Capital allowances Flashcards
What is the purpose of capital allowances?
- are provided to give a business tax relief for capital expenditure on qualifying assets
Who may claim capital allowances?
- are available to persons who buy qualifying assets i.e. plant and machinery for use in a trade or profession
- are available to both sole trader and companies
What is qualifying expenditure (capital allowance)?
- are given on the original cost of a capital asset and all subsequent qualifying expenditure of a capital nature (e.g. improvements)
What is relief 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)
Definition of machinery
- has a commonly understood meaning
- it includes all machines, computers, office equipment
What does it mean if asset perform an active function? Plant and machinery?
- yes
- apparatus with which the business is carried on
What does it mean if asset perform a passive function? Plant and machinery?
- no
- the setting in which the business is carried on
Assets treated as plant by specific legislation
- the cost of alterations to buildings needed for the installation of plant
- expenditure on acquiring computer software
What assets deemed not to be plant?
- land, buildings and structures
Common examples of plant and machinery
- computers and software
- machinery
- cars and lorries
- office furniture
- moveable partitions
- air conditioning
- alterations of buildings needed to install plant and machinery
What is the main pool (general pool)?
- general expenditure on plant and machinery becomes part of it upon which capital allowances are claimed
- most items of plant and machinery purchased are included within the main pool
- some cars are also included at purchase: all cars with CO2 emissions between 1g/km and 50g/km, second-hand cars with zero CO2 emissions
- when an asset is acquired, the purchase price increases the value of the pool
- when an asset is disposed of, the pool value is reduced by the lower of sale proceeds and original cost
What items are not included in main pool?
- new zero CO2 emission cars
- new or second-hand cars with CO2 emissions in excess of 50g/km
- 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 annual investment allowance? (AIA)
- is a 100% allowance for the firs t £1,000,000 of expenditure incurred by a business in a 12 month period on plant and machinery
What are the key rules for the allowance?
- available to all businesses
- available on acquisitions of plant and machinery in the main pool and acquisitions of special rage pool items
- not available on cars
- limited to a maximum of £1,000,000 expenditure incurred in each 12 month period of account
- for long and short periods of account the maximum allowance is increased/reduced to reflect the length of the period
- not available in the period of account in which the trade ceases
- cannot be carried forward or back
First year allowance (FYA) - new zero emission cars
- not available on cars, however a 100% fist year allowance on the purchase of new zero CO2 emission cars
When is FYA given 100% to new zero emission cars?
- in the period of acquisition
- unlike AIA and WDA, the FYA is never time apportioned for periods of account greater or less than 12 months
- the taxpayer does not have to utilise all/any of the FYA
- if FYA not used at all, the WDA is available
- FYA not available in the final period of trading
Writing down allowances (WDA)
- an annual WDA of 18% is given on a reducing balance basis in the main pool
- the tax written down value brought forward includes all prior expenditure added to the main pool, less allowances already claimed
When is given writing down allowance (WDA)?
- 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
- any additions not covered by AIA
- after taking account of disposals
Shorter and longer periods of accounts what is reflecting the length of period?
- result in the AIA and WDA being reduced/increased to reflect the length of period of account
- FYAs are never adjusted to reflect the length of the period of account
According to what is applied WDA proportionally?
- according to the length of the period of account not a length of ownership
What are the steps when an asset is sold or scrapped?
- the disposal value (lower of sale proceeds and original cost) is deducted from the total of:
- tax written down value brought forward on the pool plus
- additions to the pool (additions not qualifying for either the AIA or FYA, and additions qualifying for but not covered by AIA
- the WDA for this period is then calculated on the remaining figure
What if the sale proceeds exceed the original cost of the asse?
- the disposal value deducted from the pool is restricted to the original cost of the asset
- note that nay excess of sale proceeds over original cost may then be taxed as a chargeable gain
What if on disposal of an asset in the pool, sale proceeds exceed the balance brought forwards?
- the pool balance will become negative because allowances exceeding net cost have been claimed in the past
- the negative amount = the excess allowances previously given
- these will be recovered and charged to tax by means of a balancing charge
- the balancing charge reduces the capital allowances claim for the period
- if there is an overall net balancing charge, it is added to the tax adjusted trading profit
What will happen at cessation of trade?
