Chapter 6 - Capital allowances

Question 1

What are capital allowances?

Answer 1

Capital allowances are tax allowable depreciation. They are available in respect of expenditure on plant and machinery.

Question 2

What is the viewpoint taken when determining if an asset is eleigible for capital allowances? Briefly explain it

Answer 2

Function vs Setting

Function: if the asset is used to carry out the trade then it is eligible for capital allowances -
Setting: if the asset is within which the trade takes place then it is ineligible for capital allowances

Question 3

Who is entitled to capital allowances?

Answer 3

Capital allowances are available to a taxable person who incurs capital expenditure on assets to be used for the purposes of a trade carried on by that person.

Question 4

For capital allowances, what is considered the acquisition cost of an asset? Include reference to the special case of acquisition for sole traders and partnerships

Answer 4

• In most cases, this will simply be the purchase cost of the asset. If VAT is recoverable use the VAT exclusive price. On assets where VAT is not recoverable (e.g. cars) capital allowances are calculated on the VAT inclusive price.

For sole traders and partnerships:
* If an asset is brought into a business by the owner (e.g. when a business starts) then acquision cost to the business will be the market value of the asset when it is brought into the business.

Question 5

For capital allowances, what is considered the disposal value of an asset?

Answer 5

The general rule is that the disposal value is the sale proceeds of the asset. However, this cannot exceed the original cost of the asset.

If the asset is given away or sold for less than market value, then the disposal value will be market value on date of disposal.

If the asset is scrapped, then the disposal value will be proceeds (likely to be £nil if scrapped).

Question 6

Outline the pro-forma to use to calculate capital allowances

Answer 6

Question 7

What is the main pool in regards to capital allowances?

Answer 7

In most cases, capital allowances are not calculated for expenditure on a single asset, but on a pool of expenditure, ie, on a number of assets.

The main pool is where the majority of assets will be pooled together

Question 8

What does TWDV stand for? Briefly explain what it means

Answer 8

Tax written down value (TWDV) of an asset or pool is the expenditure remaining after capital allowances for a chargeable period have been claimed. The remainder of the value of the pool is then carried forward to the start of the next period of account. It continues to be written down on a reducing balance basis.

Question 9

What does WDA stand for? Briefly explain what it means

Answer 9

Writing down allowance (WDA) is an allowance given on a percentage of the assets held in a pool.

Question 10

What rate of WDA are we concerned with on this course?

Answer 10

The WDA is 18% per annum reducing balance

Question 11

What is important to remember about WDA for periods longer or shorter than 12 months?

Answer 11

If the period is longer or shorter than 12 months, the WDA is increased or decreased accordingly - time apportion the WDA

Question 12

What does AIA stand for? Briefly explain what it means

Answer 12

Annual investment allowance (AIA) is a limited allowance that can be used against the acquisition cost of qualifying assets in the accounting period in which it is incurred

Question 13

What is the maximum AIA available?

Answer 13

£1,000,000

Question 14

What assets qualify for AIA?

Answer 14

Most plant and machinery, except cars

Question 15

What is important to remember about AIA for periods longer or shorter than 12 months?

Answer 15

If the period is longer or shorter than 12 months, the AIA is increased or decreased accordingly - time apportion the AIA

Question 16

What happens if AIA is used up before full expenditure of newly acquired eligible assets in the main pool is reduced to nil?

Answer 16

Any balance of expenditure incurred in an accounting period on which AIA is not given, is eligible for WDA.

Question 17

What is important to remember about the balance in the main pool as it goes down to 0?

Answer 17

If the balance on the main pool is less than £1,000 (adjusted for short periods of account) it can be written off immediately, rather than at % per annum.

Question 18

What does FYA stand for? Briefly explain what it means

Answer 18

First-year allowance (FYA) is an unlimited allowance that can be used against the acquisition cost of qualifying assets in the accounting period in which it is incurred

Question 19

How does FYA differ to AIA?

Answer 19

• There is no maximum amount of FYA available like there is for AIA, if an asset qualifies for FYA the full allowance is set off against its expense
• FYA is not time-apportioned depending on the length of the period of accounts unlike AIA - FYA is always given in full

Question 20

Which assets qualify for FYA?

Answer 20

• new and unused zero emissions goods vehicles
• new and unused low emission cars ie electrically propelled or with zero CO2 emissions
• electric vehicle charging points

(see tax tables)

Question 21

What is the private use asset column in regards to capital allowances?

Answer 21

Assets that are partly used privately by a sole trader or partner are kept in a separate pool because only the business element of the capital allowances can be claimed - each asset will have its own column

Question 22

What is important to remember about the private use asset pools when calculating capital allowances with regards to AIA, FYA and WDA?

Answer 22

The AIA, the FYA or WDA is still calculated in full and deducted from the single asset pool. However the allowance given is restricted to reflect the business use/ private use of the asset - allowance will be % that is business use

Question 23

When does a balancing charge arise?

Answer 23

A balancing charge arises on disposal if too many capital allowances have been given.

This might happen if an asset is sold for an amount in excess of its tax written down value.

Question 24

Outline how we implement balancing charges and how we treat them when calculating capital allowances?

Answer 24

When the disposal proceeds of an asset exceeds the TWDV of the pool in which the asset being disposed of resides (single asset or main pool) a balancing charge will be needed to bring the TWDV c/f up to nil - the balancing charge will be the difference between the disposal proceeds and the TWDV b/f.

This balacning charge will then be deducted from capital allowances

Question 25

What is important to remember about balacning charges in regards to private use asset pools?

Answer 25

The balancing charge should be calculated in full but the capital allowance deduction must be restricted to refelct the personal use aspect of the asset

Question 26

When does a balancing allowance arise?

Answer 26

A balancing allowance arises on disposal if too few capital allowances have been given.

This might happen if an asset is sold for an amount less than its tax written down value.

Question 27

Outline how we implement balancing charges and how we treat them when calculating capital allowances?

Answer 27

When the disposal proceeds of an asset in a single asset pool (or main pool when either only one item resides or the entity is ceasing to trade) is less than the TWDV of the pool a balancing allowance will be needed to bring the TWDV c/f down to nil - the balancing allowance will be the negative of the difference between the disposal proceeds and the TWDV b/f.

This balancing allowance will then be added to capital allowances

Question 28

Outline the method for calculating the capital allowances for sole traders and partnerships and their TWDV c/f for their asset pools

Answer 28

1) Write out the pro-forma, ensuring you have enough columns (remember private use assets will each have their own column).
2) Identify the period of accounts required (note any short or long periods).
3) Add in the TWDV b/f for each pool (if there is one).
4) Record all acquisitions in their respective columns, consider carefully whether to apply AIA or FYA and record these in the allowances column, remembering to restrict for long/short periods (AIA only) and private use (both).
5) Record all disposals in their respective columns, ensuring disposal proceeds do not exceed acquisition cost. Implement a balancing charge or allowance if applicable and record this in the allowance column, remembering to restrict for long/short periods and private use.
6) Calculate the WDA at 18% for each pool and record this in the allowance column, remembering to restrict for long/short periods and private use.
7) Deduct the WDA from each pool to give the TWDV c/f.
8) Sum up the allowances column to give the total capital allowances available.