Ch 6 - Capital Allowances

Question 1

What are capital allowances?

Answer 1

They replace depreciation that is added back in the tax comp

Form of depreciation, but for tax purposes

Calculated at standard rates that apply to all businesses

Question 2

Why do HMRC use capital allowances?

Answer 2

As it means businesses can’t manipulate their depreciation rate to achieve a smaller tax adjusted trading profit

Question 3

What are the 4 types of capital allowances?

Answer 3

Writing down allowances- available annually
Annual investment allowance - available on certain assets in the year of acquisition
First Year Allowance (FYA) - env friendly assets
Balancing adjustments- allowance or charge arise in the year

Question 4

What is plant and machinery

Answer 4

Assets with which the business operates, rather than in which the business operates
E.g. petrol pumps vs garage canopy

Question 5

What does machinery include?

Answer 5

All machines
Motor vehicles
Computers

Question 6

What does ‘plant’ include?

Answer 6

Fixtures and fittings, furniture and equipment

Question 7

From case law, what qualify’s for capital allowances?

Answer 7

Building alterations incidental to installation of plant and machinery
Licence to use computer software

Question 8

What are the 2 categories of pools?

Answer 8

Private use asset pools

Main/ general pool

Question 9

What is the private use asset pool?

Answer 9

Capital allowances are calculated separately for each asset that is partly for the private use of the business owner (NOT EMPLOYEES)

Only business proportion of the allowance can be claimed

Question 10

What is the main/general pool?

Answer 10

All other assets are pooled together to enable the calculation of a single capital allowance
Includes cars with CO2 emissions of not more than 110g/km purchased on/after 6 April 2018 (1 April for companies)

Question 11

What was the previous limit for main/general pool? How does it differ to new?

Answer 11

Old: limit was 130g/km for cars purchased on/after 6 April 2013 (1 April companies)

New: net emissions of no more than 110g/km purchased on or after 6 April 2018 (1 April for companies)

Question 12

What is the TWDV?

Answer 12

Tax written down value

Balance on each pool (the tax equivalent of the carrying amount)

Question 13

What is the WDA available each year?

Answer 13

18% x TWD

Question 14

What is the AIA limit?

Answer 14

Expenditure incurred on/after 1 jan 2016 = max is £200,000

Question 15

What can AIA be used against?

Answer 15

Any assets purchased in the year that would be allocated to main pool, except those qualifying for 100% FYA and cars (not VANS THOUGH)

Question 16

Can AIA be carried forwards?

Answer 16

NO

Question 17

What happens in expenditure qualifying for AIA exceeds the £200k limit?

Answer 17

the balance is eligible for 18% WDA, by transferring the balance into the main pool before calculating the WDA for the year

Question 18

What is FYA?

Answer 18

A 100% deduction in period of acquisition

Question 19

What s the 100% `FYA available for?

Answer 19

New energy saving P&M
- new and unused emission cars, including electric propelled cars, with CO2 emissions of not more than 50g/km for cars purchased on/after 6 April 2018 (1 April 18 for companies)

• New and unused zero emissions goods vehicles
• Charging points for electric vehicles

Question 20

How do short/long periods of amount affect capital allowances?

Answer 20

WDAs and AIA are given for periods of account

i. e. have to scale / time apportion WDAs and AIA
- WDAs and AIA are never restricted by reference to the length of ownership of the asset in the period of account

NEVER pro-rate FYAs for the length of the period of account

Question 21

How are the disposals of assets from the main pool treated?

Answer 21

Before the WDA is calculated, deduct the lower of disposal proceeds and original cost

If the asset is given away / sold for less than market value, then proceeds are taken to be market value on the date of disposal

if the asset is scrapped or destroyed, the proceeds are taken to be the scrap value or the compensation received

Question 22

How are the disposals of assets from the main pool treated if the asset is given away/sold for less than market value on the date of disposal?

Answer 22

proceeds are taken to be market value on the date of disposal

Question 23

What are balancing charges used for?

Answer 23

If the disposal of an asset from the main pool makes the pool balance -ve
Happens when too many allowances have been claimed in the past

Excess allowances are then receovered and charged to tax as balancing charge, reducing capital allowances claim for the period

Question 24

What is the impact of a balancing charge on capital allowances?

Answer 24

reduces capital allowances claim for the period

If there is an overall net BC, it is added to the tax adjusted trading profit

Question 25

What is the treatment of Private use assets

Answer 25

Special rules apply to calc of capital allowances when the owner of the business (NOT EMPLOYEE) has private use of the asset

Separate column in pro forma for each private use asset

Calculate allowances as normal, but only claim business proportion

Question 26

What do you have to be careful about when calculating private use assets?

Answer 26

Need to see whether it is the business owner with the private use or an employee

Owner = needs private use column
Employee = fine

Question 27

TYU5: How is the following treated?

Purchase of motor car with emissions of 101g/km for £17k (used 60% for private purchase by employee)

Answer 27

Goes into main pool as a car as emissions aren’t low enough to qualify for FYA
No private use is required as it is private use by an employee rather than an owner

Question 28

TYU5: How is the following treated?

Sold machinery for £9,400 (originally bought for £12,000)

Answer 28

Dispose at lower of cost and disposal value

So dispose at £9,400 in main pool

Question 29

TYU5: How is the following treated?

Purchased motor car with CO2 emissions of 102g/km for £10,600 with private use of 40% by business owner

Answer 29

Has its own private use column
WDA of 18% (time apportioned if short year (NOT LENGTH OF TIME OF OWNING THE CAR)
But then in the claim column * (£10,600 * 18%) * 60% business use proportion for capital allowance

Full deduction of £10,600 * 18% in the main pool column

Question 30

What is the treatment required when private use assets are disposed of?

Answer 30

Deduct the lower of

• disposal proceeds (actual, or deemed, as for main pool)
• original cost

Unless the disposel value s equal to TWDV b/f
2 possible scenarios if this is the case:
Balancing charge if balance on pool is -ve (i.e. have applied too many allowances in the past and diff needs adding back)

Balancing allowance if balance in pool is +ve as insufficient allowances have been given in the past

BUT must remember to multiply the allowance by the business use % ONLY

Question 31

What is the small pool WDA?

Answer 31

If the balance in the main pool WDA c/f would drop below £1k, then whole amount can be claimed, rather than claiming 18%

NOT available to private use assets

Note: £1,000 may be proirated for periods longer or shorter than 12 months
i.e. £1k * x/12

Question 32

Is the small pool WDA available to all pools?

Answer 32

NO
Only main pool
NOT private use assets

Question 33

What difference does the cessation of trade have on capital allowances?

Answer 33

If it is permanently discontinued, no AIA, WDA or FYA is available in the final period of account
Instead of normal comp, the following is done:

Add in any additions in final period
Deduct any disposals made in the period
Calculate a balancing adjustment on each pool to bring the TWDV c/f one each pool to Nil