- the AIA, WDA, FYA are not available in the final period of account
What are the steps what are followed when business is permanently discontinued?
- Add in any additions made in the final period
- Do not calculate AIA, WDA, FYA
- Deduct any disposals made in the final period and any sale proceeds on the ultimate disposal of plant and machinery at cessation
- Calculate a balancing charge or balancing allowance as apporpriate
- There should not be any balances carried forward at the end of trade
What are the rules if an asset is used by the owner of the business?
- 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
- cars with private use are always treated separately - regardless of their CO2 emissions
- on disposal of the private use asset, a balancing adjustment is computed by comparing sale proceeds with the tax written down value
(there is a balancing charge if sale proceeds exceeds the tax written down value, and a balancing allowance if sale proceeds is less than the tax written down value - having computed the balancing adjustment, the amount included in the total allowances column is reduced to the business proportion
What is the special rate pool?
- is a pool of qualifying expenditure that operates in the same way as the main pool except that WDA is 6% for a 12 month period
What types of assets qualifying expenditure for the special rate pool groups?
- long life assets
- integral features of a building or structure
- thermal insulation of a building
- high emission cars more than 50 g/km
What are long life assets?
-are defined as plant and machinery with
total cost of at least £100,000 (for a 12 month period) and an expected working life of 25 years or more
What can be never classed as long life assets?
- cars
- plant and machinery situated in a building that is used as a retail shop, showroom, hotel or office
Integral features of a building or structure include expenditure incurred on:
- electrical (including lighting) systems
- cold water systems
- space or water heating systems
- external solar shading
- powered systems of ventilation, air cooling or air purification
- lifts, escalators and moving walkways
The AIA is the special rate pool
- the AIA is available against all expenditure in the this pool
- the business can choose the exact expenditure against which the AIA is allocated.
Most beneficial for the AIA in order
- the special rate pool (as assets in the special rate pool are only eligible for 6% WDA, whereas main pool plant and machinery is eligible for 18% WDA)
- the main pool
- short life assets
- private use assets
What is the small pool WDA?
- where the balance immediately before the calculation of the WDA:
- on the main and/or special rate pool
- is £1,000 or less
£1,000 limit is for a 12 month period of account
What is the purpose of short life asset election?
- exists to enable businesses to accelerate capital allowances on certain qualifying expenditure
What is qualifying expenditure for short life asset?
- all plant and machinery (with the exception of cars) which would normally go in the main pool
- where it is the intention to sell or scrap the item within eight years of the end of the chargeable period of acquisition.
What is the election?
- written application to HM Revenue and Customs
What is de-pooling
- the election must be made to enable assets to be treated separately in the capital allowances computation as short life assets
Steps if election is made on short life assets?
- on disposal within eight years - a separate balancing allowance or balancing charge is calculated
-the election - the election must be made by the fist anniversary of 31 January following the end of the tax year in which the period of account, which includes the acquisition, ends
- if not disposal has taken place within 8 years then the unrelieved balance is transferred to the main pool, the transfer takes place in the first chargeable period following the eight year anniversary
- the AIA is available against short life assets
VAT regarding purchase of tangible non-current assets
- if a business is registered for VAT it can reclaim any VAT it has been charged on the purchase of tangible non-current assets
- the only exception is cars, for which VAT can only be recovered if the car is used 100% for business
- if the business can reclaim the VAT then the cost of the asset in the capital allowances computation must be net of VAT
- if the business has charged VAT on the sale, the proceeds figure in the capital allowances computation must be net of VAT
Eligibility for Structures and Buildings allowances SBAs
- building was constructed or renovated on or after 6 April 2020
When SBA is not eligible:
-where buildings are purchased
What is the allowance for structures and buildings?
- 3% straight line
- can be claimed from the date the asset is brought into use in the trade, apportioned in the first period
Expenditure qualifying for SBAs:
- buildings including offices, retail and wholesale premises, factories and warehouses and cost of subsequent improvements
- structures including roads, walls, bridges and tunnels
What qualifying expenditure for SBA do not include?
- land
- legal fees
- repairs and maintenance
When an unused building is purchased from a builder or developer the qualifying cost is the price paid less the value of the land
