4. TC - Capital Allowances Flashcards
What are the steps to tax a sole trader?
- Adj profits for the acc period
- Deduct capital allowances for that acc period
= Adj trading profit for acc period - Consider which tax year to tax this acc period in
What are capital allowances?
They are the tax version of dep’n on P&M
Define plant and machinery
Assets with which the business operates rather than IN which it operates
i.e. petrol pumps/atmospheric lighting rather than garage canopy/general lighting
Define machinery
Machinery includes all machines, motor vehicles and computers
Define plant
Plant includes fixtures, fittings, furniture and equipment
Give some examples of items that have been specified as plant by tax legislation
- Thermal insulation of a building
- Building alterations incidental to installation of plant and machinery
- Licence to use computer software
- Fire safety equipment e.g. fire alarms/sprinkler systems
Give some examples of items that have been held to be plant in case law
- Moveable office partitioning
- Free standing decorative screens
- Dry dock
- Swimming pool at caravan park
- Light fitting/decor/murals in a hotel used to create atmosphere
- Special display lighting
Give some examples of items that have been held to NOT be plant in case law
- Ship used as floating restaurant
- Football ground stand
- False ceilings
- Shop fronts, tiles, water tanks, staircases and raised floors in restaurants
- petrol station canopy
- Building housing car wash machinery
Are the following plant according to case law?
- Moveable office partitioning
YES
Are the following plant according to case law?
- Thermal insulation of a building
YES
Are the following plant according to case law?
- Building alterations incidental to installation of plant and machinery
YES
Are the following plant according to case law?
- Licence to use computer software
YES
Are the following plant according to case law?
- Fire safety equipment e.g. fire alarms/sprinkler systems
YES
Are the following plant according to case law?
- Free standing decorative screens
YES
Are the following plant according to case law?
- Dry dock
YES
Are the following plant according to case law?
- Swimming pool at caravan park
YES
Are the following plant according to case law?
- Light fitting/decor/murals in a hotel used to create atmosphere
YES
Are the following plant according to case law?
- Special display lighting
YES
Are the following plant according to case law?
- Ship used as floating restaurant
NO
Are the following plant according to case law?
- Football ground stand
NO
Are the following plant according to case law?
- False ceilings
NO
Are the following plant according to case law?
- Shop fronts, tiles, water tanks, staircases and raised floors in restaurants
NO
Are the following plant according to case law?
- petrol station canopy
NO
Are the following plant according to case law?
- Building housing car wash machinery
NO
When are second hand fixtures included in the purchase of the building and the seller had previously used them in their trade, 2 conditions must be met for capital allowances to be available to the purchaser?
- The seller claimed FYAs on the fixtures or had allocated them to a capital allowance pool before the sale (and therefore given the AIA and/or WDAs)
AND - The value of the fixtures has been fixed at a value no higher than the seller’s original cost. This is usually done with a joint election.
i.e. a proportion of the proceeds on sale of the building has been allocated to them.
BUT if the election isn’t made, cap allowances aren’t available to the purchaser., but any disposals of the fixtures are still incl in the cap allowances comp of the seller
What are the 3 main pools of plant and machinery examinable in Tax Compliance?
Single asset pools
Special rate pool
Main/general pool
How are capital allowances calculated in single asset pools?
Capital allowances are calculated separately for each asset that is partly for private use of the business owner, and for each short life asset
What is included in the special rate pool?
Includes long life assets, integral features, thermal insulation, solar panels, and certain cars
What is included in the main pool?
All other assets are pooled together that aren’t in the special rate pool or any single asset pools.
Allows a calculation of a single capital allowance
What is tax written down value?
The balance on each pool
It is the tax equivalent of the carrying amount
How is pre-trading capital expenditure treated for capital allowances and VAT?
Pre-trading capital expenditure is treated as incurred on the first day of trading
If a trader can reclaim VAT on the asset, include the asset net of VAT in the cap allowance comp, otherwise include VAT (e.g. cars)
In the exam you should assume the correct VAT treatment has been applied unless told otherwise.
For assets included for capital allowances, should VAT be included?
