Chapter 6 - Capital Allowances

Question 1

Q: What is the purpose of capital allowances?

Answer 1

A: Capital allowances are a form of depreciation for tax purposes, providing standardized deductions that replace traditional depreciation.

Question 2

Q: What are the steps to calculate taxable trading profit with capital allowances?

Answer 2

A:

1.	Adjust profits by adding back depreciation.
2.	Deduct capital allowances for the period.
3.	Apply the tax year basis to calculate tax-adjusted profits.

Question 3

Q: What types of assets are eligible for capital allowances?

Answer 3

A: Only plant and machinery qualify, such as machines, motor vehicles, computers, fixtures, fittings, furniture, and equipment.

Question 4

Q: What types of assets do not qualify for capital allowances?

Answer 4

A: Expenditure on commercial buildings and structures does not qualify (though it may be eligible for a separate structures and buildings allowance outside the scope of the syllabus).

Question 5

Q: How are incidental building alterations for plant/machinery installation treated?

Answer 5

A: Building alterations incidental to installing plant/machinery and licenses for computer software also qualify for capital allowances.

Question 6

Q: What is a ‘Private Use Asset Pool’?

Answer 6

A: It is a pool for assets partly used for private purposes by the business owner, allowing only the business-use portion to be deducted.

Question 7

Q: What is a ‘Main/General Pool’?

Answer 7

A: This pool includes all other assets not in private use, like cars with CO2 emissions ≤ 50g/km if purchased after 6 April 2021.

Question 8

Q: What is Tax Written Down Value (TWDV)?

Answer 8

A: TWDV is the balance of each pool, representing the tax equivalent of an asset’s carrying amount.

Question 9

Q: What are Writing Down Allowances (WDA)?

Answer 9

A: WDAs are annual deductions available on eligible assets.

Question 10

Q: What is the Annual Investment Allowance (AIA)?

Answer 10

A: AIA is a deduction available for certain qualifying assets in the period of acquisition. Allowance is £1,000,000.

Question 11

Q: What is the First Year Allowance (FYA)?

Answer 11

A: FYA is a deduction available for specific qualifying assets in the acquisition year.

Question 12

Q: What is a Balancing Adjustment?

Answer 12

A: A balancing adjustment occurs on asset disposal, resulting in either a balancing allowance (deduction) or a balancing charge (additional tax).

Question 13

Q: What is the purpose of capital allowance computation?

Answer 13

A: Capital allowances are calculated for each accounting period to adjust trading profits by adding new additions, subtracting disposals, and applying relevant allowances.

Question 14

Q: How is Writing Down Allowance (WDA) calculated?

Answer 14

A: WDA is 18% of the Tax Written Down Value (TWDV) of the main pool, applied annually, and the remaining pool balance is carried forward.

Question 15

Q: What does the Annual Investment Allowance (AIA) provide?

Answer 15

A: AIA gives 100% tax relief on qualifying main pool assets in the year of purchase, with an annual limit of £1,000,000, excluding cars and FYA-qualifying assets.

Question 16

Q: What happens to expenditure that exceeds the AIA limit?

Answer 16

A: Expenditure exceeding the AIA is added to the main pool and becomes eligible for an 18% WDA

Question 17

Q: What assets qualify for the 100% First Year Allowance (FYA)?

Answer 17

A: New zero-emission cars, goods vehicles, and electric vehicle charging points qualify for 100% FYA.

Question 18

Q: Is the FYA time apportioned for short accounting periods or asset ownership duration?

Answer 18

A: No, FYA is not time apportioned; it provides full relief in the acquisition year.

Question 19

Q: How are disposals from the main pool handled in capital allowances?

Answer 19

A: Deduct the lower of disposal proceeds or original cost from the main pool before calculating WDA.

Question 20

Q: What if an asset isn’t sold but removed from business use or scrapped?

Answer 20

A: Use the market value if removed for personal use, or scrap value if destroyed, to adjust the main pool.

Question 21

Q: What is the small pool WDA, and when is it applicable?

Answer 21

A: If the main pool balance is £1,000 or less, it can be claimed in full, rather than written down at 18%. This does not apply to private-use assets.

Question 22

Q: How is the £1,000 threshold for small pool WDA adjusted?

Answer 22

A: It’s time-apportioned for accounting periods shorter or longer than 12 months.

Question 23

Q: How are capital allowances calculated for assets with private use by the business owner?

Answer 23

A: Set up a separate column for each private-use asset, calculate allowances as normal, but only claim the business-use proportion.

Question 24

Q: What should ICAEW members ensure when calculating private-use proportions for capital allowances?

Answer 24

A: ICAEW members should ensure clients don’t exaggerate the business-use proportion claimed.

Question 25

Q: What happens when a private-use asset is sold in terms of capital allowances?

Answer 25

A: Deduct the lower of disposal proceeds or original cost. If the disposal value differs from the TWDV b/f, it results in either a balancing charge or a balancing allowance.

Question 26

Q: When does a balancing charge occur for private-use assets?

Answer 26

A: A balancing charge arises if disposing of an asset leaves a negative balance in the main pool.

Question 27

Q: When is a balancing allowance given in the main pool?

Answer 27

A: A balancing allowance is only given in the main pool when the business ceases trading.

Question 28

Q: How are capital allowances handled in the final period when a business ceases trading?

Answer 28

A: No AIA, WDA, or FYA is available. Instead, add any final-period additions, deduct disposals, and calculate a balancing adjustment to bring TWDV to zero.