Chapter 6 - Capital Allowances Flashcards
Q: What is the purpose of capital allowances?
A: Capital allowances are a form of depreciation for tax purposes, providing standardized deductions that replace traditional depreciation.
Q: What are the steps to calculate taxable trading profit with capital allowances?
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.
Q: What types of assets are eligible for capital allowances?
A: Only plant and machinery qualify, such as machines, motor vehicles, computers, fixtures, fittings, furniture, and equipment.
Q: What types of assets do not qualify for capital allowances?
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).
Q: How are incidental building alterations for plant/machinery installation treated?
A: Building alterations incidental to installing plant/machinery and licenses for computer software also qualify for capital allowances.
Q: What is a ‘Private Use Asset Pool’?
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.
Q: What is a ‘Main/General Pool’?
A: This pool includes all other assets not in private use, like cars with CO2 emissions ≤ 50g/km if purchased after 6 April 2021.
Q: What is Tax Written Down Value (TWDV)?
A: TWDV is the balance of each pool, representing the tax equivalent of an asset’s carrying amount.
Q: What are Writing Down Allowances (WDA)?
A: WDAs are annual deductions available on eligible assets.
Q: What is the Annual Investment Allowance (AIA)?
A: AIA is a deduction available for certain qualifying assets in the period of acquisition. Allowance is £1,000,000.
Q: What is the First Year Allowance (FYA)?
A: FYA is a deduction available for specific qualifying assets in the acquisition year.
Q: What is a Balancing Adjustment?
A: A balancing adjustment occurs on asset disposal, resulting in either a balancing allowance (deduction) or a balancing charge (additional tax).
Q: What is the purpose of capital allowance computation?
A: Capital allowances are calculated for each accounting period to adjust trading profits by adding new additions, subtracting disposals, and applying relevant allowances.
Q: How is Writing Down Allowance (WDA) calculated?
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.
Q: What does the Annual Investment Allowance (AIA) provide?
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.
Q: What happens to expenditure that exceeds the AIA limit?
A: Expenditure exceeding the AIA is added to the main pool and becomes eligible for an 18% WDA
Q: What assets qualify for the 100% First Year Allowance (FYA)?
A: New zero-emission cars, goods vehicles, and electric vehicle charging points qualify for 100% FYA.
Q: Is the FYA time apportioned for short accounting periods or asset ownership duration?
A: No, FYA is not time apportioned; it provides full relief in the acquisition year.
Q: How are disposals from the main pool handled in capital allowances?
A: Deduct the lower of disposal proceeds or original cost from the main pool before calculating WDA.
Q: What if an asset isn’t sold but removed from business use or scrapped?
A: Use the market value if removed for personal use, or scrap value if destroyed, to adjust the main pool.
Q: What is the small pool WDA, and when is it applicable?
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.
Q: How is the £1,000 threshold for small pool WDA adjusted?
A: It’s time-apportioned for accounting periods shorter or longer than 12 months.
Q: How are capital allowances calculated for assets with private use by the business owner?
A: Set up a separate column for each private-use asset, calculate allowances as normal, but only claim the business-use proportion.
Q: What should ICAEW members ensure when calculating private-use proportions for capital allowances?
A: ICAEW members should ensure clients don’t exaggerate the business-use proportion claimed.
Q: What happens when a private-use asset is sold in terms of capital allowances?
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.
Q: When does a balancing charge occur for private-use assets?
A: A balancing charge arises if disposing of an asset leaves a negative balance in the main pool.
Q: When is a balancing allowance given in the main pool?
A: A balancing allowance is only given in the main pool when the business ceases trading.
Q: How are capital allowances handled in the final period when a business ceases trading?
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.