If a trader can reclaim VAT on the asset, include the asset net of VAT in the cap allowance comp, otherwise include VAT (e.g. cars)
In the exam you should assume the correct VAT treatment has been applied unless told otherwise.
What is the capital allowances pro forma?
Along the top Accounting period AIA/FYA Main pool SRP PU asset SLA Allowances
Down side TWDV b/f Additions- no AIA/FYA Additions - AIA X AIA (X) Disposals (BA)/BC
WDA @ 18% [Main pool] WDA @ 6% [SRP] WDA @ 18%/16% [PU assets x BU%] Additions- FYA X FYA @ 100% (X) Total allowances (RHC)
TWDV c/f
What is the capital allowance % for FYA?
100%
Give some examples of assets qualifying for a 100% FYA
- Designated energy saving and water technologies (e.g. technology efficient hand dryers)
- New (i.e. not second hand) zero emissions goods vehicles
- Expenditure by a company on new (i.e. not second hand) P&M for use one xpanding or new activities within designated assisted area in an enterprise zone within 8 yrs of the zone being established
- Electric charge point equipment before 5 April 2023
- New (i.e. not second hand) low emission cars (i.e. under 50g/km of CO2)
- All research and development capital expenditure, excluding land
How should FYA be pro-rated?
FYA is NEVER pro-rated
How are items in the main pool taxed?
Main pool: WDA is 18% pa x TWDV
WDAs are given for periods of acc so where there is a short/long period of acc, the WDA is pro-rated accordingly
Is WDA always 18% for the main pool?
NO- given for periods of acc so where there is a short/long period of acc, the WDA is pro-rated accordingly
When do cars enter the main pool and why?
Second-hand or zero emission cars enter the main pool
As they are not eligible for FYAs
Car emissions with emissions over 50g/km up to 100g/km enter the main pool
Describe the special rate pool
The WDA is 6% x TWDV from 6 April 2019 (1 April 19 for companies)
It was 8% prior to that
If the acc period straddles the rate change then a hybrid rate must be used, rounded to 2 decimal places.
What happens if an acc period straddles the change in TWDV % for the special rate pool
What is the date where it changes?
If the acc period straddles the rate change then a hybrid rate must be used, rounded to 2 decimal places.
6% after 6 April 19 (1 April 19 for companies)
8% before
Give some examples of assets that would be included in the special rate pool
Long life assets Integral features Thermal insulation Solar panels High emission cars
Cars purchased on/after 6 April 2018 (1 April 2018 for companies) with CO2 emissions > 110g/km
What happens if the main pool or special rate pool are classified as ‘small’
If the TWDV before the WDA is less than £1,000 pa, the pool may be written down to nil instead of carrying forward a small balance
Note: the £1,000 should be pro-rated for short/long periods of account
Give some examples of items that would be classified as integral features
- Electrical systems (including lighting systems)
- Cold water systems
- Space or water heating systems, powered systems of ventilation, air cooling or purification
- Lifts/escalators/ moving walkways
- External solar shading
How are expenditure on substantial rebuilding or replacement of integral features allocated on the tax comp?
Allocated to the special rate pool (rather than being treated as a revenue expense) if the total repair cost is more than 50% of the full replacement cost
Define a long life asset
P&M with an expected working life of at least 25yrs and total cost in a 12 month acc period of over £100k (pro-rate this for long/short acc periods)
Give some examples of assets that can’t be classified as long life assets
Cars
Ships
P&M used in retail shops, showrooms, offices, hotels or houses
What is the AIA limit, and when did it change, and what from?
£1,000,000 from 1 January 2019
before that it was £200k
What is AIA available to claim on?
AIA is available on the acquisition of any asset except a car
Does the AIA limit ever change?
AIA is time apportioned for acc periods that straddle the rate change
For the y/e 30 June 19 the max AIA would be £600k (6/12 x £1,000,000 + 6/12 x £200k)
What is AIA restricted to before 1 Jan 2019?
£200k for a 12 month acc period
What order is AIA allocated to assets to be the most tax efficient?
Allocate AIA against the lowest rate of allowances (SRP, then main pool, then private use assets)
What happens to expenditure that is in excess of the WDA?
