Chapter 11: Capital allowances Basic computations Flashcards
11.1 The general pool
Plant and machinery allowances are a fixed percentage of the value of the pool, calculated on a reducing balance basis. The rate of capital allowances for the general pool is 18%. The residual balance in the pool (TWDV) is then carried forward as an opening balance in the next accounting period.
11.2 General pool additions and disposals
Additions are normally brought into the capital allowances computation at the cost it was bought for. Where the cost of the asset includes VAT:
• If the trader is VAT registered, the VAT is recoverable from HMRC, the addition should be added at the VAT exclusive amount
• If the trader is not VAT registered, the addition should be added at the VAT inclusive amount
VAT cannot be recovered by any trader on the cost of a car which has any private usage. Car additions should therefore be shown as the VAT inclusive amount.
If the trader originally bought the plant and machinery for private purposes and then uses it in the business, the value at which capital allowances can be claimed is the market value of the plant and machinery when it starts to be used in the business.
The market value is used instead of cost where the plant and machinery are gifted to the trader.
When a trader disposes of plant and machinery, the disposal is taken out of the CA computation. The disposal value is deducted from the general pool and the value is normally the sale proceeds. However, market value will be used instead of the sales proceeds in the following situations:
• Where the plant and machinery are sold for less than market value to someone who cannot claim capital allowances
• Where the plant and machinery are given away
• Where the trader simply stops using the plant and machinery in their business.
If the sale proceeds (or market value where relevant) are more than the original cost of the plant and machinery, the disposal value is limited to the original cost.
11.3 General Pool – short and long periods of account
The rate of writing down allowance of 18% applies to a 12-month accounting period. Therefore, where a trader has an accounting period which is not 12 months long, this rate must be scaled up or down as appropriate.
11.4 When expenditure is incurred
When a trade acquires plant and machinery for use in his trade, he receives capital allowances in the period expenditure is incurred. Expenditure is incurred on the date on which the obligation to pay becomes unconditional. There is an exception to the rule if there is a gap of more than four months between:
• The date on which the obligation to pay becomes unconditional, and
• The date on which payment is required to be made,
Then the expenditure is not incurred until the date on which payment is required to be made
11.5 Pre-trading expenditure
If plant is acquired before trading starts, then expenditure is treated as being incurred on the first day of trading. If plant had originally been acquired and used for private purposes before being used in the trade, the allowable expenditure for capital allowances is the market value when it is first used for the purposes of the trade.
11.6 Hire purchase agreements and leasing
Expenditure on an asset under a hire purchase agreement is incurred when the asset is brought into use. Capital allowances are claimed on the capital cost of the asset. Capital allowances are not allowed with a short leasing agreement as the trader does not legally own the asset, they will receive a deduction in the P+L account instead.
11.7 claiming capital allowances
Capital allowances are not given automatically, they must be claimed. A claim can be made at any time until the time limit for the amendment of the return, 31 January 2023 for a 20/21 return.
11.8 disclaiming capital allowances
If a trader does not claim capital allowances (beneficial with low profits which may be covered by personal allowance), this will lead to a higher TWDV being carried forward.
