Ch 6 - Capital Allowances Flashcards
What are capital allowances?
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
Why do HMRC use capital allowances?
As it means businesses can’t manipulate their depreciation rate to achieve a smaller tax adjusted trading profit
What are the 4 types of capital allowances?
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
What is plant and machinery
Assets with which the business operates, rather than in which the business operates
E.g. petrol pumps vs garage canopy
What does machinery include?
All machines
Motor vehicles
Computers
What does ‘plant’ include?
Fixtures and fittings, furniture and equipment
From case law, what qualify’s for capital allowances?
Building alterations incidental to installation of plant and machinery
Licence to use computer software
What are the 2 categories of pools?
Private use asset pools
Main/ general pool
What is the private use asset pool?
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
What is the main/general pool?
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)
What was the previous limit for main/general pool? How does it differ to new?
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)
What is the TWDV?
Tax written down value
Balance on each pool (the tax equivalent of the carrying amount)
What is the WDA available each year?
18% x TWD
What is the AIA limit?
Expenditure incurred on/after 1 jan 2016 = max is £200,000
What can AIA be used against?
Any assets purchased in the year that would be allocated to main pool, except those qualifying for 100% FYA and cars (not VANS THOUGH)
Can AIA be carried forwards?
NO
What happens in expenditure qualifying for AIA exceeds the £200k limit?
the balance is eligible for 18% WDA, by transferring the balance into the main pool before calculating the WDA for the year
What is FYA?
A 100% deduction in period of acquisition
What s the 100% `FYA available for?
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
How do short/long periods of amount affect capital allowances?
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
How are the disposals of assets from the main pool treated?
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
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?
proceeds are taken to be market value on the date of disposal
What are balancing charges used for?
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
What is the impact of a balancing charge on capital allowances?
reduces capital allowances claim for the period
If there is an overall net BC, it is added to the tax adjusted trading profit
What is the treatment of Private use assets
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
What do you have to be careful about when calculating private use assets?
Need to see whether it is the business owner with the private use or an employee
Owner = needs private use column Employee = fine
TYU5: How is the following treated?
Purchase of motor car with emissions of 101g/km for £17k (used 60% for private purchase by employee)
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
TYU5: How is the following treated?
Sold machinery for £9,400 (originally bought for £12,000)
Dispose at lower of cost and disposal value
So dispose at £9,400 in main pool
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
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
What is the treatment required when private use assets are disposed of?
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
What is the small pool WDA?
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
Is the small pool WDA available to all pools?
NO
Only main pool
NOT private use assets
What difference does the cessation of trade have on capital allowances?
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
