Capital Allowances - Plant and Machinery

Question 1

Function vs setting

Answer 1

Function - “with which” we carry on a trade
Capital allowances available
Examples: Moveable partitioning, dry dock, swimming pool, light fittings to create ambience

Setting - “within which” we carry on a trade
No capital allowances available
Examples - ship used as floating restaurant, stand at a football ground, false ceiling, shop fronts, canopy at a petrol station

Question 2

Who is entitled to capital allowances

Answer 2

Available to sole trader, a partner in a partnership or a company. Broadly anyone who incurs capital expenditure for a trade. Calculated for each period of account (not each tax year)

Question 3

acquisition cost

Answer 3

Usually the cost of the asset. The owner may bring personally owned assets into the business in which case MV. If VAT is recoverable, VAT exclusive price, if VAT is not recoverable (eg on cars) use VAT inclusive price.

Question 4

Disposal value

Answer 4

cannot exceed original cost of asset

Question 5

Overview of capital allowances

Answer 5

Identify how many columns you need
Identify the periods of account required (note any short period of account)
Add in a tax written down value brought forward
Record acquisitions and disposals
- remember to restrict disposal proceeds to acquisition cost
- consider carefully whether to apply AIA or FYA
Calculate WDA remembering to restrict for
- short periods of account and
-private use of assets
- never time apportion FYA
- Add capital allowances into the adjustment to profits computation

Question 6

Assets in the main pool

Answer 6

Includes

• all machinery, fixtures, fittings and equipment
• vans, forklift trucks, lorries, motorbikes
• cars with CO2 emissions not more than 110g/km

Question 7

Writing down allowance

Answer 7

18% / 8% depending on pool

If period is longer or shorter than 12 months WDA increased or decreased accordingly

Question 8

First year allowances

Answer 8

FYA is given in period of account in which expenditure is incurred
FYA always given in full regardless of the length of the period of account
- designated new energy saving technologies such as combination heat and power equipment
- new and unused zero emission goods vehicles and
- new and unused qualifying low emmission cars that are electrically propelled or
- purchased on or after April 2018 that emit no more than 50g/km or before April 18 75g/km
charging point on electric vehicles between 23 nov 2017 - 5 April 2019

Question 9

AIA

Answer 9

Expenditure from 1 Jan 2019 - £1m
Expenditure from 1 Jan 2016 - 31 December 2018 200,000
Before Jan 16 - varied, will not be examined

Most plant and machinery EXCEPT CARS

For accounting periods which are not 12 months long AIA is pro-rated up or down accordingly.

Question 10

Single asset pools and cars

Answer 10

Date of purchase
April 13 - April 18 130g/km or less Main pool 18%
April 18 onwards 110g/km or less Main pool 18%

Question 11

Assets with private use

Answer 11

Do not do for Ltd companies. A company cannot privately use an asset.

Each asset partly used privately by a sole trader or partner is kept in a separate pool Only the business element of the capital allowances can be claimed.

AIA / FYA / WDA still calculated in full and deducted from the single asset pool, restrict allowance given to reflect business / private use

Question 12

Balancing charge

Answer 12

if too many capital allowances have been given on an asset over its lifetime, a balancing charge arises. This might happen if an asset is sold for an amount in excess of its tax written down value.

TWDV b/f x
Disposal (proceeds limited to cost) (x)
—-
Balancing charge (x)

Points to note:
Deduct from other capital allowances (so increase trading profits)
Restrict if a private use asset
Can happen to single asset pools and main pool at any time.

Question 13

Balancing allowance

Answer 13

If too few capital allowances have been given on an asset over its lifetime, a balancing allowance may arise. This might happen if an asset is sold for an amount less than its tax written down value.

TWDV b/f x
Disposal (proceeds limited to cost) (x)
—-
Balancing allowance x

Points to note
Add to other capital allowances (so reduce trading profits)
Restrict if a private use asset
Can happen to single asset pools at any time, but only in main pool when trade ceases

Remember that in the period a trade ceases, no AIAs, FYAs or WDAs are given, only balancing adjustments.

Question 14

Annual investment allowance additional points

Answer 14

Can be used against any qualifying expenditure (NOT CARS) therefore sensible to allocate it against expenditure attracting the lowest rate of WDA

Only one AIA irrespective of number of qualifying activities. Members of a group only entitled to one AIA per group

Within a period the AIA will be applied to qualifying expenditure and the balance of expenditure on which AIA is not given will then receive the relevant WDA at the end of the chargeable period.

Question 15

Special rate pool

Answer 15

This pool includes expenditure on

• long life assets
• integral features
• thermal insulation
• solar panels
• cars purchased after 1 April 2018 with CO2 in excess of 110g/km (previously 130)

The WDA on assets in the special rate pool is 8% for a 12 month period

Question 16

Long life assets

Answer 16

An item of plant and machienry is classed as a long life asset if
- the asset has an expected economic working life of 25 years or more
and
the total expenditure on this kind of asset exceeds £100,000 in the 12 month accounting period (pro rata for a shorter period)

Question 17

Integral features

Answer 17

Integral features

• Electrical systems (including lighting systems)
• Cold water systems
• Space or water heating systems, powered systems of ventilation, air cooling or purification and any floor or ceiling comprised in such systems
• lift / escalators / moving walkways
• external solar shading

Question 18

Thermal insulation

Answer 18

Expenditure on thermal insulation of all existing buildings, other than residential property, is entitled to capital allowances

Question 19

Short life assets

Answer 19

The taxpayer may elect for most assets in the main pool to be depooled except for cars or assets with private use.

If the short life asset has not been disposed of by the end of eight years after the end of the basis period (or chargeable period for companies) in which the expenditure was incurred then at the beginning of the next period its TWDV will be transferred from its separate pool to the main pool where it will then be written down as normal.

A depooling election must be made by the first anniversary of 31 January following the end of the tax year in which the period of account of expenditure ends. For companies a depooling election must be made by the end of two years following the end of the accounting period of expenditure.

Question 20

Pre-trading expenditure

Answer 20

Capital expenditure incurred before a business starts is eligible for capital allowances.

In general the capital expenditure is treated as incurred on the first day of trading and so included in the capital allowances computation for the first accounting period.

However the rate of allowances available is determined by the actual date of expenditure.

Question 21

Allowances on cessation

Answer 21

On the cessation of trade all the plant and machinery in the business are disposed of or deemed to have been disposed of.

Capital allowances for the final period of account are computer as follows:

• any items acquired in the final period are added to TWDV bf
• No WDAs or FYAs or AIAs are given for the final period of account
• the disposal value of the assets in each pool is deducted from the balance, giving rise to balancing allowances or balancing charges
• any assets taken over personally by the owner are treated as sold for market value.

Question 22

Successions

Answer 22

If a trade is sold to a connected person, assets are deemed to be sold at market value

However a joint election can be made by the original owner and the new owner to transfer the capital assets at their tax written down value so that no balancing adjustments will arise. This is useful eg when a business is incorporated.

The election must be made within two years of the date on which the succession takes effect.