It immediately qualifies for the normal WDA in the period of purchase and future periods
How are the following amounts apportioned depending on the length of the acc period
WDA
AIA
FYA
AIA and WDA and annual figures so are time apportioned for length of acc period
FYAs are never time apportioned
How are disposals of main/ special rate pool dealt with in the Tax comp?
For items sold from main/ special pool, before giving WDA for the period, deduct the lower of:
- Proceeds (use market val if the asset is taken out the business by the sole trader)
- original asset
How are disposals of main/ special rate pool dealt with in the Tax comp when they are part-exchanged?
If an asset is part exchanged for a new one the disposal proceeds are the part-exchange value.
The acquisition cost of the new asset is the total of the part-each proceeds and the cash amount paid.
Give some examples of items that end up single asset pool
Private use assets- assets with private use by owner (not employee)
Short life assets
What happens on the tax comp pro forma where the owner of the business has private use of an asset?
A separate column is set up for each pvte use asset
Calc allowances as normal but only claim the business proportions
What happens on the tax comp pro forma where the owner of the business has private use of an asset?
A separate column is set up for each pvte use asset
Calc allowances as normal but only claim the business proportions
When are balancing charges or allowances required?
When there is a disposal of an asset from a single asset pool, a balancing adj is calc by comparing proceeds with TWDV
Proceeds > TWDC - had too many allowances so balancing charge
Proceeds < TWDV - not had enough allowances so needs balancing allowance
When is a balancing charge required?
Proceeds > TWDC - had too many allowances so balancing charge
When is a balancing allowance required?
Proceeds < TWDV - not had enough allowances so needs balancing allowance
How are private use of assets dealt with in balancing adjustments?
If there has been any pate use of the asset, only the business proportion of the balancing adjustment can be claimed
Describe when balancing allowances and charges can occur?
On disposals from the main pool or special rate pool, no balancing charge can occur (unless ceasing to trade)
A balancing charge can arise however, if the main or special rate pool turns -ve following a disposal
Define short life assets
Main pool assets that are expected to be used for not more than 8 years
What difference can be made for short life assets on the pro forma?
A de-pooling election may be made to put a short life asset in its own pool (rather than the main pool) to enable the calc of a balancing allowance on the disposal
If not disposed of within 8 yrs, it is transferred to main pool at TWDV
What happens if de-pooling election is made for short life assets but it isn’t disposed of within 8 yrs?
It is transferred into the main pool at TWDV
What are the time limits for de-pooling election?
- Sole trader: First anniversary of 31 Jan following end of tax year in which period of acc of expenditure ends
- Company: 2 years after the end of acc period of expenditure
What is available when business is permanently discontinued?
No AIA, WDA or FYA is available in the final POA
Instead, normal capital allowances comp being prepared the following steps should be followed:
- Add in any additions made in the final period
- Deduct any disposals;s made in the final period (if the owner takes an asset treat it as sold for MV)
- Calc a balancing adj on each pool to bring the TWDCV c/f to nil
What are the steps to follow when trade is ceased and preparing the capital allowance computation?
- Add in any additions made in the final period
- Deduct any disposals;s made in the final period (if the owner takes an asset treat it as sold for MV)
- Calc a balancing adj on each pool to bring the TWDCV c/f to nil
Give some examples of qualifying expenditure for structures and building allowances (SBA)
Buildings including offices, retail and wholesale premises, factories, warehouses, hotels and care homes
Structures including roads, walls, bridges and care tunnels
What is SBA?
Structures and buildings allowances
Give some examples of expenses that are not qualifying expenditure for SBA?
Land
Stamp duty
Professional fees
What is SBA not available on?
Not available on residential property or buildings that function as dwellings
When can SBA be claimed (providing the asset is qualifying)
When the asset is brought into use
and must be time apportioned if that is part way through the acc period
When (and when not) are capital allowances available for cost of structures and buildings?
Not allowed on the actual cost of structures and buildings
But would be available on qualifying P&M purchased as well
What steps should be followed when disposing of structures and buildings?
- There is no balancing adjustment for the sller
- The base cost of the asset for the seller is reduced by the SBAs received
- The buyer takes over the remainder of the 50 years and receives a 2% SBA based on the original cost of the structure/ building
