee use market value at that date for sale proceeds

Question 26

what WDA can be claimed on each pool?

Answer 26

WDA @ 8% can be claimed on special rate pool assets.

For all other assets WDA @18% can be claimed.

Question 27

what do you do if the chargeable period is more or less than 12 months?

Answer 27

You need to time apportion the capital allowance

Question 28

what happens to WDA if the asset was bought during the accounting period

Answer 28

nothing. the WDA is not affected by this. it would be the same if asset was bought on first or last day of accounting period.

Question 29

What is the Tax written down value (TWDV)?

Answer 29

this is the balance on the main pool.

Question 30

what if the TWDV is £1,000 or less before any annual writing down allowances have been calculated?

Answer 30

any allowance may be claimed to write off the whole of the pool.

Question 31

what is First year allowances (FYA)?

Answer 31

This was introduced to encourage capital investment for limited periods at varying rates over the last few years on unused (not second hand) plant and machinery.

Question 32

what can you claim FYA on? and how much?

Answer 32

you can claim 100% FYA on:

• low emission cars (<50g/km)
• zero emission good vehicles
• designated energy saving and water technology
• qualifying R&D expenditure

Question 33

what was brought in to replace FYA?

Answer 33

Annual investment allowance (AIA)

Question 34

why was the AIA introduced?

what does it not apply to?

Answer 34

to encourage businesses to invest in P&M.

Applies to most P&M but not cars.

Question 35

what is the maximum AIA amount for all periods?

Answer 35

£200,000

Question 36

what allowances can therefore be claimed on:

1. “new machine £508,000 on 1/10/17”
2. “Energy saving boiler £62,000 on 1/5/18”

Answer 36

1. The full 200k AIA can be claimed on this as AIA can be claimed on most P&M except for cars
2. Can claim FYA on this as it is “designated energy saving and water technology”

Question 37

three types of allowances allowed?

Answer 37

AIA, FYA and WDA

Question 38

what persons do “private use assets” apply to?

what column does assets that have an element of private use go?

Answer 38

Sole traders and partners. NOT EMPLOYEES.

They go in their own column.

Question 39

with private use assets, how much of the capital allowance is an allowable deduction from trading?

i.e. how are these accounted for?

Answer 39

you can deduct the business proportion of the capital allowance. BUT you must work out the full FYA/WDA and deduct it from the pool to work out the carry forward figure.

So put the full figure in for the FYA AND WDA and carry this down for the totals for each pool. however when you plug figures in the allowance column, multiply it by the business use percentage given.

Question 40

what if an employee has private use of an asset?

Answer 40

full capital allowances are claimed by the business owner and the employee may suffer a benefit charge (see Lecture 3).

Question 41

what is the WDA for private use assets?

Answer 41

WDA @18% if it would normally have gone to the main pool and WDA @ 8% if it would normally have gone to the special rate pool

i.e. what pool should it be in if it was not in its own pool as a result of being used for private use?

Question 42

what is a single pool asset

Answer 42

this is an asset that has its on pool. this could be due to its short life or private use.

Question 43

what adjustment is made for the sale of a single pool asset?

Answer 43

For the sale of a single use asset:

Take the lower of the original cost of the asset and the sale proceeds and deduct from TWDV.
*same as for Main/general pool

Question 44

what WDA is given in the year of disposal of a single pool asset?

Answer 44

No WDA is given in the year of disposal

Question 45

What is given in the year of disposal of a single pool asset instead of a WDA?

Answer 45

balancing allowance if the TWDV is positive to write off the value of the single pool asset to nil.

balancing charge if the TWDV is negative to write off the value of the single pool asset to nil.

*remember if the asset has a private use element then only the business use element is chargeable/allowable.

Question 46

what happens if you sell an asset mid taxable year? (what is it)

i.e. how do you calc the WDA for this.

Answer 46

The taxable year is 6/4/18 to 5/4/19

If you sold an asset in Dec. you need to write off the disposal amount before you calculate the WDA. WDA is therefore not affected

Question 47

If you are told that cars/assets are used for private use, what do you do?

Answer 47

Each asset will be givin its own pool (column). you then work out as normal and carry down all allowances to give the TWDV for the next period. however in the allowances column which shows the amount of the allowance that can be claimed, you must multiply this by the % of business use. this is because only the business use can be claimed.