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Taxation FA22 > Capital allowances > Flashcards

Capital allowances Flashcards

1
Q

What is the purpose of capital allowances?

A
  • are provided to give a business tax relief for capital expenditure on qualifying assets
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2
Q

Who may claim capital allowances?

A
  • 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
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3
Q

What is qualifying expenditure (capital allowance)?

A
  • are given on the original cost of a capital asset and all subsequent qualifying expenditure of a capital nature (e.g. improvements)
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4
Q

What is relief for capital allowances?

A
  • 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)
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5
Q

Definition of machinery

A
  • has a commonly understood meaning
  • it includes all machines, computers, office equipment
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6
Q

What does it mean if asset perform an active function? Plant and machinery?

A
  • yes
  • apparatus with which the business is carried on
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7
Q

What does it mean if asset perform a passive function? Plant and machinery?

A
  • no
  • the setting in which the business is carried on
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8
Q

Assets treated as plant by specific legislation

A
  • the cost of alterations to buildings needed for the installation of plant
  • expenditure on acquiring computer software
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9
Q

What assets deemed not to be plant?

A
  • land, buildings and structures
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10
Q

Common examples of plant and machinery

A
  • computers and software
  • machinery
  • cars and lorries
  • office furniture
  • moveable partitions
  • air conditioning
  • alterations of buildings needed to install plant and machinery
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11
Q

What is the main pool (general pool)?

A
  • 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
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12
Q

What items are not included in main pool?

A
  • 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
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13
Q

What is the annual investment allowance? (AIA)

A
  • 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
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14
Q

What are the key rules for the allowance?

A
  • 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
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15
Q

First year allowance (FYA) - new zero emission cars

A
  • not available on cars, however a 100% fist year allowance on the purchase of new zero CO2 emission cars
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16
Q

When is FYA given 100% to new zero emission cars?

A
  • 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
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17
Q

Writing down allowances (WDA)

A
  • 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
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18
Q

When is given writing down allowance (WDA)?

A
  • 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
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19
Q

Shorter and longer periods of accounts what is reflecting the length of period?

A
  • 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
20
Q

According to what is applied WDA proportionally?

A
  • according to the length of the period of account not a length of ownership
21
Q

What are the steps when an asset is sold or scrapped?

A
  • 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
22
Q

What if the sale proceeds exceed the original cost of the asse?

A
  • 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
23
Q

What if on disposal of an asset in the pool, sale proceeds exceed the balance brought forwards?

A
  • 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
24
Q

What will happen at cessation of trade?

A
  • the AIA, WDA, FYA are not available in the final period of account
25
Q

What are the steps what are followed when business is permanently discontinued?

A
  1. Add in any additions made in the final period
  2. Do not calculate AIA, WDA, FYA
  3. Deduct any disposals made in the final period and any sale proceeds on the ultimate disposal of plant and machinery at cessation
  4. Calculate a balancing charge or balancing allowance as apporpriate
  5. There should not be any balances carried forward at the end of trade
26
Q

What are the rules if an asset is used by the owner of the business?

A
  • 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
27
Q

What is the special rate pool?

A
  • 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
28
Q

What types of assets qualifying expenditure for the special rate pool groups?

A
  • long life assets
  • integral features of a building or structure
  • thermal insulation of a building
  • high emission cars more than 50 g/km
29
Q

What are long life assets?

A

-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

30
Q

What can be never classed as long life assets?

A
  • cars
  • plant and machinery situated in a building that is used as a retail shop, showroom, hotel or office
31
Q

Integral features of a building or structure include expenditure incurred on:

A
  • 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
32
Q

The AIA is the special rate pool

A
  • the AIA is available against all expenditure in the this pool
  • the business can choose the exact expenditure against which the AIA is allocated.
33
Q

Most beneficial for the AIA in order

A
  1. 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)
  2. the main pool
  3. short life assets
  4. private use assets
34
Q

What is the small pool WDA?

A
  • 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
35
Q

What is the purpose of short life asset election?

A
  • exists to enable businesses to accelerate capital allowances on certain qualifying expenditure
36
Q

What is qualifying expenditure for short life asset?

A
  • 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.
37
Q

What is the election?

A
  • written application to HM Revenue and Customs
38
Q

What is de-pooling

A
  • the election must be made to enable assets to be treated separately in the capital allowances computation as short life assets
39
Q

Steps if election is made on short life assets?

A
  • 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
40
Q

VAT regarding purchase of tangible non-current assets

A
  • 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
41
Q

Eligibility for Structures and Buildings allowances SBAs

A
  • building was constructed or renovated on or after 6 April 2020
42
Q

When SBA is not eligible:

A

-where buildings are purchased

43
Q

What is the allowance for structures and buildings?

A
  • 3% straight line
  • can be claimed from the date the asset is brought into use in the trade, apportioned in the first period
44
Q

Expenditure qualifying for SBAs:

A
  • buildings including offices, retail and wholesale premises, factories and warehouses and cost of subsequent improvements
  • structures including roads, walls, bridges and tunnels
45
Q

What qualifying expenditure for SBA do not include?

A
  • 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

Taxation FA22 (25 decks)

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